NEWS RELEASE

FOR IMMEDIATE RELEASE

October 31, 2012

CAPITOL FEDERAL FINANCIAL, INC. 
REPORTS FISCAL YEAR 2012 RESULTS

Topeka, KS - Capitol Federal Financial, Inc. (NASDAQ: CFFN) (the “Company”) announced results today for the year ended September 30, 2012.  Detailed results will be available in the Company’s Annual Report on Form 10-K for the year ended September 30, 2012, which will be filed with the Securities and Exchange Commission (“SEC”) on or about November 29, 2012 and posted on our website, http://ir.capfed.com. 

Highlights for fiscal year 2012 include:

Comparison of Operating Results for the Fiscal Years Ended September 30, 2012 and 2011

Net income for fiscal year 2012 was $74.5 million, compared to $38.4 million for fiscal year 2011.  The $36.1 million, or 94.0%, increase for the current year was due primarily to the prior year including a $40.0 million ($26.0 million, net of income tax benefit) contribution to the Capitol Federal Foundation (the “Foundation”) in connection with the second step conversion and stock offering completed in December 2010 (the “corporate reorganization”).    Additionally, net interest income increased $16.2 million, or 9.6%, from $168.7 million for the prior year to $184.9 million for the current year.  The increase in net interest income was due primarily to a decrease in interest expense of $34.9 million, or 19.6%, partially offset by a decrease in interest income of $18.8 million, or 5.4%. 

The net interest margin increased 17 basis points to 2.01% for the current year, up from 1.84% for the prior year.  The increase was largely due to a decrease in the cost of the certificate of deposit portfolio, along with a decrease in costs on Federal Home Loan Bank (“FHLB”) advances and other borrowings, partially offset by a decrease in interest income on loans receivable.

The following table presents selected financial results and performance ratios for the Company for fiscal years 2012 and 2011.  Because of the magnitude and non-recurring nature of the $40.0 million ($26.0 million, net of income tax benefit) contribution to the Foundation in connection with the corporate reorganization, management believes it is important for comparability purposes to present selected financial results and performance ratios excluding the contribution to the Foundation.  The adjusted financial results and ratios for fiscal year 2011 are not presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

⁽¹⁾The adjusted financial results and ratios are not presented in accordance with GAAP as the amounts and ratios exclude the effect of the contribution to the Foundation, net of income tax benefit.

⁽²⁾Due to rounding, the quarterly earnings per share during fiscal year 2011 do not individually add to $0.40 per share. 

Total interest and dividend income for fiscal year 2012 was $328.1 million, compared to $346.9 million for fiscal year 2011.  The $18.8 million, or 5.4%, decrease was primarily a result of decreases in interest income on loans receivable of $15.7 million and interest income on investment securities of $3.1 million.  The average yield on total interest-earning assets decreased 20 basis points, from 3.77% for the prior fiscal year to 3.57% for the current fiscal year, primarily as a result of a decrease in the yield on the loans receivable portfolio. 

Interest income on loans receivable decreased $15.7 million, or 6.2%, from $251.9 million for the prior fiscal year to $236.2 million for the current fiscal year.  The decrease was the result of a 41 basis point decrease in the weighted average yield on the portfolio to 4.49% for the current fiscal year.  The decrease in the weighted average yield was due to loan endorsements and refinances to current market rates, along with originations and purchases at rates lower than the average yield of the existing portfolio. 

Interest income on investment securities decreased $3.2 million, or 16.4%, from $19.1 million for the prior fiscal year to $15.9 million for the current fiscal year.  The decrease in interest income on investment securities was a result of a $323.9 million decrease in the average balance of the portfolio.  The decrease in the average balance was due to calls and maturities not being replaced in their entirety; rather, the proceeds were used primarily to fund loan and mortgage-backed securities (“MBS”) purchases and repurchase common stock.

