Capitol Federal Financial, Inc.® Reports Strategic Securities Transaction and Fiscal Year 2023 Results

Capitol Federal Financial, Inc.^® (NASDAQ:CFFN) (the "Company"), the parent company of Capitol Federal Savings Bank (the "Bank"), announced today a strategic securities transaction and results for the quarter and fiscal year ended September 30, 2023. For best viewing results, please view this release in Portable Document Format (PDF) on our website, https://ir.capfed.com.

Strategic Securities Transaction to Improve Future Earnings

In October 2023, the Company initiated a strategic securities transaction ("securities strategy") by selling $1.30 billion of securities, representing 94% of the securities portfolio, of which the net income impact is reflected in our September 30, 2023 financial statements. The securities strategy is designed to allow the Company to improve its earnings stream going forward, beginning in fiscal year 2024, and to provide liquidity to deleverage the balance sheet. The securities strategy is expected to increase our earnings per share by approximately $0.30 and our net interest margin by approximately 60 basis points in fiscal year 2024 through securities reinvestment. This securities strategy also provides liquidity to pay down borrowings, which should enable the Company to reduce the size of the balance sheet to under $10 billion in total assets by December 31, 2023, while keeping the Bank and Company well-capitalized and with tangible common equity for the Company of more than 10.0%. Following the execution of the securities strategy, the Company maintains exceptional asset quality along with strong liquidity measures, including an unused $2.11 billion line of credit with the Federal Home Loan Bank Topeka ("FHLB"), enabling the Company to meet current and expected future commitments.

Along with the securities strategy, it is anticipated that the Company will maintain cash and securities in excess of $1.00 billion, reduce borrowings by $500 million, and reduce total assets to approximately $9.70 billion at December 31, 2023. The yield on the securities sold was 1.22% and the average duration was 3.6 years. The rate on the borrowings to be repaid during the December 31, 2023 quarter is 4.70%. At the date of this announcement, the $1.30 billion of securities had been sold. Of the cash received from the sale and not used to pay down debt, approximately $650 million is expected to be reinvested into fixed rate securities modeled to yield 5.70%. We have a target date of October 31, 2023 to have the funds reinvested, but the execution of the reinvestment may extend beyond this date. The remaining cash balance is expected to be held at the Federal Reserve Bank ("FRB") earning 5.40%, or the Fed Funds overnight rate, until used to fund commercial loan commitments or other Bank operations. The Company expects the earn-back period to be 3.9 years, aligning closely with the average duration of the securities sold. In association with the securities strategy, the Company incurred a pre-tax loss of $206.0 million resulting in an after-tax loss of $155.7 million, which is being reflected in fiscal year 2023.

The Company's balance sheet is primarily composed of one- to four-family loans, most of which were refinanced in fiscal years 2020, 2021 and 2022 at then-current market interest rates. Securities were purchased during the same time period, also at low market interest rates, as a result of significant cash inflows from pandemic-related governmental stimulus support. Beginning in March 2022, the Federal Reserve started to raise interest rates at a record pace which resulted in the Bank increasing rates on deposit products to retain funds. Some of the Bank's borrowings also repriced to higher market interest rates during that same time period. Due to the composition of our loan and securities portfolios, our assets were not able to reprice as quickly as our liabilities, resulting in net interest margin compression. The securities strategy addresses the Company's recent decline in earnings associated with net interest margin compression driven by these factors by recognizing a net loss in fiscal year 2023. Because the securities sold in the securities strategy were held on our balance sheet as available for sale, the net loss in fiscal year 2023 had minimal impact to the Company's tangible book value per share ("TBVPS"), as most of this loss was already included in the calculation of our TBVPS.

Fiscal Year 2023 Highlights

The highlights for fiscal year 2023 include:

• On October 24, 2023, announced a cash dividend of $0.085 per share, payable on November 17, 2023 to stockholders of record as of the close of business on November 3, 2023;
• successfully implemented new core processing and digital banking systems to enhance customer experiences and better position the Bank for the future;
• net interest margin of 1.43% (1.55% excluding the effects of the leverage strategy);
• loan growth of 6.8%;
• paid dividends of $0.62 per share.

Comparison of Operating Results for the Three Months Ended September 30, 2023 and June 30, 2023

For the quarter ended September 30, 2023, the Company recognized a net loss of $150.5 million, or $(1.13) per share, compared to net income of $8.3 million, or $0.06 per share, for the quarter ended June 30, 2023. The net loss for the current quarter was due to the securities strategy. Excluding the securities strategy, earnings per share would have been $0.04 for the current quarter. The net interest margin decreased 11 basis points, from 1.32% for the prior quarter to 1.21% for the current quarter. Excluding the effects of the leverage strategy discussed in the "Leverage Strategy" section below, the net interest margin decreased 15 basis points, from 1.39% for the prior quarter to 1.24% for the current quarter. The decrease in the net interest margin excluding the effects of the leverage strategy was due mainly to an increase in the cost of deposits, primarily retail certificates of deposit.

