Capitol Federal Financial, Inc. Reports Second Quarter Fiscal Year 2013 Results

TOPEKA, Kan., April 29, 2013 /PRNewswire/ -- Capitol Federal® Financial, Inc. (NASDAQ: CFFN) (the "Company") announced results today for the quarter ended March 31, 2013.  Detailed results will be available in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, which will be filed with the Securities and Exchange Commission ("SEC") on or about May 6, 2013 and posted on our website, http://ir.capfed.comFor best viewing results, please view this release in Portable Document Format (PDF) on our website.

Highlights for the quarter include:

  • net income of $17.7 million,
  • basic and diluted earnings per average share outstanding of $0.12,
  • net interest margin of 1.97%,
  • repurchased 2,813,700 shares of common stock at an average price of $11.85 per share, and
  • paid dividends of $11.0 million.

Comparison of Operating Results for the Quarters Ended March 31, 2013 and December 31, 2012

Net income increased $152 thousand, or 0.9%, from $17.6 million for the quarter ended December 31, 2012 to $17.7 million for the quarter ended March 31, 2013.  The net interest margin decreased four basis points, from 2.01% for the prior quarter, to 1.97% for the current quarter primarily as a result of continued downward pressure on loan and security yields.  Decreases in the cost of funds tempered the decrease in the net interest margin, but were not enough to fully offset the impact of decreasing asset yields. 

Interest and Dividend Income

The weighted average yield on total interest-earning assets decreased nine basis points from the prior quarter to 3.33% for the current quarter and the average balance of interest-earning assets decreased $73.3 million between the two periods.  The decrease in the weighted average balance between the two periods was primarily in lower yielding assets; specifically the investment securities portfolio.  The average balance of the loan portfolio increased between the two periods; however, not enough to overcome the impact of the reduction in the loan portfolio yield between the two periods.

The following table presents the components of interest and dividend income for the time periods presented, along with the change in dollars and percent.  The decrease in interest income on loans receivable and mortgage-backed securities ("MBS") was due primarily to a decrease in the weighted average yield of each portfolio.  The decrease in interest income on investment securities was due primarily to a decrease in the average balance of the portfolio between periods.














For the Three Months Ended








March 31,


December 31,


Change Expressed in:



2013


2012


Dollars


Percent



(Dollars in thousands)




INTEREST AND DIVIDEND INCOME:












Loans receivable

$

56,936


$

58,467


$

(1,531)


(2.6)%


MBS


14,446



15,183



(737)


(4.9)


Investment securities


2,457



2,865



(408)


(14.2)


Capital stock of Federal Home Loan Bank ("FHLB")


1,105



1,128



(23)


(2.0)


Cash and cash equivalents


36



33



3


9.1


Total interest and dividend income

$

74,980


$

77,676


$

(2,696)


(3.5)%


The decrease in interest income on loans receivable was due to a 15 basis point decrease in the weighted average yield of the portfolio to 4.01% for the current quarter, partially offset by a $59.2 million increase in the average balance of the portfolio.  The decrease in the weighted average yield was due to the continued downward repricing of the existing portfolio due to endorsements and refinances, as well as to the origination and purchase of loans at rates less than the weighted average rate of the existing portfolio.  Also contributing to the decrease in the weighted average yield was a decrease in deferred fee amortization due primarily to a decrease in loan endorsement and refinance activity between periods. 

The decrease in interest income on MBS was due primarily to a 10 basis point decrease in the average yield of the portfolio, from 2.60% for the prior quarter to 2.50% for the current quarter, and partially due to a $24.8 million decrease in the average balance of the portfolio.  The decrease in the average yield of the portfolio was due primarily to purchases of MBS during the quarter with yields less than the average yield on the existing portfolio, and the decrease in the average balance was due primarily to the timing of when purchases were made. 

The decrease in interest income on investment securities was due primarily to a $113.1 million decrease in the average balance of the portfolio as a result of cash flows from calls and maturities not being replaced in their entirety; rather, the proceeds were used, in part, to fund loan activity and repay maturing repurchase agreements.

