Capitol Federal Financial, Inc. Reports Second Quarter Fiscal Year 2015 Results

TOPEKA, Kan., April 29, 2015 /PRNewswire/ -- Capitol Federal® Financial, Inc. (NASDAQ: CFFN) (the "Company") announced results today for the quarter ended March 31, 2015.  Detailed results will be available in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, which will be filed with the Securities and Exchange Commission ("SEC") on or about May 5, 2015 and posted on our website, http://ir.capfed.com.  For best viewing results, please view this release in Portable Document Format (PDF) on our website.

Highlights for the quarter include:

• net income of $19.2 million, including $682 thousand from the daily leverage strategy;
• basic and diluted earnings per share of $0.14;
• annualized loan portfolio growth of 7%;
• annualized deposit portfolio growth of 11%;
• net interest margin of 1.71% (which would have been 2.04%, excluding the effects of the daily leverage strategy);
• dividends paid of $11.6 million, or $0.085 per share.

Comparison of Operating Results for the Three Months Ended March 31, 2015 and December 31, 2014

Net income decreased $1.2 million, or 6.0%, from the quarter ended December 31, 2014 to $19.2 million for the quarter ended March 31, 2015, due primarily to a decrease in interest income.  Net income attributable to the daily leverage strategy was $682 thousand during the current quarter.  The net interest margin decreased five basis points from the prior quarter to 1.71% for the current quarter.  Excluding the effects of the daily leverage strategy, the net interest margin would have been 2.04% for the current quarter, compared to 2.11% for the prior quarter.  The decrease in the net interest margin from the prior quarter, both including and excluding the effects of the daily leverage strategy, was due primarily to a decrease in the weighted average yield on the loans receivable portfolio.

Interest and Dividend Income
The weighted average yield on total interest-earning assets for the current quarter decreased four basis points from the prior quarter, to 2.70%, due mainly to a decrease in the weighted average yield on the loans receivable portfolio, while the average balance of interest-earning assets increased $38.7 million between the two periods.  Absent the impact of the daily leverage strategy, the weighted average yield on total interest-earnings assets would have decreased five basis points from the prior quarter, to 3.21%, while the average balance would have increased $53.6 million.  The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent.

The decrease in interest income on loans receivable was due to a six basis point decrease in the weighted average yield on the portfolio, to 3.69% for the current quarter, partially offset by a $56.9 million increase in the average balance of the portfolio.  The decrease in the weighted average yield was due primarily to an increase in the net amortization of premiums/deferred costs and to the downward repricing of adjustable-rate loans.  Net premium/deferred cost amortization of $331 thousand during the current quarter decreased the average yield on the portfolio by two basis points.  During the prior quarter, $118 thousand of net discounts/unearned loan fees were accreted, which increased the average yield on the portfolio by one basis point.

The decrease in interest income on MBS was due to a $70.0 million decrease in the average balance of the portfolio as cash flows not reinvested in the portfolio were used primarily to fund loan growth.  During the current quarter, $1.3 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 30 basis points.  During the prior quarter, $1.3 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 31 basis points.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities increased three basis points from the prior quarter, to 1.14% for the current quarter due mainly to an increase in the weighted average rate paid on FHLB advances, and the average balance of interest-bearing liabilities increased $77.7 million between the two periods.  Absent the impact of the daily leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased three basis points from the prior quarter, to 1.39%, and the average balance would have increased $92.7 million due mainly to an increase in the average balance of the deposit portfolio.  The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.

The increase in interest expense on FHLB borrowings was due primarily to a nine basis point increase in the weighted average rate paid on FHLB advances, to 2.51%, during the current quarter.  This increase was due primarily to a full quarter impact of the renewal of $250.0 million of advances during the prior quarter with a previous weighted average rate of 0.84% to a new weighted average rate of 1.99%.

Provision for Credit Losses
Capitol Federal Savings Bank (the "Bank") recorded a provision for credit losses during the current quarter of $275 thousand compared to a provision for credit losses during the prior quarter of $173 thousand.  The $275 thousand provision for credit losses in the current quarter takes into account net charge-offs of $166 thousand and loan growth.

Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.

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.  The decrease in retail fees and charges was due primarily to a decrease in debit card income, due in part to seasonality, and a decrease in service charges earned.

Income Tax Expense
Income tax expense was $9.7 million for the current quarter compared to $9.5 million for the prior quarter.  The increase between periods was due to an increase in the effective income tax rate, from 31.7% for the prior quarter, to 33.5% for the current quarter.  The change in the effective tax rate was due largely to the prior quarter including discrete items related to state income tax liabilities which lowered the effective tax rate, along with a reduction in the benefit of the low income housing tax credits in the current quarter.  The reduction in benefit was due to adjusting the tax credits to actual credits we expect to realize during the tax year due to the receipt of the related Schedule K-1s.

Comparison of Operating Results for the Six Months Ended March 31, 2015 and 2014

For the six month period ended March 31, 2015, the Company recognized net income of $39.7 million, compared to net income of $37.5 million for the six month period ended March 31, 2014.  The $2.2 million, or 5.9%, increase in net income was due primarily to a $4.7 million increase in interest income, partially offset by a $1.4 million increase in total non-interest expense and a $786 thousand increase in income tax expense due mainly to an increase in pre-tax income.  The net interest margin decreased 29 basis points, from 2.02% for the prior year six month period, to 1.73% for the current six month period as a result of the daily leverage strategy.  Excluding the effects of the daily leverage strategy, the net interest margin would have been 2.08% for the current six month period, or six basis points higher than the prior year six month period.  This increase was primarily a result of a decrease in the cost of funds and an increase in the dividend rate received on FHLB stock between the two periods.  The positive impact on the net interest margin resulting from the shift in the mix of interest-earning assets from relatively lower yielding securities to higher yield loans was mostly offset by a decrease in market interest rates.

Interest and Dividend Income
The weighted average yield on total interest-earning assets decreased 52 basis points, from 3.24% for the prior year six month period, to 2.72% for the current six month period, while the average balance of interest-earning assets increased $2.04 billion from the prior year six month period.  The decrease in the weighted average yield and the increase in the average balance both were due primarily to the daily leverage strategy.  Absent the impact of the daily leverage strategy, the weighted average yield on total interest-earnings assets would have decreased one basis point from the prior year six month period, to 3.23%, and the average balance would have decreased $32.4 million.  The following table presents the components of interest and dividend income for the time periods presented along with the change measured in dollars and percent.

The increase in interest income on loans receivable was due to a $261.5 million increase in the average balance of the portfolio, partially offset by a decrease in the weighted average yield on the portfolio.  The weighted average yield on the portfolio decreased seven basis points, from 3.79% for the prior year six month period, to 3.72% for the current six month period.  The decrease in the weighted average yield was due primarily to downward repricing of adjustable-rate loans, as well as to repayments of higher-yielding loans.

The decrease in interest income on MBS and investment securities was due primarily to a decrease in the average balance of each portfolio as cash flows not reinvested in the portfolios were used largely to fund loan growth.  The average balance of the MBS portfolio decreased $258.5 million and the average balance of the investment securities portfolio decreased $124.2 million between the two periods.  Additionally, the weighted average yield on the MBS portfolio decreased 11 basis points, from 2.39% during the prior year six month period, to 2.28% for the current six month period.  The decrease in the weighted average yield on the MBS portfolio was due primarily to repayments of MBS with yields greater than the weighted average yield on the existing portfolio, and to an increase in the impact of net premium amortization.  Net premium amortization was $2.6 million during the current six month period, which decreased the weighted average yield on the portfolio by 31 basis points.  During the prior year six month period, $2.7 million of net premiums were amortized, which decreased the weighted average yield on the portfolio by 27 basis points.  At March 31, 2015, the net balance of premiums/(discounts) on our portfolio of MBS was $16.4 million.

