Capitol Federal Financial, Inc. (CFFN) 8-K Earnings Release, Regulated Disclosure

Topeka, KS - Capitol Federal^® Financial, Inc. (NASDAQ: CFFN) (the "Company"), the parent company of Capitol Federal Savings Bank (the "Bank"), announced results today for the fiscal year ended September 30, 2018. Detailed results will be available in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2018, which will be filed with the Securities and Exchange Commission ("SEC") on or about November 29, 2018 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 fourth quarter include:


•	closed on the acquisition of Capital City Bancshares, Inc. ("CCB");


•	net income of $21.4 million;


•	basic and diluted earnings per share of $0.16;


•	net interest margin of 2.24% (2.26% excluding the effects of the leverage strategy); and


•	paid dividends of $11.4 million, or $0.085 per share.

Highlights for the fiscal year include:


•	net income of $98.9 million;


•	basic and diluted earnings per share of $0.73;


•	net interest margin of 1.95% (2.24% excluding the effects of the leverage strategy);


•	paid dividends of $118.3 million, or $0.88 per share; and


•	declared a fiscal year 2018 cash true-up dividend of $0.39 per share, payable on November 30, 2018.

On August 31, 2018, the Company completed its acquisition of CCB, the parent company of Capital City Bank, a Kansas state chartered bank headquartered in Topeka, KS. Immediately upon closing the merger, Capital City Bank merged with and into the Bank. As a result of the merger, the Bank is entering the commercial banking business through the origination of commercial lending products and offering of commercial deposit services, and began offering trust and brokerage services. During the quarter ended September 30, 2018, the Company recognized approximately $375 thousand of acquisition-related expenses and recognized approximately $875 thousand of such expenses during fiscal year 2018. The Company's fiscal year 2018 results include one month of CCB operating results. Integration of information systems is anticipated to be completed early in the second calendar quarter of 2019.

Comparison of Operating Results for the Fiscal Years Ended September 30, 2018 and 2017

The Company recognized net income of $98.9 million, or $0.73 per share, for the fiscal year ended September 30, 2018 compared to net income of $84.1 million, or $0.63 per share, for the fiscal year ended September 30, 2017. The increase in net income was due primarily to a decrease in income tax expense. During the current fiscal year, the Tax Cuts and Jobs Act (the "Tax Act") was enacted which reduced the federal corporate income tax rate from 35% to 21% effective January 1, 2018. In accordance with accounting principles generally accepted in the United States of America ("GAAP"), the Company revalued its deferred tax assets and liabilities as of December 22, 2017 to account for the lower corporate income tax rate. The revaluation of the Company's deferred income tax assets and liabilities reduced income tax expense by $7.5 million. The effective tax rate for the current fiscal year was 20.2%. Management estimates the effective income tax rate for fiscal year 2019 will be approximately 22%.

The net interest margin increased 16 basis points, from 1.79% for the prior fiscal year to 1.95% for the current fiscal year. Excluding the effects of the leverage strategy, the net interest margin would have increased nine basis points, from 2.15% for the prior fiscal year to 2.24% for the current fiscal year. The increase in the net interest margin was due mainly to an increase in interest-earning asset yields.

Interest and Dividend Income

The weighted average yield on total interest-earning assets increased 29 basis points, from 2.87% for the prior fiscal year to 3.16% for the current fiscal year, while the average balance of interest-earning assets decreased $720.1 million from the prior fiscal year. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have increased 12 basis points, from 3.27% for the prior fiscal year to 3.39% for the current fiscal year, while the average balance of interest-earning assets would have decreased $93.0 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.



	For the Year Ended
	September 30,				Change Expressed in:
	2018		2017		Dollars			Percent
	(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable	$	260,198	$	253,393	$	6,805		2.7	%
Cash and cash equivalents	23,443		19,389		4,054			20.9
Mortgage-backed securities ("MBS")	22,619		23,809		(1,190		)	(5.0	)
Federal Home Loan Bank Topeka ("FHLB") stock	10,962		12,233		(1,271		)	(10.4	)
Investment securities	4,670		4,362		308			7.1
Total interest and dividend income	$	321,892	$	313,186	$	8,706		2.8

The increase in interest income on loans receivable was due to a six basis point increase in the weighted average yield on the portfolio to 3.60% for the current fiscal year, as well as an $86.2 million increase in the average balance of the portfolio. The increase in the weighted average yield was due primarily to adjustable-rate loans repricing to higher market rates, along with the origination and purchase of new loans at higher market rates.

The table above includes interest income on cash and cash equivalents associated and not associated with the leverage strategy. Interest income on cash and cash equivalents not related to the leverage strategy increased $1.4 million from the prior fiscal year due to a 71 basis point increase in the weighted average yield. Interest income on cash associated with the leverage strategy increased $2.7 million from the prior fiscal year due to a 61 basis point increase in the weighted average yield. In both cases, the increase in the weighted average yield was related to cash balances held at the Federal Reserve Bank of Kansas City (the "FRB of Kansas City").