Interest Expense

The weighted average rate paid on total interest-bearing liabilities decreased five basis points from the prior quarter to 1.66% for the current quarter and the average balance of interest-bearing liabilities increased $70.0 million between the two periods. The increase in the average balance of interest-bearing liabilities was in lower rate deposit products while the average balance of certificates of deposit decreased between the two periods.

The following table presents the components of interest expense for the time periods presented, along with the change in dollars and percent. The decrease in interest expense on FHLB advances and deposits was due primarily to a decrease in the weighted average rate paid on the portfolios, as well as to there being fewer days during the current quarter as compared to the prior quarter. 














For the Three Months Ended








March 31,


December 31,


Change Expressed in:



2013


2012


Dollars


Percent



(Dollars in thousands)




INTEREST EXPENSE:












FHLB advances

$

17,909


$

18,628


$

(719)


(3.9)%


Deposits


9,344



9,849



(505)


(5.1)


Repurchase agreements


3,407



3,569



(162)


(4.5)


Total interest expense

$

30,660


$

32,046


$

(1,386)


(4.3)%


The weighted average rate paid on FHLB advances decreased five basis points, from 2.92% for the prior quarter to 2.87% for the current quarter.  The decrease in the weighted average rate paid on FHLB advances was due primarily to the current quarter including the full impact of the renewal of a $100.0 million advance during the prior quarter, which had an effective rate of 4.85%, to a new advance with a term of four years and a fixed contractual rate of 0.78%.  The decrease in the weighted average rate paid on the deposit portfolio was due primarily to a decrease in the weighted average rate paid on the certificate of deposit portfolio.  The weighted average rate paid on the certificate of deposit portfolio decreased four basis points, from 1.41% for the prior quarter to 1.37% for the current quarter. 

Provision for Credit Losses

The Bank did not record a provision for credit losses during the current quarter, compared to $233 thousand recorded during the prior quarter.  The overall performance of our loan portfolio continued to improve during the current quarter as evidenced by the decline in net charge-offs and loans 90 or more days delinquent or in foreclosure.  Net charge-offs during the current quarter were $405 thousand compared to $856 thousand in the prior quarter.  Included in the current quarter and prior quarter were net charge-off amounts of $3 thousand and $369 thousand, respectively, related to loans that were discharged in a prior fiscal year under Chapter 7 bankruptcy that must be, in accordance with Office of Comptroller of Currency ("OCC") regulations, evaluated for collateral value loss, even if they are current.  Loans 90 or more days delinquent or in foreclosure decreased $865 thousand, or 4.5%, from $19.0 million at December 31, 2012 to $18.2 million at March 31, 2013.

Other Income

The following table presents the components of other income for the time periods presented, along with the change in dollars and percent.














For the Three Months Ended








March 31,


December 31,


Change Expressed in:



2013


2012


Dollars


Percent



(Dollars in thousands)




OTHER INCOME:












Retail fees and charges

$

3,521


$

3,992


$

(471)


(11.8)%


Insurance commissions


979



571



408


71.5


Loan fees


418



467



(49)


(10.5)


Income from bank-owned life insurance ("BOLI")


361



382



(21)


(5.5)


Other income, net


665



356



309


86.8


Total other income

$

5,944


$

5,768


$

176


3.1%


The decrease in retail fees and charges was due primarily to a decrease in debit card income, due in part to seasonality, and service charges.  The increase in insurance commissions was due largely to the receipt of annual commissions from certain insurance providers as a result of favorable claims experience during the prior year. 

Other Expense

The following table presents the components of other expense for the time periods presented, along with the change in dollars and percent.