The increase in dividends received on FHLB stock was due primarily to an $80.0 million increase in the average balance of the portfolio as a result of the daily leverage strategy, as well as an increase in the FHLB dividend rate between the two periods.  The increase in interest income on cash and cash equivalents was due primarily to a $2.08 billion increase in the average balance resulting mainly from the daily leverage strategy.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities decreased 33 basis points, from 1.46% for the prior year six month period, to 1.13% for the current six month period, while the average balance of interest-bearing liabilities increased $2.14 billion from the prior year six month period due primarily to the daily leverage strategy.  Absent the impact of the daily leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have decreased nine basis points from the prior six month period, to 1.37%, due primarily to a decrease in the cost of term borrowings.  The average balance of interest-bearing liabilities would have increased $73.1 million due to deposit growth.  The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.

The increase in interest expense on FHLB borrowings was due primarily to a $2.07 billion increase in the average balance on the FHLB line of credit as a result of the daily leverage strategy, partially offset by a 111 basis point decrease in the weighted average rate paid on the borrowings.  The decrease in the weighted average rate paid on the FHLB borrowings portfolio was primarily a result of borrowings on the FHLB line of credit, at an average rate of 0.25% for the current six month period, in conjunction with the daily leverage strategy.  Absent the impact of the daily leverage strategy, the average rate paid on FHLB borrowings would have decreased 12 basis points from the prior year six month period, to 2.46% for the current six month period, primarily as a result of renewals of advances to lower market rates during the prior fiscal year.

The decrease in interest expense on repurchase agreements was due to the maturity of a $100.0 million agreement at 4.20% between periods.  The repurchase agreement was replaced with an FHLB advance, which was at a lower rate than the maturing repurchase agreement.

Provision for Credit Losses
The Bank recorded a provision for credit losses during the current six month period of $448 thousand compared to a provision for credit losses during the prior year six month period of $675 thousand.  The $448 thousand provision for credit losses in the current six month period takes into account net charge-offs of $269 thousand and loan growth.

Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.

The decrease in insurance commissions was due primarily to a decrease in annual commissions received from certain insurance providers as a result of less favorable claims experience year-over-year.  Management currently anticipates retail fees and charges earned will decrease approximately $100 thousand during the full fiscal year 2015 compared to the full fiscal year 2014, as opposed to our original estimate of $1.3 million.  The change in our estimate is due primarily to higher than anticipated growth in our checking portfolio, resulting in higher than anticipated fee and debit card activity.

Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.

The decrease in salaries and employee benefits expense was due primarily to the prior year six month period including compensation expense on unallocated Employee Stock Ownership Plan ("ESOP") shares related to the True Blue® Too Capitol dividend paid in December 2013, along with a decrease in costs associated with the short-term performance plan.  The increase in information technology and communications expense was primarily related to continued upgrades to our information technology infrastructure.  The decrease in occupancy, net was due mainly to a decrease in building repair and maintenance.  The increase in low income housing partnership expense was due mainly to impairments, as well as to an increase in amortization expense due to an increase in the overall investment balance as a result of funding new partnerships and the general life cycle of the partnership activities.  We have grown our investments in newly formed low income housing partnerships over the past couple of years.  Generally, losses associated with these partnerships out-pace the tax credit benefit in the early years as they establish their operations.  Management anticipates that low income housing partnership expense will increase approximately $2.6 million in fiscal year 2015 compared to fiscal year 2014, an increase from our original estimate of $2.0 million.  The overall increase in low income housing expense year-over-year is due to an increase in impairments and amortization expense.  The increase in federal insurance premium was due primarily to the daily leverage strategy.  The decrease in advertising and promotional expense was due primarily to the timing of media campaigns and sponsorships.

The Company's efficiency ratio was 43.66% for the current six month period compared to 44.09% for the prior year six month period.  The change in the efficiency ratio was due primarily to an increase in net interest income.  The efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income.  A lower value indicates that the financial institution is generating revenue with a lower level of expense.