The decrease in interest income on the MBS portfolio was due to a $127.2 million decrease in the average balance of the portfolio, partially offset by a 16 basis point increase in the weighted average yield on the portfolio to 2.35% for the current fiscal year. Cash flows not reinvested were used primarily to fund loan growth and pay off certain maturing term borrowings. The increase in the weighted average yield was due primarily to adjustable-rate MBS repricing to higher market rates, as well as a decrease in the impact of net premium amortization. Net premium amortization of $3.0 million during the current fiscal year decreased the weighted average yield on the portfolio by 31 basis points. During the prior fiscal year, $4.2 million of net premiums were amortized which decreased the weighted average yield on the portfolio by 39 basis points. As of September 30, 2018, the remaining net balance of premiums on our portfolio of MBS was $3.4 million.

The decrease in dividend income on FHLB stock was due mainly to the leverage strategy being in place less often during the current fiscal year, as the strategy was not always profitable. See additional discussion regarding the leverage strategy in the Financial Condition section below.

Interest Expense

The weighted average rate paid on total interest-bearing liabilities increased 15 basis points, from 1.21% for the prior fiscal year to 1.36% for the current fiscal year, while the average balance of interest-bearing liabilities decreased $693.7 million from the prior fiscal year. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities would have increased four basis points, from 1.29% for the prior fiscal year to 1.33% for the current fiscal year, while the average balance of interest-bearing liabilities would have decreased $68.6 million. 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 Year Ended
	September 30,				Change Expressed in:
	2018		2017		Dollars			Percent
	(Dollars in thousands)
INTEREST EXPENSE:
FHLB borrowings	$	67,120	$	68,871	$	(1,751	)	(2.5	)%
Deposits	52,625		42,968		9,657			22.5
Other borrowings	3,374		5,965		(2,591		)	(43.4	)
Total interest expense	$	123,119	$	117,804	$	5,315		4.5

The table above includes interest expense on FHLB borrowings associated and not associated with the leverage strategy. Interest expense on FHLB borrowings not related to the leverage strategy decreased $5.4 million from the prior fiscal year due to a 17 basis point decrease in the weighted average rate paid on the portfolio, to 2.07% for the current fiscal year, and an $84.3 million decrease in the average balance of the portfolio. The decrease in the weighted average rate paid was due to certain maturing advances being replaced at lower effective interest rates. Interest expense on FHLB borrowings associated with the leverage strategy increased $3.6 million from the prior fiscal year due to a 66 basis point increase in the weighted average rate paid as a result of an increase in interest rates between periods, partially offset by a decrease in the average balance due the strategy not being in place as often during the current fiscal year.

The increase in interest expense on deposits was due primarily to a 17 basis point increase in the weighted average rate, to 0.99% for the current fiscal year. The increase in the weighted average rate was primarily related to the certificate of deposit portfolio, which increased 24 basis points to 1.62% for the current fiscal year. The weighted average rate paid on wholesale certificates increased 66 basis points, to 1.57% for the current fiscal year.

The decrease in interest expense on other borrowings was due mainly to the maturity of a $100.0 million repurchase agreement, which was not replaced, during the current fiscal year.

Provision for Credit Losses

The Bank did not record a provision for credit losses during the current fiscal year or the prior fiscal year. Based on management's assessment of the allowance for credit losses ("ACL") formula analysis model and several other factors, it was determined that no provision for credit losses was necessary. Net loan recoveries were $65 thousand during the current fiscal year compared to net charge-offs of $142 thousand in the prior fiscal year. At September 30, 2018, loans 30 to 89 days delinquent were 0.25% of total loans and loans 90 or more days delinquent or in foreclosure were 0.12% of total loans. At September 30, 2017, loans 30 to 89 days delinquent were 0.26% of total loans and loans 90 or more days delinquent or in foreclosure were 0.13% of total loans.

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 Year Ended
	September 30,				Change Expressed in:
	2018		2017		Dollars			Percent
	(Dollars in thousands)
NON-INTEREST INCOME:
Deposit service fees	$	15,636	$	15,053	$	583		3.9	%
Income from bank-owned life insurance ("BOLI")	1,875		2,233		(358		)	(16.0	)
Other non-interest income	4,524		4,910		(386		)	(7.9	)
Total non-interest income	$	22,035	$	22,196	$	(161	)	(0.7	)

The increase in deposit service fees was due mainly to increases in debit card income due to higher transaction volume in the current year and a reduction in waived fees as customers and vendors more fully utilize the chip card technology. The decrease in income from BOLI was due mainly to a one-time adjustment, in the current fiscal year, to the benchmark interest rate associated with one of the policies. The decrease in other non-interest income was due mainly to a loss on the sale of loans during the current fiscal year compared to a gain on the sale of loans during the prior fiscal year as management tested loan sale processes for liquidity purposes.