Interest expense decreased $34.9 million, or 19.6%, from $178.1 million for the prior fiscal year to $143.2 million for the current fiscal year.  The decrease in interest expense was due primarily to a $17.4 million decrease in interest expense on deposits, primarily the certificate of deposit portfolio, as well as a $9.3 million decrease in interest expense on other borrowings and an $8.3 million decrease in interest expense on FHLB advances.  The average rate paid on interest-bearing liabilities decreased 42 basis points, from 2.35% for the prior fiscal year to 1.93% for the current fiscal year.  The decrease was due primarily to a continued decrease in the cost of our certificate of deposit portfolio, as well as the renewal/prepayment of FHLB advances to lower rates and higher rate repurchase agreements maturing and being replaced with lower rate FHLB advances.

Interest expense on deposits decreased $17.4 million, or 27.4%, from $63.6 million for the prior fiscal year to $46.2 million for the current fiscal year.  The decrease was due primarily to a 44 basis point decrease in the average rate paid on the certificate of deposit portfolio, to 1.60% for the current fiscal year, as the portfolio continued to reprice to lower market rates, as well as to a $166.1 million decrease in the average balance of the certificate of deposit portfolio for the current fiscal year.  Additionally, the average rate paid on our money market portfolio decreased 20 basis points to 0.32% for the fiscal year, and the average rate paid on our savings portfolio decreased 33 basis points to 0.16% for the current fiscal year.    The decrease in the average balance of the certificate of deposit

portfolio was due primarily to a decrease in certificates with original terms-to-maturity of 35 months or less, including the maturity and payout of one retail certificate of deposit related to a legal settlement to which Capitol Federal Savings Bank (“the Bank”) was not a party, partially offset by an increase in certificates with original terms-to-maturity of 36 months or greater. 

Interest expense on FHLB advances decreased $8.3 million, or 9.1%, from $90.3 million for the prior fiscal year to $82.0 million for the current fiscal year.  The decrease in expense was due to a decrease of 51 basis points in the average rate paid, from 3.79% for fiscal year 2011 to 3.28% for the current fiscal year, partially offset by a $121.3 million increase in the average balance.  The decrease in the average rate paid was due primarily to advances that were renewed/prepaid during the year.  The increase in the average balance was a result of $150.0 million of maturing repurchase agreements being replaced with FHLB advances during the current fiscal year, as rates for FHLB advances were more favorable than rates for comparable repurchase agreements. 

Interest expense on other borrowings decreased $9.3 million, or 38.4%, from $24.3 million for the prior fiscal year to $15.0 million for the current fiscal year.  The decrease was primarily the result of a $226.8 million decrease in the average balance due primarily to maturing repurchase agreements, the majority of which were replaced with FHLB advances with lower rates than the maturing repurchase agreements.

The Bank recorded a provision for credit losses of $2.0 million for the current fiscal year, compared to a provision for credit losses of $4.1 million for the prior fiscal year.  The $2.1 million decrease in the provision for credit losses between fiscal years was due to the continued improvement in the performance of our loan portfolio as evidenced by the decline in our loans 90 or more days delinquent or in foreclosure, and a continued decline in the level of charge-offs.  Loans 90 or more days delinquent or in foreclosure decreased $7.0 million, or 26.6%, from $26.5 million at September 30, 2011 to $19.5 million at September 30, 2012.  Net charge-offs during the current fiscal year were $2.9 million, excluding the $3.5 million of specific valuation allowances (“SVAs”) charged-off during the second quarter of fiscal year 2012 as a result of implementing a loan charge-off policy change as the requirements for the Office of Comptroller of Currency (“OCC”) Call Reports do not permit the use of SVAs, compared to $3.5 million of net charge-offs during the prior fiscal year.