Income Tax Expense
Income tax expense was $19.2 million for the current six month period compared to $18.4 million for the prior year six month period.  The $786 thousand increase between periods was due to an increase in pre-tax income.  The effective tax rate for the current six month period was 32.6% compared to 32.9% in the prior year six month period.  Management anticipates the effective tax rate for fiscal year 2015 will be approximately 32% to 33%, based on fiscal year 2015 estimates as of March 31, 2015.  The tax benefit associated with the low income housing tax credits is expected to be $4.3 million for fiscal year 2015, which is reflected in the effective tax rate range.

Financial Condition as of March 31, 2015

Total assets were $10.02 billion at March 31, 2015 compared to $9.87 billion at September 30, 2014.  Total assets were in excess of $10.0 billion at March 31, 2015 due to growth in deposits.  Management does not currently anticipate being in excess of $10.0 billion in total assets in future quarters as the daily leverage tier strategy will be adjusted accordingly, nor do we anticipate being subject to any additional regulatory requirements as a result of exceeding $10.0 billion in total assets at March 31, 2015 as we have not exceeded this regulatory threshold for four consecutive quarters.  The increase in total assets was primarily in cash and cash equivalents held, in excess of the daily leverage strategy, due mainly to the balance of operating cash at September 30, 2014 being lower than the normal range of $50 million to $75 million, maintaining cash for increased loan closings and for brokered deposits maturing in late April and throughout the month of May, and from the redemption of $58.5 million of FHLB stock due to the removal of $1.30 billion from the FHLB line of credit in conjunction with the daily leverage strategy at March 31, 2015.  A majority of the cash received from the redemption of the FHLB stock was used to acquire FHLB stock when the full daily leverage strategy was reinstated on April 1, 2015.

Loans receivable, net, increased $132.2 million from September 30, 2014, to $6.37 billion at March 31, 2015.  The majority of the loan growth was funded with cash flows from the securities portfolio.  During the current year six month period, the Bank originated and refinanced $307.7 million of loans with a weighted average rate of 3.62%, purchased $282.7 million of loans from correspondent lenders with a weighted average rate of 3.47%, and participated in $21.6 million of commercial real estate loans with a weighted average rate of 3.70%.

Total liabilities were $8.55 billion at March 31, 2015 compared to $8.37 billion at September 30, 2014.  The $174.3 million increase was due primarily to a $182.0 million increase in the deposit portfolio.  The increase in deposits was comprised of a $75.7 million increase in the certificate of deposit portfolio, a $69.8 million increase in the checking portfolio, a $20.8 million increase in the money market portfolio, and a $15.7 million increase in the savings portfolio.

Stockholders' equity was $1.48 billion at March 31, 2015 compared to $1.49 billion at September 30, 2014.  The $16.2 million decrease between periods was due primarily to the payment of $57.3 million in dividends and the repurchase of $3.6 million of stock, partially offset by net income of $39.7 million and a $2.8 million increase in accumulated other comprehensive income resulting from an increase in unrealized gains on available-for-sale ("AFS") securities due to a decrease in market yields between periods.  The $57.3 million in dividends paid during the current six month period consisted of a $0.26 per share, or $35.5 million, true-up dividend related to fiscal year 2014 earnings per the Company's dividend policy, and two regular quarterly dividends totaling $0.16 per share, or $21.8 million.  On April 17, 2015, the Company declared a regular quarterly cash dividend of $0.085 per share, or approximately $11.6 million, payable on May 15, 2015 to stockholders of record as of the close of business on May 1, 2015.

At March 31, 2015, Capitol Federal Financial, Inc., at the holding company level, had $118.7 million on deposit at the Bank.  For fiscal year 2015, it is the intent of the Board of Directors and management to continue with the payout of 100% of the Company's earnings to its stockholders.  Dividend payments depend upon a number of factors including the Company's financial condition and results of operations, regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company.

The Company's current stock repurchase plan, which does not have an expiration date, is for $175.0 million of common stock, of which $42.8 million remained available through the date of this release.  The Company did not repurchase any shares during the current quarter but did repurchase $3.6 million during the December 31, 2014 quarter.  Through the date of this release, the Company had repurchased 11,075,854 shares at an average price of $11.94 per share, or $132.2 million.