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 Year Ended
	September 30,				Change Expressed in:
	2018		2017		Dollars			Percent
	(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits	$	46,563	$	43,437	$	3,126		7.2	%
Information technology and related expense	13,999		11,282		2,717			24.1
Occupancy, net	11,455		10,814		641			5.9
Regulatory and outside services	5,709		5,821		(112		)	(1.9	)
Deposit and loan transaction costs	5,621		5,284		337			6.4
Advertising and promotional	5,034		4,673		361			7.7
Federal insurance premium	3,277		3,539		(262		)	(7.4	)
Office supplies and related expense	1,888		1,981		(93		)	(4.7	)
Other non-interest expense	3,356		2,827		529			18.7
Total non-interest expense	$	96,902	$	89,658	$	7,244		8.1

The increase in salaries and employee benefits expense was due primarily to an increase in payroll expense, as well as $1.0 million related to the 2018 Tax Savings Bonus Plan and approximately $730 thousand related to the addition of CCB employees and other payroll-related costs associated with the acquisition. The 2018 Tax Savings Bonus plan is a one-time bonus award to qualifying non-officer employees. Management anticipates salaries and employee benefits associated with CCB employees, based on current staffing levels, will be approximately $5.6 million in fiscal year 2019. The increase in information technology and related expense was due mainly to a change in the presentation of certain information technology professional and consulting expenses beginning in fiscal year 2018. Information technology professional and consulting expenses are now being reported in information technology and related expenses rather than regulatory and outside services. Additionally, these expenses increased compared to the prior year due primarily to ongoing enhancements to the Bank's online banking services, along with increases in information technology expenses related to software licensing and depreciation. The change in the presentation of expenses resulted in a decrease in the amount of regulatory and outside services expenses for the current fiscal year, but this was offset by approximately $875 thousand of acquisition-related expenses. The increase in other non-interest expense was due primarily to $242 thousand of expense related to the amortization of deposit intangibles associated with the CCB acquisition and an increase in other real estate owned ("OREO") operations expense. Management anticipates that the deposit intangible amortization expense will be approximately $2.4 million in fiscal year 2019.

The Company's efficiency ratio was 43.89% for the current fiscal year compared to 41.21% for the prior fiscal year. The change in the efficiency ratio was due primarily to higher non-interest expense in the current fiscal year compared to the prior fiscal year. 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 proportionally lower level of expense.

Income Tax Expense

Income tax expense was $25.0 million for the current fiscal year compared to $43.8 million for the prior fiscal year. The effective tax rate was 20.2% for the current fiscal year compared to 34.2% for the prior fiscal year. The decrease in the effective tax rate was due mainly to the Tax Act being signed into law in December 2017.

Comparison of Operating Results for the Three Months Ended September 30, 2018 and June 30, 2018

For the quarter ended September 30, 2018, the Company recognized net income of $21.4 million, or $0.16 per share, compared to net income of $22.4 million, or $0.17 per share, for the quarter ended June 30, 2018. The decrease in net income was due primarily to an increase in non-interest expense, mainly related to acquisition-related expenses.

Net interest income increased $644 thousand, or 1.3%, from the prior quarter to $50.1 million for the current quarter. The net interest margin increased 32 basis points from 1.92% for the prior quarter to 2.24% for the current quarter. When the leverage strategy is in place, it reduces the net interest margin due to the amount of earnings from the transaction in comparison to the size of the transaction. The leverage strategy was suspended at certain times during the current quarter due to the negative interest rate spreads between the related FHLB borrowings and cash held at the FRB of Kansas City making the transaction unprofitable. Excluding the effects of the leverage strategy, the net interest margin would have increased two basis points from 2.24% for the prior quarter to 2.26% for the current quarter. The increase in net interest margin excluding the effects of the leverage strategy was due mainly to an increase in interest-earning asset yields.

Interest and Dividend Income

The weighted average yield on total interest-earning assets for the current quarter increased 26 basis points from the prior quarter, to 3.46%, while the average balance of interest-earning assets decreased $1.35 billion between the two periods. Absent the impact of the leverage strategy, the weighted average yield on total interest-earning assets would have increased seven basis points from the prior quarter, to 3.47%, and the average balance of interest-earning assets would have increased $82.8 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.



	For the Three Months Ended
	September 30,		June 30,		Change Expressed in:
	2018		2018		Dollars			Percent
	(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable	$	66,922	$	64,893	$	2,029		3.1	%
Cash and cash equivalents	1,213		7,221		(6,008		)	(83.2	)
MBS	6,056		5,921		135			2.3
FHLB stock	1,847		2,819		(972		)	(34.5	)
Investment securities	1,275		1,307		(32		)	(2.4	)
Total interest and dividend income	$	77,313	$	82,161	$	(4,848	)	(5.9	)

The increase in interest income on loans receivable was due to a $97.2 million increase in the average balance of the portfolio, as well as a six basis point increase in the weighted average yield on the portfolio to 3.65% for the current quarter. The increase in the average balance was also due primarily to the acquisition of CCB. The increase in the weighted average yield was due to the acquisition of CCB and its portfolio of higher yielding commercial loans, along with the origination and purchase of new loans at higher market rates and adjustable-rate loans repricing to higher market rates.

The table above includes interest income on cash and cash equivalents associated and not associated with the leverage strategy. Interest income on cash and cash equivalents not related to the leverage strategy increased $158 thousand from the prior quarter due to a 19 basis point increase in the weighted average yield, which was related to balances held at the FRB of Kansas City. Interest income on cash associated with the leverage strategy decreased $6.2 million from the prior quarter and dividend income on FHLB stock associated with the leverage strategy decreased $1.1 million from the prior quarter due to the leverage strategy being in place for fewer days in the current quarter compared to the prior quarter.