Total other expense for the current fiscal year was $91.1 million, compared to $132.3 million for the prior fiscal year.  The $41.2 million, or 31.2%, decrease was due primarily to the $40.0 million cash contribution made to the Foundation in connection with the corporate reorganization in December 2010.  We currently anticipate the following increases in other expenses during fiscal year 2013:  a) a $2.0 million increase in salaries and employee benefits as fiscal year 2013 primarily includes a full year impact of the equity plan awards made in May 2012 and September 2012, b) a $1.8 million increase in communications, information technology and occupancy expense as a result of an increase in licensing and maintenance expenses related to upgrades to our information technology infrastructure, and an increase in depreciation expense associated with the remodel of our Home Office, and c) a $600 thousand increase in advertising expense, which is due primarily to media campaigns that were delayed until fiscal year 2013.

Income tax expense for the current fiscal year was $41.5 million, compared to $18.9 million for the prior fiscal year.  The $22.6 million, or 118.9%, increase in income tax expense during the current fiscal year was due primarily to the $40.0 million contribution made to the Foundation during the prior fiscal year, which resulted in $14.0 million of income tax benefit, as well as to overall higher pretax income during the current fiscal year.  The effective tax rate for the current fiscal year was 35.8% compared to 33.0% for the prior fiscal year.  Excluding a $686 thousand tax return to tax provision adjustment in the prior fiscal year, the effective tax rate for the prior fiscal year would have been 34.2%.  The additional difference in the effective tax rate between years was primarily due to the prior fiscal year having higher deductible expenses associated with the Employee Stock Ownership Plan (“ESOP”), due to the new ESOP loan in December 2010 and the $0.60 per share “welcome” dividend paid in March 2011.

Comparison of Operating Results for the Quarters Ended September 30, 2012 and June 30, 2012

For the quarter ended September 30, 2012, the Company recognized net income of $17.7 million, compared to net income of $18.7 million for the quarter ended June 30, 2012.  The $937 thousand, or 5.0%, decrease in net income was due primarily to an increase in other expenses of $1.2 million and a decrease in net interest income of $335 thousand, partially offset by a $878 thousand decrease in income tax expense.

The net interest margin increased one basis point, from 2.00% for the prior quarter to 2.01% for the current quarter.  The increase in the net interest margin was due primarily to a decrease in the cost of our certificate of deposit portfolio and the renewal of an FHLB advance at a rate less than the existing portfolio, as well as a decrease in the rate of decline of the average yield on interest-earning assets.

Total interest and dividend income for the current quarter was $79.3 million compared to $80.6 million for the prior quarter.  The $1.3 million, or 1.7%, decrease was primarily a result of a $1.7 million, or 9.2%, decrease in interest income on MBS and a $374 thousand, or 9.9%, decrease in interest income on investment securities, partially offset by a $671 thousand, or 1.2%, increase in interest income

on loans receivable.  The decrease in interest income on MBS and investment securities was due primarily to decreases in the average balance of the portfolios as a large portion of the proceeds from matured and called securities were used to purchase a $342.5 million bulk loan package during the current quarter.  The increase in interest income on loans receivable was due to an increase in the average balance of the portfolio between the two periods.  The average yield on total interest-earning assets decreased three basis points, to 3.47% for the current quarter.  The decrease in the average yield was due primarily to cash flows from interest-earning assets being reinvested at lower market rates.

Total interest expense for the current quarter was $33.5 million compared to $34.5 million for the prior quarter.  The $1.0 million, or 2.9%, decrease was due to a $588 thousand, or 5.3%, decrease in interest expense on deposits, and a $456 thousand, or 2.3%, decrease in interest expense on FHLB advances.  Both decreases were due primarily to a decrease in the weighted average rate paid on the portfolios.

The Bank did not record a provision for credit losses during the current quarter, consistent with the prior quarter, due to the continued improvement in the performance of our loan portfolio as evidenced by the decline in our loans 90 or more days delinquent or in foreclosure, and a continued decline in the overall level of charge-offs.  Loans 90 or more days delinquent decreased $2.1 million, or 10.1%, from $21.6 million at June 30, 2012 to $19.5 million at September 30, 2012.  Net charge-offs during the current quarter were $677 thousand compared to $782 thousand in the prior quarter.