The following table presents the balance of stockholders' equity and related information as of the dates presented.

The following table presents a reconciliation of total and net shares outstanding as of March 31, 2015.

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a "well-capitalized" status for the Bank and the Company in accordance with regulatory standards.  As of March 31, 2015, the Company and Bank exceeded all regulatory capital requirements.  The following table presents the Bank's regulatory capital ratios at March 31, 2015 calculated under the Basel III guidelines.

A reconciliation of the Bank's equity under accounting principles generally accepted in the United States of America ("GAAP") to regulatory capital amounts as of March 31, 2015 is as follows (dollars in thousands):

Capitol Federal Financial, Inc. is the holding company for the Bank.  The Bank has 47 branch locations in Kansas and Missouri, and is one of the largest residential lenders in the State of Kansas.  News and other information about the Company can be found on the Internet at the Bank's website, http://www.capfed.com.

Except for the historical information contained in this press release, the matters discussed may be deemed to be forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions.  The words "may," "could," "should," "would," "will," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements.  Forward-looking statements that involve risks and uncertainties, including changes in economic conditions in the Company's market area, changes in policies by regulatory agencies and other governmental initiatives affecting the financial services industry, fluctuations in interest rates, demand for loans in the Company's market area, the future earnings and capital levels of the Bank, which would affect the ability of the Company to pay dividends in accordance with its dividend policies, competition, and other risks detailed from time to time in documents filed or furnished by the Company with the SEC.  Actual results may differ materially from those currently expected.  These forward-looking statements represent the Company's judgment as of the date of this release.  The Company disclaims, however, any intent or obligation to update these forward-looking statements.

SUPPLEMENTAL FINANCIAL INFORMATION

The following is a reconciliation of the basic and diluted earnings per share calculations for the periods indicated.

Loan Portfolio

The following table presents information related to the composition of our loan portfolio in terms of dollar amounts, weighted average rates, and percentages (before deductions for undisbursed loan funds, unearned loan fees and deferred costs, and ACL) as of the dates indicated.

The following table presents, for our portfolio of one- to four-family loans, the amount, percent of total, weighted average credit score, weighted average loan-to-value ("LTV") ratio, and the average balance per loan at the dates presented.  Credit scores are updated at least semiannually, with the last update in March 2015, from a nationally recognized consumer rating agency.  The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent Bank appraisal, if available.  In most cases, the most recent appraisal was obtained at the time of origination.

Loan Commitments

The following table summarizes our one- to four-family loan origination, refinance, and correspondent purchase commitments as of March 31, 2015, along with associated weighted average rates.  Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a rate lock fee.  A percentage of the commitments are expected to expire unfunded, so the amounts reflected in the table below are not necessarily indicative of future cash requirements.

Loan Activity

The following tables summarize activity in our loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in undisbursed loan funds, ACL, discounts/unearned loan fees, and premiums/deferred costs.  Loans that were paid-off as a result of refinances are included in repayments.  Purchased loans include purchases from correspondent lenders and participations with other lead banks.  There were no bulk loan purchases from nationwide lenders during the periods presented.  Loan endorsements are not included in the activity in the following tables because a new loan is not generated at the time of the endorsement.  The endorsed balance and rate are included in the ending loan portfolio balance and rate.  During the three and six months ended March 31, 2015, the Bank endorsed $70.2 million and $84.6 million of one- to four-family loans, respectively, reducing the average rate on those loans by 93 and 94 basis points, respectively.

The following table presents loan origination, refinance, and purchase activity for the periods indicated, excluding endorsement activity, along with associated weighted average rates and percent of total.  Loan originations, purchases, participations, and refinances are reported together.  The fixed-rate one- to four-family loans less than or equal to 15 years have an original maturity at origination of less than or equal to 15 years, while fixed-rate one- to four-family loans greater than 15 years have an original maturity at origination of greater than 15 years.  The adjustable-rate one- to four-family loans less than or equal to 36 months have a term to first reset of less than or equal to 36 months at origination, and adjustable-rate one- to four-family loans greater than 36 months have a term to first reset of greater than 36 months at origination.