For the Three Months Ended








March 31,


December 31,


Change Expressed in:



2013


2012


Dollars


Percent



(Dollars in thousands)




OTHER EXPENSES:












Salaries and employee benefits

$

12,155


$

12,181


$

(26)


(0.2)%


Occupancy


2,391



2,318



73


3.1


Information technology and communications


2,232



2,198



34


1.5


Regulatory and outside services


1,290



1,765



(475)


(26.9)


Deposit and loan transaction costs


1,384



1,526



(142)


(9.3)


Federal insurance premium


1,116



1,114



2


0.2


Advertising and promotional


1,004



1,032



(28)


(2.7)


Other expenses, net


1,645



2,607



(962)


(36.9)


Total other expenses

$

23,217


$

24,741


$

(1,524)


(6.2)%


The decrease in regulatory and outside services expense was due primarily to the timing of fees paid for external audit and tax preparation services. The decrease in other expenses, net was due primarily to a $638 thousand decrease in other real estate owned ("OREO") operations expense, from $670 thousand for the prior quarter, to $32 thousand for the current quarter, along with a decrease in expenses related to our low-income housing partnerships.  Over the past 12 months, OREO properties were owned by Capitol Federal Savings Bank (the "Bank"), on average, for approximately five months before they were sold.

Income Tax Expense

Income tax expense was $9.3 million for the current quarter compared to $8.9 million for the prior quarter.  The effective income tax rate for the current quarter was 34.5% compared to 33.5% for the prior quarter.  The difference in the effective income tax rate between quarters was due primarily to items impacting the prior quarter, largely the filing of the Company's income tax returns.  Management anticipates the effective tax rate for fiscal year 2013 will be approximately 34%, based on fiscal year 2013 estimates as of March 31, 2013.  This rate is lower than the prior year rate of 35.8% due primarily to higher deductible expenses associated with the Employee Stock Ownership Plan "ESOP", and higher tax credits related to our low income housing partnerships.  Additionally, pre-tax income is anticipated to be lower than the prior year, due primarily to the items outlined in other expenses in the "Comparison of Operating Results for the Six Months Ended March 31, 2013 and 2012" discussion below, which results in all items impacting the income tax rate to have a larger impact on the overall effective tax rate than in fiscal year 2012.

Comparison of Operating Results for the Six Months Ended March 31, 2013 and 2012

For the six month period ended March 31, 2013, the Company recognized net income of $35.3 million, compared to net income of $38.1 million for the six month period ended March 31, 2012.  The $2.8 million, or 7.4%, decrease in net income was due primarily to an increase in other expenses and a decrease in net interest income, partially offset by a decrease in income tax expense and provision for credit losses.  The net interest margin decreased three basis points, from 2.02% for the prior year six month period to 1.99% for the current six month period, primarily as a result of a decrease in loan and security yields which more than offset the benefit received from a decrease in the cost of funds between the two periods. 

Interest and Dividend Income

The weighted average yield on total interest-earning assets decreased 27 basis points from the prior year six month period to 3.38% for the current six month period and the average balance of interest-earning assets decreased $154.6 million from the prior year six month period.  The decrease in the weighted average balance between the two periods was primarily in lower yielding assets; specifically the investment securities portfolio, where the proceeds from securities called or maturing not reinvested in the portfolio were used largely to repurchase stock, pay dividends to stockholders, and fund loan activity.  The average balance of the loan portfolio increased between the two periods; however, not enough to overcome the impact of the reduction in the loan portfolio yield.

The following table presents the components of interest and dividend income for the time periods presented, along with the change in dollars and percent. The decrease in interest income on loans receivable and MBS was due primarily to a decrease in the weighted average yield of each portfolio.  The decrease in interest income on investment securities was due primarily to a decrease in the average balance of the portfolio between periods.














For the Six Months Ended








March 31,


Change Expressed in:



2013


2012


Dollars


Percent



(Dollars in thousands)




INTEREST AND DIVIDEND INCOME:












Loans receivable

$

115,403


$

120,460


$

(5,057)


(4.2)%


MBS


29,629



36,542



(6,913)


(18.9)


Investment securities


5,322



8,752



(3,430)


(39.2)


Capital stock of FHLB


2,233



2,202



31


1.4


Cash and cash equivalents


69



145



(76)


(52.4)


Total interest and dividend income

$

152,656


$

168,101


$

(15,445)


