Capitol Federal Financial, Inc.® Reports Second Quarter Fiscal Year 2021 Results

Rhea-AI Summary

Capitol Federal Financial, Inc. (CFFN) reported net income of $20.4 million or $0.15 per share for Q1 2021, compared to $18.9 million or $0.14 per share in Q4 2020. The net interest margin decreased to 1.88% due to lower yields on loans and securities. Notably, a $7.4 million gain was realized from the sale of Visa Class B shares, while a $4.8 million loss was incurred from terminating interest rate swaps. The Bank also recorded a $3.0 million negative provision for credit losses, reflecting an improved economic outlook. A dividend of $0.085 per share was declared for distribution on May 21, 2021.

Positive

• Net income increased to $20.4 million from $18.9 million QoQ.
• Realized a $7.4 million gain from the sale of Visa Class B shares.
• Negative provision for credit losses of $3.0 million indicates improving economic conditions.
• Annualized deposit growth of approximately 15%.

Negative

• Net interest margin decreased from 1.92% to 1.88%.
• Interest income on loans decreased by 5.6%, impacting overall income metrics.
• Non-interest expenses increased due to a $4.8 million loss from terminating interest rate swaps.

Capitol Federal Financial, Inc.^® (NASDAQ: CFFN) (the "Company"), the parent company of Capitol Federal Savings Bank (the "Bank"), announced results today for the quarter ended March 31, 2021. Detailed results will be available in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, which will be filed with the Securities and Exchange Commission ("SEC") on or about May 10, 2021 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 $20.4 million;
• basic and diluted earnings per share of $0.15;
• net interest margin of 1.88%;
• annualized deposit growth of approximately 15%;
• paid dividends of $11.5 million, or $0.085 per share; and
• on April 20, 2021, announced a cash dividend of $0.085 per share, payable on May 21, 2021 to stockholders of record as of the close of business on May 7, 2021.

During the current quarter, the Bank completed three unique transactions that impacted operating results:

• Sold Visa Class B shares for a gain of $7.4 million.
• Terminated $200.0 million of fixed-pay swaps with an average cost at the time of termination of 2.62% and realized a loss of $4.8 million. The estimated earn-back period of the loss is approximately 15 months.
• Wrote down the value of a branch we intend to sell by $1.2 million.

For the quarter ended March 31, 2021, the Bank also recorded a negative provision for credit losses of $3.0 million.

Since the onset of the Coronavirus Disease 2019 ("COVID-19") pandemic, the Bank has lowered its rates offered on all deposit products except retail checking and savings accounts. The impact of reducing rates offered on our certificate of deposit products has been to lower the cost of deposits as certificates of deposit reprice to a lower rate when they mature and as new accounts are opened. Additionally, certain borrowings were repaid or restructured over the past year using funds obtained through deposit growth, which reduced interest expense on borrowings. Over this time, we lowered rates for our loan products. In late February 2021, as market interest rates began to increase, we began to increase our offered loan rates in our market areas. Despite this recent increase, the yield on the loan portfolio will likely continue to decrease in the near term due to the high levels of prepayments, refinances and endorsements, but not at the same magnitude as the past year. With significant cash inflows realized due to investment securities being called and prepayments on loans and mortgage-backed securities ("MBS") over the past year and the current yields on reinvested funds into new securities being lower than existing portfolio yields, the yield on our investments has been reduced significantly.

Comparison of Operating Results for the Three Months Ended March 31, 2021 and December 31, 2020

For the quarter ended March 31, 2021, the Company recognized net income of $20.4 million, or $0.15 per share, compared to net income of $18.9 million, or $0.14 per share, for the quarter ended December 31, 2020. The increase was due primarily to an increase in non-interest income resulting mainly from the sale of VISA Class B shares, partially offset by an increase in non-interest expense due to the termination of $200.0 million of interest rate swaps. The net interest margin decreased four basis points, from 1.92% for the prior quarter to 1.88% for the current quarter. The decrease in the net interest margin was due mainly to a decrease in the loan portfolio and securities portfolio average yields, along with a change in asset mix as cash flows from the loan portfolio have been invested into lower yielding securities, partially offset by a decrease in the average cost of borrowings and deposits. Our net interest margin could continue to decrease if our interest-earning assets continue to reprice to lower market rates at a faster pace than our deposits and borrowings, and if we continue investing in lower yielding securities rather than reinvesting cash flows into the loan portfolio.

Interest and Dividend Income

The weighted average yield on total interest-earning assets decreased 17 basis points, from 2.98% for the prior quarter to 2.81% for the current quarter, while the average balance of interest-earning assets increased $30.1 million between the two periods. 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.

	For the Three Months Ended
	March 31,				December 31,				Change Expressed in:
	2021				2020				Dollars					Percent
	(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable	$	57,285			$	60,694			$	(3,409	)			(5.6	)	%
MBS	5,429				5,710				(281		)			(4.9	)
Federal Home Loan Bank Topeka ("FHLB") stock	951				1,069				(118		)			(11.0	)
Investment securities	629				683				(54		)			(7.9	)
Cash and cash equivalents	40				51				(11		)			(21.6	)
Total interest and dividend income	$	64,334			$	68,207			$	(3,873	)			(5.7	)

The decrease in interest income on loans receivable was due to a 14 basis point decrease in the weighted average portfolio yield and a $96.2 million decrease in the average balance. The weighted average yield on the loans receivable portfolio decreased from 3.41% for the prior quarter to 3.27% for the current quarter, due mainly to loans repricing to lower current market rates as a result of endorsements, refinances and adjustable-rate loan rate changes, along with a decrease in commercial loan deferred fee and discount recognition related to Paycheck Protection Program ("PPP") loans and other commercial loan activity. One- to four-family correspondent loan payoff activity decreased during the current quarter compared to the prior quarter; thereby reducing the amount of premium amortization and reduction in the loan portfolio yield. Correspondent loan payoff activity remains at elevated levels compared to historical norms which was the primary reason for the decrease in the average balance of the loan portfolio during the current quarter.