Interest Expense

The weighted average rate paid on total interest-bearing liabilities for the current quarter decreased five basis points from the prior quarter, to 1.39%, and the average balance of interest-bearing liabilities decreased $1.34 billion between the two periods. Absent the impact of the leverage strategy, the weighted average rate paid on total interest-bearing liabilities for the current quarter would have increased four basis points from the prior quarter, to 1.38%, and the average balance of interest-bearing liabilities would have increased $83.8 million. 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
	September 30,		June 30,		Change Expressed in:
	2018		2018		Dollars			Percent
	(Dollars in thousands)
INTEREST EXPENSE:
FHLB borrowings	$	11,930	$	18,501	$	(6,571	)	(35.5	)%
Deposits	14,597		13,587		1,010			7.4
Other borrowings	709		640		69			10.8
Total interest expense	$	27,236	$	32,728	$	(5,492	)	(16.8	)

The increase in interest expense on deposits was due primarily to a five basis point increase in the weighted average rate paid, to 1.07% for the current quarter. The increase in the weighted average rate paid was due primarily to increases in the retail certificate of deposit portfolio rate and wholesale certificate of deposit portfolio rate, which increased seven basis points and 17 basis points, respectively.

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
	September 30,		June 30,		Change Expressed in:
	2018		2018		Dollars		Percent
	(Dollars in thousands)
NON-INTEREST INCOME:
Deposit service fees	$	4,086	$	3,915	$	171	4.4	%
Income from BOLI	555		510		45		8.8
Other non-interest income	1,179		999		180		18.0
Total non-interest income	$	5,820	$	5,424	$	396	7.3

The increase in deposit service fees was due mainly to fees generated on deposit accounts acquired from CCB. The increase in other non-interest income was due primarily to the trust operations acquired from CCB.

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
	September 30,		June 30,		Change Expressed in:
	2018		2018		Dollars			Percent
	(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits	$	12,932	$	11,936	$	996		8.3	%
Information technology and related expense	3,683		3,363		320			9.5
Occupancy, net	3,064		2,787		277			9.9
Regulatory and outside services	1,790		1,628		162			10.0
Deposit and loan transaction costs	1,464		1,437		27			1.9
Advertising and promotional	1,522		1,490		32			2.1
Federal insurance premium	765		813		(48		)	(5.9	)
Office supplies and related expense	549		455		94			20.7
Other non-interest expense	988		602		386			64.1
Total non-interest expense	$	26,757	$	24,511	$	2,246		9.2

The increase in salaries and employee benefits expense was due mainly to the addition of CCB employees and other payroll-related costs associated with the acquisition. The increase in information technology and related expense was due primarily to ongoing enhancements to the Bank's online banking services, as well as costs related to the integration of CCB operations. The increase in occupancy, net was due largely to expenses related to the properties acquired from CCB. The increase in other non-interest expense was due primarily to amortization of deposit intangibles associated with the acquisition of CCB, along with an increase in OREO operations expense.

The Company's efficiency ratio was 47.87% for the current quarter compared to 44.68% for the prior quarter. The change in the efficiency ratio was due primarily to higher non-interest expense in the current quarter compared to the prior quarter.

Income Tax Expense

Income tax expense was $7.8 million for the current quarter, compared to $8.0 million for the prior quarter. The decrease was due to lower pretax income in the current quarter. The effective tax rate was 26.6% for the current quarter compared to 26.3% for the prior quarter.

Financial Condition as of September 30, 2018

Total assets were $9.45 billion at September 30, 2018 compared to $9.19 billion at September 30, 2017. The $256.6 million increase was due primarily to an increase in loans receivable due to the acquisition of CCB.

The loans receivable portfolio, net, totaled $7.51 billion at September 30, 2018 compared to $7.20 billion at September 30, 2017. The Bank acquired loans with a fair value of $299.7 million from CCB. During the current fiscal year, the Bank originated and refinanced $633.4 million of loans with a weighted average rate of 4.17% and purchased $391.6 million of one- to four-family loans from correspondent lenders with a weighted average rate of 3.80%. The Bank also entered into participations of $135.8 million of commercial real estate loans with a weighted average rate of 4.22%, of which $108.4 million had not yet been funded as of September 30, 2018.

The Bank is continuing to manage the size and mix of its loan portfolio, as it manages its liquidity levels, as measured by the ratio of securities and cash to total assets, to a target level of approximately 15%. The ratio of securities and cash to total assets was 15.5% at September 30, 2018. The size of the loan portfolio has been managed by controlling correspondent loan volume primarily through the rates offered to correspondent lenders. Management intends to continue to manage the size of the loan portfolio by utilizing cash flows from the correspondent loan portfolio to fund commercial loan growth. Given the balance of total assets, it is unlikely that loan growth will substantially increase in the current environment. Generally, over the past few years, cash flows from the securities portfolio have been used primarily to purchase loans and in part to pay down FHLB advances. By moving cash from lower yielding assets to higher yielding assets and repaying higher costing liabilities, we have been able to maintain our net interest margin. In addition to the repayment of securities, the Bank has emphasized growth in the deposit portfolio in part to pay down term borrowings.

In the long run, management considers a 10% ratio of stockholders' equity to total assets at the Bank an appropriate level of capital. At September 30, 2018, this ratio was 12.9%.