(9.2)%


The average yield on the loans receivable portfolio decreased 54 basis points, from 4.62% for the prior year six month period to 4.08% for the current six month period.  The decrease in the weighted average yield was due to the continued downward repricing of the existing portfolio due to endorsements and refinances, as well as to the origination and purchase of loans at rates less than the weighted average rate of the existing portfolio.  The decrease in interest income on loans receivable resulting from the decrease in the average yield was partially offset by a $439.9 million increase in the average balance of the portfolio, which was primarily a result of a bulk loan purchase during the quarter ended September 30, 2012.  The average yield on the MBS portfolio decreased 48 basis points, from 3.03% during the prior year six month period to 2.55% for the current six month period.  The decrease in the average yield was due primarily to purchases of MBS between periods with yields less than the average yield on the existing portfolio.  The funds for these purchases were provided primarily from repayments and prepayments of higher yielding MBS.  The decrease in interest income on investment securities was due primarily to a $448.6 million decrease in the average balance of the portfolio, of which $257.1 million related to securities at the holding company.  The cash flows from calls and maturities of investment securities that were not reinvested in the portfolio were used to repurchase stock, pay dividends to stockholders, and fund loan activity. 

Interest Expense

The weighted average rate paid on total interest-bearing liabilities decreased 35 basis points from the prior year six month period to 1.68% for the current six month period and the average balance of interest-bearing liabilities increased $67.0 million from the prior year six month period.  The increase in the average balance of interest-bearing liabilities was largely in lower rate deposit products while the average balance of certificates of deposit decreased between the two periods.

The following table presents the components of interest expense for the time periods presented, along with the change in dollars and percent. The decrease in interest expense on FHLB advances and deposits was due primarily to a decrease in the weighted average rate paid on the portfolios.  The decrease in interest expense on repurchase agreements was due primarily to a decrease in the average balance between periods.














For the Six Months Ended








March 31,


Change Expressed in:



2013


2012


Dollars


Percent



(Dollars in thousands)




INTEREST EXPENSE:












FHLB advances

$

36,537


$

42,782


$

(6,245)


(14.6)%


Deposits


19,193



24,622



(5,429)


(22.0)


Repurchase agreements


6,976



7,857



(881)


(11.2)


Total interest expense

$

62,706


$

75,261


$

(12,555)


(16.7)%


The weighted average rate paid on FHLB advances decreased 54 basis points, from 3.44% for the prior year six month period to 2.90% for the current six month period.  The decrease in the average rate paid was due to the renewal of advances between periods to lower rates, as well as to the prepayment of an advance during the second quarter of fiscal year 2012.  The decrease in the weighted average rate paid on the deposit portfolio was primarily due a decrease in the weighted average rate paid on the certificate of deposit and money market portfolios as the portfolios continued to reprice to lower market rates.  The weighted average rate paid on the certificate of deposit portfolio decreased 32 basis points, from 1.71% for the prior year six month period to 1.39% for the current six month period.  The weighted average rate paid on the money market portfolio decreased 12 basis points, from 0.34% for the prior year six month period to 0.22% for the current six month period.  The decrease in interest expense on repurchase agreements was due primarily to a $39.5 million decrease in the average balance between periods as a result of maturing agreements not being renewed; rather, the agreements were replaced with FHLB advances.

Provision for Credit Losses

The provision for credit losses for the current six month period was $233 thousand, compared to $2.0 million for the prior year six month period.  The decrease in the provision for credit losses between periods was a result of the improvement in the performance of our loan portfolio, as evidenced by the decline in net charge-offs and loans 90 or more days delinquent or in foreclosure. Net charge-offs during the current six month period were $1.3 million, of which $372 thousand related to loans that were discharged in a prior fiscal year under Chapter 7 bankruptcy that must be, in accordance with OCC regulations, evaluated for collateral value loss, even if they are current.  Net charge-offs during the prior year six month period were $4.9 million, of which $3.5 million was related to the implementation of a loan charge-off policy during January 2012.  OCC Call Report requirements do not permit the use of specific valuation allowances, which the Bank was previously utilizing for potential loan losses, as permitted by the Bank's previous regulator.  Loans 90 or more days delinquent or in foreclosure decreased $7.1 million, or 28.1%, from $25.3 million at March 31, 2012 to $18.2 million at March 31, 2013. 

Other Income

The following table presents the components of other income for the time periods presented, along with the change in dollars and percent.