Total other expense was $24.1 million for the current quarter, compared to $22.9 million for the prior quarter.  Other real estate owned (“OREO”) operations expense was $826 thousand for the current quarter, compared to $780 thousand for the prior quarter.

Comparison of Operating Results for the Quarters Ended September 30, 2012 and 2011

For the quarter ended September 30, 2012, the Company recognized net income of $17.7 million, compared to net income of $16.8 million for the quarter ended September 30, 2011.  The $970 thousand, or 5.8%, increase in net income was due primarily to a $2.0 million increase in net interest income, partially offset by a $1.1 million increase in other expenses.

Total interest and dividend income for the current quarter was $79.3 million compared to $86.6 million for the prior year quarter.  The $7.3 million, or 8.4%, decrease was due to a $3.8 million, or 6.1%, decrease in interest income on loans receivable, a $2.5 million, or 13.1%, decrease in interest income on MBS, and a $1.0 million, or 23.5%, decrease in interest income on investment securities.  The decrease in interest income on loans receivable and MBS was due to a decrease in the weighted average yields of the related portfolios.  The decrease in interest income on investment securities was due to a decrease in the average balance of the portfolio.

Total interest expense decreased $9.2 million, or 21.7%, to $33.5 million for the current quarter from $42.7 million for the prior year quarter.  The decrease in interest expense was due to a $4.1 million, or 28.2%, decrease in interest expense on deposits, a $3.3 million, or 14.4%, decrease in interest expense on FHLB advances, and a $1.9 million, or 34.7%, decrease in interest expense on other borrowings.  The decrease in interest expense on deposits was due primarily to a decrease in the weighted average rate of the portfolio, most notably on the certificate of deposit portfolio.  The decrease in interest expense on FHLB advances was also due to a decrease in the weighted average rate of the portfolio, partially offset by an increase in the average balance.  The decrease in interest expense on other borrowings was due primarily to a decrease in the average balance.

The Bank did not record a provision for credit losses during the current quarter, compared to a provision of $1.7 million for the prior year quarter.  No provision was recorded in the current quarter due to the continued improvement in the performance of our loan portfolio as evidenced by the decline in our loans 90 or more days delinquent or in foreclosure, and a continued decline in the level of charge-offs.  Loans 90 or more days delinquent decreased $7.0 million, or 26.6%, from $26.5 million at September 30, 2011 to $19.5 million at September 30, 2012.  Net charge-offs during the current quarter were $677 thousand compared to $1.0 million for the quarter ended September 30, 2011. 

Total other expense was $24.1 million for the current quarter compared to $23.0 million for the prior year quarter.  The $1.1 million, or 4.8%, increase between periods was due primarily to an $810 thousand increase in other expenses, net, due primarily to a $452 thousand increase in expenses related to OREO operations.

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(Dollars in thousands)

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

⁽¹⁾Income allocated to participating securities (unvested restricted stock) was inconsequential for the three months and year ended September 30, 2011. 

Financial Condition as of September 30, 2012 

Total assets decreased $72.5 million, from $9.45 billion at September 30, 2011 to $9.38 billion at September 30, 2012, due primarily to a $561.8 million decrease in the securities portfolio, partially offset by an increase of $458.3 million in loans receivable, net, and an increase in cash and cash equivalents of $20.6 million.    

The $561.8 million decrease in the securities portfolio during the current fiscal year was due primarily to called and matured investment securities not being fully replaced, including $300.0 million at Capitol Federal Financial, Inc., at the holding company level.  Cash flows from the securities portfolio not reinvested were used, in part, to repurchase common stock and fund lending operations.  At September 30, 2012, Capitol Federal Financial, Inc., at the holding company level, had $308.6 million in deposit accounts with the Bank and $60.1 million in investment securities. 