The Bank continued, at times, to utilize a leverage strategy to increase earnings in fiscal year 2018. The leverage strategy during the current fiscal year involved borrowing up to $2.10 billion either on the Bank's FHLB line of credit or by entering into short-term FHLB advances, depending on the rates offered by FHLB. The borrowings were repaid prior to each quarter end, or earlier if the strategy was suspended. The proceeds from the borrowings, net of the required FHLB stock holdings which yielded 7.3% during the current quarter and 6.7% during the current fiscal year, were deposited at the FRB of Kansas City. Net income attributable to the leverage strategy is largely derived from the dividends received on FHLB stock holdings, plus the net interest rate spread between the yield on the cash at the FRB of Kansas City and the rate paid on the related FHLB borrowings, less applicable federal insurance premiums and estimated taxes. Net income attributable to the leverage strategy was $8 thousand during the current quarter, compared to $212 thousand during the quarter ending June 30, 2018. Net income attributable to the leverage strategy was $1.7 million for the current fiscal year, compared to $2.8 million for the prior fiscal year. The decrease between quarters and years was due mainly to the suspension of the strategy at certain times during the last half of the current fiscal year due to the large negative interest rate spread, which resulted in the strategy not being profitable. Management continues to monitor the net interest rate spread and overall profitability of the strategy. It is expected that the strategy will be reimplemented if it reaches a position that is profitable.

Total liabilities were $8.06 billion at September 30, 2018 compared to $7.82 billion at September 30, 2017. The $233.3 million increase was due mainly to an increase in deposits upon completion of the acquisition of CCB. The Bank acquired deposits totaling $352.5 million from CCB.

Stockholders' equity was $1.39 billion at September 30, 2018 compared to $1.37 billion at September 30, 2017. The $23.3 million increase was due primarily to net income of $98.9 million, along with the issuance of 3.0 million shares, or $39.1 million, related to the acquisition of CCB, partially offset by the payment of $118.3 million in cash dividends. The cash dividends paid during the current fiscal year totaled $0.88 per share and consisted of a $0.29 per share cash true-up dividend related to fiscal year 2017 earnings per the Company's dividend policy, a $0.25 per share True Blue Capitol dividend, and four regular quarterly cash dividends totaling $0.34 per share.

On October 17, 2018, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.7 million, payable on November 16, 2018 to stockholders of record as of the close of business on November 2, 2018. On October 26, 2018, the Company announced a fiscal year 2018 cash true-up dividend of $0.39 per share, or approximately $53.7 million, related to fiscal year 2018 earnings. The $0.39 per share cash true-up dividend was determined by taking the difference between total earnings for fiscal year 2018 and total regular quarterly cash dividends paid during fiscal year 2018, divided by the number of shares outstanding as of October 22, 2018. The cash true-up dividend is payable on November 30, 2018 to stockholders of record as of the close of business on November 16, 2018, and is the result of the Board of Directors' commitment to distribute to stockholders 100% of the annual earnings of Capitol Federal Financial, Inc. for fiscal year 2018.

At September 30, 2018, Capitol Federal Financial, Inc., at the holding company level, had $137.7 million on deposit at the Bank. For fiscal year 2019, it is the intent of the Board of Directors and management to continue 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.

In October 2015, the Company announced a stock repurchase plan for up to $70.0 million of common stock. The repurchase plan does not have an expiration date. The Company has not repurchased any shares under the repurchase plan through the date of this release.

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



	September 30,			June 30,			September 30,
	2018			2018			2017
	(Dollars in thousands)
Stockholders' equity	$	1,391,622		$	1,341,325		$	1,368,313
Equity to total assets at end of period	14.7		%	14.8		%	14.9		%

The following table presents a reconciliation of total to net shares outstanding as of September 30, 2018.



Total shares outstanding	141,225,516
Less unallocated Employee Stock Ownership Plan ("ESOP") shares and unvested restricted stock	(3,687,506	)
Net shares outstanding	137,538,010

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well-capitalized status for the Bank in accordance with regulatory standards. As of September 30, 2018, the Bank and Company exceeded all regulatory capital requirements. The following table presents the Bank's regulatory capital ratios at September 30, 2018.



		Regulatory
		Requirement For
	Bank	Well-Capitalized
	Ratios	Status
Tier 1 leverage ratio	13.0%	5.0	%
Common equity tier 1 capital ratio	25.0	6.5
Tier 1 capital ratio	25.0	8.0
Total capital ratio	25.2	10.0

A reconciliation of the Bank's equity under GAAP to regulatory capital amounts as of September 30, 2018 is as follows (dollars in thousands):



Total Bank equity as reported under GAAP	$	1,221,706
Accumulated Other Comprehensive Income ("AOCI")	(4,340		)
Goodwill and other intangibles, net of deferred tax liabilities	(15,240		)
Total tier 1 capital	1,202,126
ACL	8,463
Total capital	$	1,210,589

Capitol Federal Financial, Inc. is the holding company for the Bank. The Bank has 58 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 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 involve risks and uncertainties, including the possibility that expected cost savings, synergies and other benefits from the acquisition of CCB might not be realized within the anticipated time frames or at all, and the possibility that costs or difficulties relating to integration matters might be greater than expected, changes in economic conditions in the Company's market area, changes in policies or the application or interpretation of laws and regulations by regulatory agencies and tax authorities, other governmental initiatives affecting the financial services industry, changes in accounting principles, policies or guidelines, 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.