The decrease in interest income on the MBS portfolio was due to a 25 basis point decrease in the weighted average yield, to 1.50% for the current quarter, due primarily to an increase in the impact of net premium amortization, along with purchases at lower market yields. This was partially offset by a $142.5 million increase in the average balance as a result of purchases, primarily utilizing excess cash flows from the loan portfolio and operating cash, along with funds from growth in the deposit portfolio that were not used to pay down borrowings.

Interest Expense

The weighted average rate paid on interest-bearing liabilities decreased 14 basis points, from 1.20% for the prior quarter to 1.06% for the current quarter, while the average balance of interest-bearing liabilities increased $48.1 million between the two periods. The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.

	For the Three Months Ended
	March 31,				December 31,				Change Expressed in:
	2021				2020				Dollars					Percent
	(Dollars in thousands)
INTEREST EXPENSE:
Deposits	$	12,529			$	14,067			$	(1,538	)			(10.9	)	%
Borrowings	8,732				10,327				(1,595		)			(15.4	)
Total interest expense	$	21,261			$	24,394			$	(3,133	)			(12.8	)

The decrease in interest expense on deposits was due primarily to a decrease in the weighted average rate paid on the retail/business certificate of deposit portfolio. The weighted average rate on the retail/business certificate of deposit portfolio decreased 15 basis points, to 1.61% for the current quarter. Management has generally reduced deposit offer rates as discussed above. See the Financial Condition section below for additional information on deposits.

The decrease in interest expense on borrowings was due primarily to not replacing term borrowings that matured during the current quarter and prior quarter, along with prepaying certain advances and replacing them at lower rates. Cash flows from the deposit portfolio were generally utilized to repay maturing term borrowings during the current and prior quarters. The average balance of borrowings decreased $171.9 million compared to the prior quarter.

Provision for Credit Losses

For the quarter ended March 31, 2021, the Bank recorded a negative provision for credit losses of $3.0 million, compared to a negative provision for credit losses of $1.5 million for the prior quarter. The negative provision in the current quarter was composed of a $2.7 million decrease in the allowance for credit losses ("ACL") for loans and a $305 thousand decrease in reserves for off-balance sheet credit exposures. The $3.0 million negative provision for credit losses was due primarily to continued improvements in the economic forecast used in the model. See additional discussion regarding management's evaluation of the adequacy of the Bank's ACL and reserves for off-balance sheet credit exposures at March 31, 2021 in the Asset Quality section below.

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.

	For the Three Months Ended
	March 31,				December 31,				Change Expressed in:
	2021				2020				Dollars					Percent
	(Dollars in thousands)
NON-INTEREST INCOME:
Gain on sale of Visa Class B shares	$	7,386			$	—			$	7,386				N/A
Deposit service fees	2,814				2,947				(133		)			(4.5	)	%
Insurance commissions	888				638				250					39.2
Other non-interest income	1,389				1,485				(96		)			(6.5	)
Total non-interest income	$	12,477			$	5,070			$	7,407				146.1

During the current quarter, the Bank sold all of its Visa Class B shares, resulting in a $7.4 million gain. The increase in insurance commissions was due primarily to the receipt of annual contingent insurance commissions which were higher than what was anticipated and accrued.

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.

	For the Three Months Ended
	March 31,				December 31,				Change Expressed in:
	2021				2020				Dollars					Percent
	(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits	$	13,397			$	14,138			$	(741	)			(5.2	)	%
Information technology and related expense	4,599				4,233				366					8.6
Occupancy, net	3,523				3,379				144					4.3
Loss on interest rate swap termination	4,752				—				4,752					N/A
Regulatory and outside services	1,234				1,585				(351		)			(22.1	)
Advertising and promotional	1,484				838				646					77.1
Deposit and loan transaction costs	664				766				(102		)			(13.3	)
Federal insurance premium	634				621				13					2.1
Office supplies and related expense	463				424				39					9.2
Other non-interest expense	1,903				1,083				820					75.7
Total non-interest expense

FAQ

What were Capitol Federal Financial's earnings for Q1 2021?

Capitol Federal Financial reported net income of $20.4 million, or $0.15 per share for Q1 2021.

How did Capitol Federal Financial perform compared to the previous quarter?

Net income increased from $18.9 million in Q4 2020 to $20.4 million in Q1 2021.

What is the net interest margin reported by CFFN?

The net interest margin for CFFN decreased to 1.88% for Q1 2021.

What is the significance of the Visa Class B shares sale?

The sale of Visa Class B shares resulted in a $7.4 million gain, positively impacting non-interest income.

What was the recent dividend announcement by Capitol Federal Financial?

CFFN announced a cash dividend of $0.085 per share, payable on May 21, 2021.