The following table presents originated, refinanced, and correspondent activity in our one- to four-family loan portfolio, excluding endorsement activity, along with associated weighted average LTVs and weighted average credit scores for the periods indicated.

The following table presents the amount, percent of total, and weighted average rate, by state, for one- to four-family loan originations and correspondent purchases where originations and purchases in the state exceeded five percent of the total amount originated and purchased during the six months ended March 31, 2015.

Asset Quality

Economic conditions in the Bank's local market areas have a significant impact on the ability of borrowers to repay loans and the value of the collateral securing these loans.  As of March 2015, the unemployment rate was 4.2% for Kansas and 5.6% for Missouri, compared to the national average of 5.5%, based on information from the Bureau of Labor Statistics.

The following tables present loans 30 to 89 days delinquent, non-performing loans, and other real estate owned ("OREO") as of the dates indicated.  Of the loans 30 to 89 days delinquent at March 31, 2015, approximately 68% were 59 days or less delinquent.  Non-performing loans are loans that are 90 or more days delinquent or in foreclosure, and nonaccrual loans that are less than 90 days delinquent but are required to be reported as nonaccrual pursuant to Office of the Comptroller of the Currency ("OCC") reporting requirements even if the loans are current.  Non-performing assets include non-performing loans and OREO.  Over the past 12 months, OREO properties were owned by the Bank, on average, for approximately four months before they were sold.

The following tables present ACL activity and related ratios at the dates and for the periods indicated.

Securities Portfolio

The following table presents the distribution of our MBS and investment securities portfolio, at amortized cost, at the dates indicated.  The majority of our MBS and investment securities portfolio are composed of securities issued by U.S. government-sponsored enterprises ("GSEs").  Overall, fixed-rate securities comprised 79% of these portfolios at March 31, 2015.  The weighted average life ("WAL") is the estimated remaining principal repayment term (in years) after three-month historical prepayment speeds and projected call option assumptions have been applied.  Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.

MBS:  The following tables provide a summary of the activity in our MBS portfolio for the periods presented.  The weighted average yields and WALs for purchases are presented as recorded at the time of purchase.  The yields for the beginning balances are as of the last day of the period previous to the period presented and the yields for the ending balances are as of the last day of the period presented and are generally derived from recent prepayment activity on the securities in the portfolio as of the dates presented.  The beginning and ending WAL is the estimated remaining principal repayment term (in years) after three-month historical prepayment speeds have been applied.

Investment Securities:  The following tables provide a summary of the activity in our investment securities portfolio for the periods presented.  The weighted average yields and WALs for purchases are presented as recorded at the time of purchase.  The yields for the beginning balances are as of the last day of the period previous to the period presented and the yields for the ending balances are as of the last day of the period presented.  The beginning and ending WALs represent the estimated remaining principal repayment terms (in years) of the securities after projected call dates have been considered, based upon market rates at each date presented.

Deposit Portfolio

The following table presents the amount, weighted average rate, and percent of total for the components of our deposit portfolio at the dates presented.

The following table presents scheduled maturities of our certificates of deposit, along with associated weighted average rates, as of March 31, 2015:

Borrowings

The following table presents the maturity of FHLB advances, at par, and repurchase agreements, along with associated weighted average contractual and effective rates as of March 31, 2015.  At March 31, 2015, the Bank had $800.0 million outstanding on the FHLB line of credit, at a rate of 0.25%, in conjunction with the daily leverage strategy, that is not included in the following table.

The following table presents the maturity and weighted average repricing rate, which is also the weighted average effective rate, of certificates of deposit, split between retail and public unit/brokered deposit amounts, and term borrowings for the next four quarters as of March 31, 2015.