For further information contact:



Kent Townsend	Investor Relations
Executive Vice President,	700 S Kansas Ave
Chief Financial Officer and Treasurer	Topeka, KS 66603
700 S Kansas Ave	(785) 270-6055
Topeka, KS 66603	investorrelations@capfed.com
(785) 231-6360
ktownsend@capfed.com

SUPPLEMENTAL FINANCIAL INFORMATION

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands, except per share amounts)



	September 30,			September 30,
	2018			2017
ASSETS:
Cash and cash equivalents (includes interest-earning deposits of $122,733 and $340,748)	$	139,055		$	351,659
Securities:
Available-for-sale ("AFS"), at estimated fair value (amortized cost of $718,564 and $410,541)	714,614			415,831
Held-to-maturity at amortized cost (estimated fair value of $601,071 and $833,009)	612,318			827,738
Loans receivable, net (ACL of $8,463 and $8,398)	7,514,485			7,195,071
FHLB stock, at cost	99,726			100,954
Premises and equipment, net	96,005			84,818
Income taxes receivable, net	2,177			—
Other assets	271,167			216,845
TOTAL ASSETS	$	9,449,547		$	9,192,916

LIABILITIES:
Deposits	$	5,603,354		$	5,309,868
FHLB borrowings	2,174,981			2,173,808
Other borrowings	110,052			200,000
Advance payments by borrowers for taxes and insurance	65,264			63,749
Income taxes payable, net	—			530
Deferred income tax liabilities, net	21,253			24,458
Accounts payable and accrued expenses	83,021			52,190
Total liabilities	8,057,925			7,824,603

STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 100,000,000 shares authorized, no shares issued or outstanding	—			—
Common stock, $0.01 par value; 1,400,000,000 shares authorized, 141,225,516 and 138,223,835
shares issued and outstanding as of September 30, 2018 and 2017, respectively	1,412			1,382
Additional paid-in capital	1,207,644			1,167,368
Unearned compensation, ESOP	(36,343		)	(37,995		)
Retained earnings	214,569			234,640
AOCI, net of tax	4,340			2,918
Total stockholders' equity	1,391,622			1,368,313
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	9,449,547		$	9,192,916

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands)



	For the Three Months Ended				For the Year Ended
	September 30,		June 30,		September 30,
	2018		2018		2018		2017
INTEREST AND DIVIDEND INCOME:
Loans receivable	$	66,922	$	64,893	$	260,198	$	253,393
Cash and cash equivalents	1,213		7,221		23,443		19,389
MBS	6,056		5,921		22,619		23,809
FHLB stock	1,847		2,819		10,962		12,233
Investment securities	1,275		1,307		4,670		4,362
Total interest and dividend income	77,313		82,161		321,892		313,186

INTEREST EXPENSE:
FHLB borrowings	11,930		18,501		67,120		68,871
Deposits	14,597		13,587		52,625		42,968
Other borrowings	709		640		3,374		5,965
Total interest expense	27,236		32,728		123,119		117,804

NET INTEREST INCOME	50,077		49,433		198,773		195,382

PROVISION FOR CREDIT LOSSES	—		—		—		—
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES	50,077		49,433		198,773		195,382

NON-INTEREST INCOME:
Deposit service fees	4,086		3,915		15,636		15,053
Income from BOLI	555		510		1,875		2,233
Other non-interest income	1,179		999		4,524		4,910
Total non-interest income	5,820		5,424		22,035		22,196

NON-INTEREST EXPENSE:
Salaries and employee benefits	12,932		11,936		46,563		43,437
Information technology and related expense	3,683		3,363		13,999		11,282
Occupancy, net	3,064		2,787		11,455		10,814
Regulatory and outside services	1,790		1,628		5,709		5,821
Deposit and loan transaction costs	1,464		1,437		5,621		5,284
Advertising and promotional	1,522		1,490		5,034		4,673
Federal insurance premium	765		813		3,277		3,539
Office supplies and related expense	549		455		1,888		1,981
Other non-interest expense	988		602		3,356		2,827
Total non-interest expense	26,757		24,511		96,902		89,658
INCOME BEFORE INCOME TAX EXPENSE	29,140		30,346		123,906		127,920
INCOME TAX EXPENSE	7,751		7,974		24,979		43,783
NET INCOME	$	21,389	$	22,372	$	98,927	$	84,137

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



	For the Three Months Ended						For the Year Ended
	September 30,			June 30,			September 30,
	2018			2018			2018			2017
	(Dollars in thousands, except per share amounts)
Net income	$	21,389		$	22,372		$	98,927		$	84,137
Income allocated to participating securities	(8		)	(9		)	(40		)	(44		)
Net income available to common stockholders	$	21,381		$	22,363		$	98,887		$	84,093

Average common shares outstanding	135,375,386			134,401,188			134,635,886			134,019,962
Average committed ESOP shares outstanding	124,346			83,052			62,458			62,458
Total basic average common shares outstanding	135,499,732			134,484,240			134,698,344			134,082,420

Effect of dilutive stock options	55,928			45,713			60,647			161,442

Total diluted average common shares outstanding	135,555,660			134,529,953			134,758,991			134,243,862

Net earnings per share:
Basic	$	0.16		$	0.17		$	0.73		$	0.63
Diluted	$	0.16		$	0.17		$	0.73		$	0.63

Antidilutive stock options, excluded from the diluted
average common shares outstanding calculation	529,195			578,777			541,418			200,800

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 as of the dates indicated. The increase in commercial loans from June 30, 2018 to September 30, 2018 was due primarily to the acquisition of CCB.