For the Six Months Ended








March 31,


Change Expressed in:



2013


2012


Dollars


Percent



(Dollars in thousands)




OTHER INCOME:












Retail fees and charges

$

7,513


$

8,018


$

(505)


(6.3)%


Insurance commissions


1,550



1,343



207


15.4


Loan fees


885



1,135



(250)


(22.0)


BOLI


743



799



(56)


(7.0)


Other income, net


1,021



1,029



(8)


(0.8)


Total other income

$

11,712


$

12,324


$

(612)


(5.0)%


The decrease in retail fees and charges was due primarily to a decrease in service charges and debit card income.  The decrease in loan fees was due primarily to a decrease in servicing fees received from sold loans as a result of a decrease in our sold loan portfolio.  The increase in insurance commissions was due largely to the receipt of annual commissions from certain insurance providers as a result of favorable claims experience during the prior year.

Other Expense

The following table presents the components of other expense for the time periods presented, along with the change in dollars and percent.














For the Six Months Ended








March 31,


Change Expressed in:



2013


2012


Dollars


Percent



(Dollars in thousands)




OTHER EXPENSES:












Salaries and employee benefits

$

24,336


$

21,173


$

3,163


14.9%


Occupancy expense


4,709



4,170



539


12.9


Information technology and communications


4,430



3,664



766


20.9


Regulatory and outside services


3,055



2,548



507


19.9


Deposit and loan transaction costs


2,910



2,505



405


16.2


Federal insurance premium


2,230



2,176



54


2.5


Advertising and promotional


2,036



1,751



285


16.3


Other expenses, net


4,252



6,049



(1,797)


(29.7)


Total other expenses

$

47,958


$

44,036


$

3,922


8.9%


The increase in salaries and employee benefits expense was due primarily to compensation expense on unallocated ESOP shares related to the $0.52 True Blue® dividend paid in December 2012, along with stock option and restricted stock grants in May 2012 and September 2012.  The increase in occupancy expense was due largely to an increase in depreciation expense and real estate taxes associated with the remodel of our home office.  The increase in information technology and communications expense was primarily related to maintenance and licensing expenses.  The increase in regulatory and outside services was due largely to professional services, along with the timing of fees paid for external audit and tax preparation services.  The increase in deposit and loan transaction costs was primarily related to loan activity.  The decrease in other expenses, net, was due primarily to a decrease in OREO operations expense, a decrease in office supplies and related expenses, and a recovery of valuation allowance expense on the mortgage-servicing rights asset compared to an impairment expense in the prior year. 

We currently anticipate the following increases in other expenses during the full fiscal year 2013, as compared to the full fiscal year 2012:  (1) a $4.8 million increase in salaries and employee benefits due primarily to an estimated $2.7 million in compensation expense on unallocated ESOP shares as a result of the True Blue® and special year-end dividends paid and $1.4 million resulting from a full year's impact of equity plan awards made in May 2012 and September 2012; (2) a $2.6 million increase in information technology and communications expense and occupancy expense as a result of an increase in licensing and maintenance expenses related to upgrades to our information technology infrastructure and an increase in depreciation expense associated with the remodel of our home office; and (3) a $1.1 million increase in advertising expense, which is due primarily to media campaigns that were delayed until fiscal year 2013.  We currently anticipate that the preceding increases in other expenses will be partially offset by an estimated $1.0 million decrease in other expenses, net, due primarily to decreases in OREO operations expense.

The final ESOP loan payment associated with the shares acquired in our initial public offering in March 1999 will be made on September 30, 2013.  As a result, salaries and employee benefits expense is currently anticipated to decrease approximately $4.5 million in fiscal year 2014, as compared to fiscal year 2013.  Additionally, we do not currently anticipate additional compensation expense on unallocated ESOP shares in fiscal year 2014, which would result in an additional decrease in salaries and employee benefit expense of $3.0 million, when compared to fiscal year 2013.

Income Tax Expense

Income tax expense was $18.2 million for the current six month period compared to $21.0 million for the prior year six month period.  The decrease in expense between periods was due primarily to a decrease in pretax income.  The effective tax rate for the current six month period was 34.0% compared to 35.5% for the prior year six month period.