The following tables present term borrowing activity for the periods shown, which includes FHLB advances, at par, and repurchase agreements.  Line of credit activity is excluded from the following tables.  At March 31, 2015, the Bank had $800.0 million outstanding on the FHLB line of credit, at a rate of 0.25%, in conjunction with the daily leverage strategy.  The weighted average effective rate includes the net impact of the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid and deferred gains related to interest rate swaps previously terminated.  Rates on new borrowings are fixed-rate.  The weighted average maturity ("WAM") is the remaining weighted average contractual term in years.  The beginning and ending WAMs represent the remaining maturity at each date presented.  For new borrowings, the WAMs presented are as of the date of issue.

Average Rates and Lives

The following table presents the weighted average yields/rates and WALs (in years), after applying prepayment, call assumptions, and decay rates for our interest-earning assets and interest-bearing liabilities as of the date presented.  Yields presented for interest-earning assets include the amortization of fees, costs, premiums and discounts, which are considered adjustments to the yield.  The interest rate presented for term borrowings is the effective rate, which includes the net impact of the amortization of deferred prepayment penalties resulting from FHLB advances previously prepaid and deferred gains related to interest rate swaps previously terminated.  The terms presented for one- to four-family loans represent the contractual terms of the loan.

At March 31, 2015, the Bank's one-year gap between the amount of interest-earning assets and interest-bearing liabilities projected to reprice was $463.3 million, or 4.6% of total assets, compared to $326.0 million, or 3.6% of total assets, at December 31, 2014.  The amount of interest-bearing liabilities expected to reprice in a given period is not typically impacted by changes in interest rates because the Bank's borrowings and certificate of deposit portfolios have contractual maturities and generally cannot be terminated early without a prepayment penalty.  The majority of interest-earning assets anticipated to reprice in the coming year are repayments and prepayments on mortgage loans and MBS, both of which include the option to prepay without a fee being paid by the contract holder.  As interest rates rise, the amount of interest-earning assets expected to reprice will likely decrease from estimated levels as borrowers would have less economic incentive to modify their cost of borrowings.  If interest rates were to increase 200 basis points, as of March 31, 2015, the Bank's one-year gap is projected to be -$20.0 million, or -0.2% of total assets, meaning more liabilities would be anticipated to reprice than assets.  This compares to a one-year gap of -$148.7 million, or -1.6% of total assets, if interest rates were to increase 200 basis points as of December 31, 2014.  The change in the one-year gap amount in both the base case and +200 basis point scenarios between periods was due primarily to lower interest rates at March 31, 2015 than at December 31, 2014, resulting in an increase in prepayment projections on the Bank's mortgage loan and MBS portfolios, as well as an increase in the amount of securities projected to be called, resulting in an increase in the amount of assets expected to reprice over the 12-month horizon.  Additionally, the Bank repriced $250.0 million of term borrowings during the current quarter, which decreased the amount of liabilities expected to reprice during the 12-month horizon compared to the prior quarter projection.  The gap position of the Bank has been managed over the past several years in anticipation of higher interest rates.  Because of the on-balance sheet strategies implemented over the past several years of lengthening FHLB advances, increasing rates offered on longer-term certificate of deposit products, purchasing shorter term agency debentures, and focusing on the long-term value of the balance sheet through the measurement and management of our market value of portfolio equity, management believes the Bank is well-positioned to move into a market rate environment where interest rates are higher.

Average Balance Sheets

The following tables present the average balances of our assets, liabilities, and stockholders' equity, and the related annualized weighted average yields and rates on our interest-earning assets and interest-bearing liabilities for the periods indicated and the weighted average yield/rate on our interest-earning assets and interest-bearing liabilities at March 31, 2015.  As previously discussed, $1.30 billion of the daily leverage strategy was removed at March 31, 2015, so the yields/rates presented at March 31, 2015 in the tables below do not reflect the full effects of the daily leverage strategy.  Weighted average yields are derived by dividing annualized income by the average balance of the related assets, and weighted average rates are derived by dividing annualized expense by the average balance of the related liabilities, for the periods shown.  Average outstanding balances are derived from average daily balances.  The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates.  Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.

 

SOURCE Capitol Federal Financial, Inc.

Related Links

http://http://www.capfed.com