	September 30, 2018							June 30, 2018							September 30, 2017
						% of							% of							% of
	Amount			Rate		Total		Amount			Rate		Total		Amount			Rate		Total
	(Dollars in thousands)
One- to four-family:
Originated	$	3,964,172		3.74	%	52.8	%	$	3,931,251		3.71	%	54.4	%	$	3,959,232		3.70	%	55.1	%
Correspondent purchased	2,505,987			3.59		33.4		2,514,929			3.56		34.8		2,445,311			3.53		34.0
Bulk purchased	293,606			2.60		3.9		309,837			2.41		4.3		351,705			2.29		4.9
Construction	34,670			4.05		0.5		27,565			3.54		0.4		30,647			3.45		0.4
Total	6,798,435			3.64		90.6		6,783,582			3.59		93.9		6,786,895			3.56		94.4
Commercial:
Commercial real estate	421,016			4.32		5.6		274,410			4.10		3.8		183,030			4.24		2.6
Commercial and industrial	62,869			5.00		0.9		—			—		—		—			—		—
Construction	85,725			4.62		1.1		44,645			4.64		0.6		86,952			3.80		1.2
Total	569,610			4.44		7.6		319,055			4.17		4.4		269,982			4.10		3.8
Consumer loans:
Home equity	129,588			5.97		1.7		119,079			5.79		1.6		122,066			5.40		1.7
Other	10,012			4.59		0.1		4,453			4.02		0.1		3,808			4.05		0.1
Total	139,600			5.87		1.8		123,532			5.73		1.7		125,874			5.36		1.8
Total loans receivable	7,507,645			3.74		100.0	%	7,226,169			3.66		100.0	%	7,182,751			3.61		100.0	%

Less:
ACL	8,463							8,344							8,398
Discounts/unearned loan fees	33,933							25,124							24,962
Premiums/deferred costs	(49,236		)					(46,683		)					(45,680		)
Total loans receivable, net	$	7,514,485						$	7,239,384						$	7,195,071

Loan Activity: The following table summarizes activity in the loan portfolio, along with weighted average rates where applicable, for the periods indicated, excluding changes in ACL, discounts/unearned loan fees, and premiums/deferred costs. Loans that were paid-off as a result of refinances and loans that were sold are included in repayments. Loan endorsements are not included in the activity in the following table 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. Commercial loan renewals are not included in the activity in the following table unless new funds are disbursed at the time of renewal.



	For the Three Months Ended
	September 30, 2018					June 30, 2018					March 31, 2018					December 31, 2017
	Amount			Rate		Amount			Rate		Amount			Rate		Amount			Rate
	(Dollars in thousands)
Beginning balance	$	7,226,169		3.66	%	$	7,187,742		3.63	%	$	7,177,504		3.62	%	$	7,182,751		3.61	%
Originations and refinances:
Fixed	117,904			4.44		143,059			4.21		77,825			3.80		109,102			3.70
Adjustable	56,996			4.55		54,385			4.42		36,612			4.28		37,502			4.26
Purchases and participations:
Fixed	80,138			4.40		78,650			4.04		120,155			3.85		85,565			3.73
Adjustable	20,105			3.92		30,017			3.49		48,062			3.61		64,689			3.87
Acquisition of CCB loans, net	299,659			4.77		—			—		—			—		—			—
Change in undisbursed loan funds	(8,104		)			19,808					(25,002		)			(17,706		)
Repayments	(284,927		)			(286,923		)			(246,894		)			(283,880		)
Principal recoveries (charge-offs), net	119					(46		)			20					(28		)
Other	(414		)			(523		)			(540		)			(491		)
Ending balance	$	7,507,645		3.74		$	7,226,169		3.66		$	7,187,742		3.63		$	7,177,504		3.62



	For the Year Ended
	September 30, 2018					September 30, 2017
	Amount			Rate		Amount			Rate
	(Dollars in thousands)
Beginning balance	$	7,182,751		3.61	%	$	6,949,522		3.60	%
Originations and refinances:
Fixed	447,890			4.07		511,223			3.62
Adjustable	185,495			4.40		187,255			3.83
Purchases and participations:
Fixed	364,508			3.98		543,473			3.73
Adjustable	162,873			3.73		87,396			3.03
Acquisition of CCB loans, net	299,659			4.77		—			—
Change in undisbursed loan funds	(31,004		)			77,029
Repayments	(1,102,624		)			(1,169,808		)
Principal recoveries (charge-offs), net	65					(142		)
Other	(1,968		)			(3,197		)
Ending balance	$	7,507,645		3.74		$	7,182,751		3.61

The following table presents loan origination, refinance, and purchase activity for the periods indicated, excluding endorsement and renewal activity and $299.7 million of loans at a rate of 4.77% purchased in connection with the acquisition of CCB, along with associated weighted average rates and percent of total. Loan originations, purchases, 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.