The net loans receivable portfolio increased $458.3 million, or 8.9%, to $5.61 billion at September 30, 2012, from $5.15 billion at September 30, 2011.  The increase in the portfolio was due primarily to an increase in one- to four-family loans resulting largely from $630.2 million of bulk and correspondent loan purchases during the current fiscal year.  Included in the $630.2 million of total purchases is $342.5 million related to one bulk loan purchase in the fourth quarter of the current fiscal year.  The purchase was funded with cash flows from the Bank’s securities portfolio, using the FHLB line-of-credit to temporarily fund the purchase due to the timing of those cash flows.  The FHLB line-of-credit was repaid before September 30, 2012.  The loans are adjustable-rate mortgage loans that reprice annually at various times throughout the year.  The weighted average rate of the loans was 2.48% at the time of purchase, which was higher than the yield available on similar duration securities.  The seller of the loans has guaranteed, and has the ability, to repurchase or replace delinquent loans.

The following table presents the principal balance of delinquent and non-performing loans, OREO and related ratios as of the dates shown.  In accordance with the OCC Call Report requirements, troubled debt restructurings (“TDRs”) that were either nonaccrual at the time of restructuring or did not receive a credit evaluation prior to the restructuring and have not made six consecutive monthly payments per the restructured loan terms are reported as nonaccrual loans at September 30, 2012.  This change occurred during the quarter ended March 31, 2012, as it was the first quarter the Bank was required to file a Call Report.  During July 2012, the OCC provided guidance to the industry regarding loans that had been discharged under Chapter 7 bankruptcy proceedings where the borrower has not reaffirmed the debt owed to the lender.  The OCC requires that these loans be reported as TDRs and nonaccrual, regardless of their delinquency status.  As a result of this guidance, the Bank identified $4.6 million of these loans that were reported as TDRs at September 30, 2012, of which $4.3 million were performing.  The $4.6 million of loans are included in the non-performing loan amounts in the table below.  Management will continue to evaluate and monitor loans in our portfolio at September 30, 2012 that have been discharged under Chapter 7 bankruptcy.  We do not anticipate that any results from the continued evaluation of our portfolio will be material.  The allowance for credit losses (“ACL”) as a percentage of total loans decreased from September 30, 2011 due primarily to the implementation of a loan charge-off policy during the quarter ended March 31, 2012 as the Call Report requirements do not permit the use of SVAs, which were included in the September 30, 2011 ACL. 

⁽¹⁾Included in the non-performing amount at September 30, 2012 are $1.0 million of TDRs that are also reported in the 30 to 89 days delinquent category, and $9.4 million that are currently performing in accordance with the restructured terms but are required to be reported as nonaccrual per OCC Call Report requirements.

Total liabilities increased $60.6 million, from $7.51 billion at September 30, 2011 to $7.57 billion at  September 30, 2012.  The increase was due primarily to a $55.5 million increase in deposits.  The increase in the deposit portfolio was due primarily to a $54.9 million increase in the checking portfolio and a $44.9 million increase in the money market portfolio, partially offset by a $52.0 million decrease in the certificate of deposit portfolio.  Additionally, during the first quarter of fiscal year 2012, a $150.0 million repurchase agreement matured and was replaced with a $150.0 million fixed-rate FHLB advance, which accounts for the majority of the balance change between periods in both portfolios.

Stockholders’ equity decreased $133.1 million, from $1.94 billion at September 30, 2011 to $1.81 billion at September 30, 2012.  The decrease was due primarily to the repurchase of $149.0 million of common stock and the payment of $63.8 million of dividends, partially offset by net income of $74.5 million.

In December 2011, the Company announced that the Board of Directors approved the repurchase of up to $193.0 million of the Company’s common stock.  The Company began repurchasing common stock during the second fiscal quarter and, as of September 30, 2012, had repurchased 12,642,502 shares at an average price of $11.78, or $149.0 million.  Subsequent to September 30, 2012 through October 12, 2012, the Company repurchased 728,600 shares at an average price of $11.92 per share, bringing the total number of shares repurchased during calendar year 2012 to 13,371,102 at an average price paid of $11.79 per share, or $157.7 million in total.