	For the Three Months Ended						For the Year Ended
	September 30, 2018						September 30, 2018
	Amount		Rate		% of Total		Amount		Rate		% of Total
Fixed-Rate:	(Dollars in thousands)
One- to four-family:
<= 15 years	$	33,074	3.92	%	12.0	%	$	160,099	3.51	%	13.8	%
> 15 years	112,243		4.50		40.8		530,606		4.12		45.7
One- to four-family construction	17,309		4.35		6.3		43,604		4.11		3.8
Commercial:
Commercial real estate	4,696		4.90		1.7		10,644		4.48		0.9
Commercial and industrial	1,579		5.24		0.6		1,579		5.24		0.1
Commercial construction	27,316		4.50		9.9		60,417		4.30		5.2
Home equity	1,508		6.46		0.5		4,758		6.18		0.4
Other	317		5.64		0.1		691		7.54		0.1
Total fixed-rate	198,042		4.42		71.9		812,398		4.03		70.0

Adjustable-Rate:
One- to four-family:
<= 36 months	3,572		3.79		1.3		8,233		3.39		0.7
> 36 months	45,448		3.86		16.5		173,775		3.49		15.0
One- to four-family construction	7,633		3.82		2.8		18,791		3.58		1.6
Commercial:
Commercial real estate	150		6.50		0.1		570		5.03		—
Commercial and industrial	325		5.81		0.1		325		5.81		—
Commercial construction	—		—		—		69,543		4.16		6.0
Home equity	19,233		5.97		7.0		74,042		5.66		6.4
Other	740		3.04		0.3		3,089		3.24		0.3
Total adjustable-rate	77,101		4.39		28.1		348,368		4.09		30.0

Total originated, refinanced and purchased	$	275,143	4.41		100.0	%	$	1,160,766	4.05		100.0	%

Purchased and participation loans included above:
Fixed-rate:
Correspondent - one- to four-family	$	52,938	4.35				$	298,299	3.92
Participations - commercial	27,200		4.50				66,209		4.28
Total fixed-rate purchased/participations	80,138		4.40				364,508		3.98

Adjustable-rate:
Correspondent - one- to four-family	20,105		3.92				93,330		3.41
Participations - commercial	—		—				69,543		4.16
Total adjustable-rate purchased/participations	20,105		3.92				162,873		3.73

Total purchased/participation loans	$	100,243	4.31				$	527,381	3.91

One- to Four-Family Loans: 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 average balance per loan as of the dates presented. Credit scores are updated at least semiannually, with the latest update in September 2018, 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.



	September 30, 2018									June 30, 2018									September 30, 2017
			% of		Credit			Average				% of		Credit			Average				% of		Credit			Average
	Amount		Total		Score	LTV		Balance		Amount		Total		Score	LTV		Balance		Amount		Total		Score	LTV		Balance
	(Dollars in thousands)
Originated	$	3,964,172	58.6	%	767	62	%	$	136	$	3,931,251	58.2	%	768	63	%	$	137	$	3,959,232	58.6	%	767	63	%	$	135
Correspondent purchased	2,505,987		37.1		764	67		378		2,514,929		37.2		764	67		378		2,445,311		36.2		764	68		375
Bulk purchased	293,606		4.3		758	62		304		309,837		4.6		759	62		305		351,705		5.2		757	63		305
	$	6,763,765	100.0	%	766	64		184		$	6,756,017	100.0	%	766	64		186		$	6,756,248	100.0	%	765	65		182

One- to Four-Family Loan Commitments - The following table summarizes our one- to four-family loan origination and refinance commitments and one- to four-family correspondent loan purchase commitments as of September 30, 2018, along with associated weighted average rates. Loan commitments generally have fixed expiration dates or other termination clauses and may require the payment of a rate lock fee. It is expected that some of the loan commitments will expire unfunded, so the amounts reflected in the table below are not necessarily indicative of future cash needs.



	Fixed-Rate
	15 years			More than			Adjustable-			Total
	or less			15 years			Rate			Amount		Rate
	(Dollars in thousands)
Originate/refinance	$	9,651		$	28,915		$	11,920		$	50,486	4.20	%
Correspondent	1,822			58,897			10,669			71,388		4.26
	$	11,473		$	87,812		$	22,589		$	121,874	4.23

Rate	3.98		%	4.38		%	3.80		%

The following table presents originated, refinanced, and correspondent purchased 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. Of the loans originated during the current quarter and current fiscal year, $15.8 million and $74.8 million, respectively, were refinanced from other lenders.



	For the Three Months Ended					For the Year Ended
	September 30, 2018					September 30, 2018
					Credit					Credit
	Amount		LTV		Score	Amount		LTV		Score
	(Dollars in thousands)
Originated	$	131,733	77	%	762	$	473,140	77	%	762
Refinanced by Bank customers	14,503		67

Capitol Federal Financial, Inc. (CFFN) SEC Filing 8-K Material Event for the period ending Friday, October 26, 2018

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