The $63.8 million of dividends paid during fiscal year 2012 consisted of four regular quarterly dividends totaling  $47.6 million and a special dividend of $16.2 million related to fiscal year 2011 earnings, per the Company’s dividend policy.  On October 18, 2012, the Company declared a regular quarterly cash dividend of $0.075 per share, or approximately $11.2 million,  payable on  November 16, 2012.  On October 30, 2012, the Company declared a special year-end dividend of $0.18 per share, or approximately $26.9 million, payable on December 7, 2012 to stockholders of record as of the close of business on November 23, 2012.  The special year-end dividend 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 years 2012 and 2011, the first two years after the second-step stock conversion was completed in December 2010.    The $0.18 per share special year-end dividend was determined by taking the difference between total earnings for fiscal year 2012 and total regular quarterly dividends paid during fiscal year 2012, divided by the number of shares outstanding as of October 30, 2012.  Dividend payments depend upon a number of factors including the Company's financial condition and results of operations, the Bank’s 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 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 September 30, 2012. 

During fiscal year 2012, grants of stock options and restricted stock were made under the 2012 Equity Incentive Plan.  The following table presents the future compensation expense expected to be recognized during each fiscal year presented as a result of the grants during the 2012 fiscal year.  The Company recognized $1.1 million of compensation expense during the current fiscal year related to grants during the current fiscal year.

CAPITOL FEDERAL FINANCIAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands)

Consistent with our goal to operate a sound and profitable financial institution, we actively seek to maintain a “well-capitalized” status for the Bank in accordance with regulatory standards.  As of September 30, 2012, the Bank exceeded all regulatory capital requirements.  The following table presents the Bank’s regulatory capital ratios at September 30, 2012 based upon regulatory guidelines.

A reconciliation of the Bank’s equity under GAAP to regulatory capital amounts as of September 30, 2012 is as follows (dollars in thousands):

Capitol Federal Financial, Inc. is the holding company for Capitol Federal Savings Bank.  Capitol Federal Savings Bank has 46 branch locations in Kansas and Missouri.  Capitol Federal Savings Bank 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, 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 Capitol Federal Savings Bank, which would affect the ability of the Capitol Federal Financial, Inc. to pay dividends in accordance with its dividend policies, competition, and other risks detailed from time to time in Capitol Federal Financial, Inc.’s SEC reports.  Actual results in future periods may differ materially from those currently expected.  These forward-looking statements represent Capitol Federal Financial, Inc.’s judgment as of the date of this release.  Capitol Federal Financial, Inc. disclaims, however, any intent or obligation to update these forward-looking statements.

For further information contact:

Supplemental Financial Information

Loan Portfolio

The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages (before deductions for undisbursed loan funds, unearned loan fees and deferred costs, and the ACL) as of the dates indicated.   The average rate of the portfolio decreased 22 basis points from 4.37% at June 30, 2012 to 4.15% at September 30, 2012 due primarily to the purchase and origination of loans during the quarter with rates less than the average rate of the existing portfolio.  The average rate of the portfolio decreased 54 basis points from 4.69% at September 30, 2011 to 4.15% at September 30, 2012 due primarily to the endorsement of loans at current market rates, as well as the purchase and origination of loans during the year with rates less than the average rate of the existing portfolio. 

The following table summarizes the activity in the loan portfolio for the periods indicated, excluding changes in loans in process, deferred fees, and ACL.  Loans that were paid-off as a result of refinances 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, however, included in the ending loan portfolio balance and rate.

⁽¹⁾Principal charge-offs, net represent potential loss amounts that reduce the unpaid principal balance of a loan.

⁽²⁾“Other” consists of transfers to OREO, endorsement fees advanced and reductions in commitments.

The following table presents the principal balance, weighted average credit score, loan-to-value (“LTV”) ratio, and the average principal balance for our one- to four-family loans at the dates presented.  Credit scores are typically updated during the last month of the quarter and are obtained 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 or broker price opinion.  In most cases, the most recent appraisal was obtained at the time of origination.