Interest and Dividend Income

The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent. The weighted average yield on loans receivable increased nine basis points and the weighted average yield on cash and cash equivalents increased 15 basis points compared to the prior quarter.

The increase in interest income on loans receivable was due to an increase in the weighted average yield, along with an increase in the average balance of commercial loans. The increase in the weighted average yield was due primarily to originations and purchases/participations at higher market rates, as well as disbursements on commercial construction loans at rates higher than the overall portfolio rate and upward repricing of existing adjustable-rate loans due to higher market interest rates. The decrease in interest income on cash and cash equivalents was due mainly to a decrease in the average balance of cash associated with the leverage strategy compared to the prior quarter due to a reduction in the leverage strategy usage in the current quarter. The decrease in dividend income on FHLB stock was due mainly to a decrease in the average balance of FHLB stock associated with the leverage strategy, partially offset by an increase in the dividend rate paid by FHLB.

Interest Expense

The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent. The weighted average rate paid on deposits increased 37 basis points and the weighted average rate paid on borrowings not associated with the leverage strategy increased 10 basis points compared to the prior quarter.

During the current quarter, interest expense on borrowings associated with the leverage strategy decreased $4.7 million due to a reduction in usage of the leverage strategy. This was partially offset by an increase in interest expense on borrowings not associated with the leverage strategy, specifically the full quarter impact of borrowings under the Federal Reserve's Bank Term Funding Program ("BTFP"). The increase in interest expense on deposits was due primarily to increases in the weighted average rate paid and average balance of the retail certificate of deposit portfolio.

Provision for Credit Losses

For the quarter ended September 30, 2023, the Bank recorded a provision for credit losses of $963 thousand, compared to a provision for credit losses of $1.3 million for the prior quarter. The provision for credit losses in the current quarter was comprised of a $1.4 million increase in the allowance for credit losses ("ACL") for loans, partially offset by a $477 thousand decrease in the reserve for off-balance sheet credit exposures. The provision for credit losses associated with the ACL was due primarily to the reduction in prepayment speeds related to the commercial loan portfolio and commercial loan growth. The release of provision for credit losses associated with the reserve for off-balance sheet credit exposures was due primarily to a reduction in commercial construction off-balance sheet credit exposures due to projects being completed.

Non-Interest Income

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

The decrease in deposit service fees was due primarily to waiving certain fees for several weeks after the implementation of the Bank's new core processing system ("digital transformation") and due to changes in the fee structure of certain deposit products after the digital transformation. The net loss from securities transactions relates to the securities strategy discussed above. The decrease in other non-interest income was due mainly to a decrease in income on bank-owned life insurance related to the receipt of death benefits during the prior quarter, with no such benefits during the current quarter.

Non-Interest Expense

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

The decrease in salaries and employee benefits was mainly related to the provision of our short-term performance plan that does not allow for the payment of incentive compensation as a result of the Company's net loss in the current fiscal year. The increase in information technology and related expense was due primarily to software licensing expenses associated with the Company's digital transformation. The increase in regulatory and outside services was due mainly to the timing of external audit fees, in addition to expenses related to customer support associated with the digital transformation. The decrease in advertising and promotional expense was due mainly to the timing of campaigns. The increase in deposit and loan transaction costs was due primarily to new expenses associated with the digital transformation. The increase in office supplies and related expense was due mainly to postage expense associated with the digital transformation mailings.

The Company's efficiency ratio was (16.55)% for the current quarter compared to 72.32% for the prior quarter. Excluding the effects of the securities strategy, the efficiency ratio would have been 79.08% for the current quarter. The change in the efficiency ratio, excluding the securities strategy, was due primarily to lower net interest income. The efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income. A higher value generally indicates that it is costing the financial institution more money to generate revenue, relative to its net interest income and non-interest income.

Income Tax Expense

The following table presents pretax income, income tax expense, and net income for the time periods presented, along with the change measured in dollars and percent and the effective tax rate.

The income tax benefit in the current quarter was a result of the pretax loss. The pretax loss, combined with the Company's permanent differences, contributed to the increase in the effective tax rate. Generally, the Company's permanent differences lower the effective tax rate when the Company has pretax income and tax expense, but as a result of the current quarter pretax loss, the Company's permanent differences have the impact of raising the effective tax rate.

Comparison of Operating Results for the Years Ended September 30, 2023 and 2022

The Company recognized net loss of $111.7 million, or $(0.84) per share, for the current year, compared to net income of $84.5 million, or $0.62 per share, for the prior year. The net loss for the current year resulted from the securities strategy. Excluding the effects of the securities strategy, earnings per share would have been $0.33 for the current year, due primarily to lower net interest income, along with recording a provision for credit losses of $6.8 million for the current year compared to a release of provision of $4.6 million for the prior year. The net interest margin decreased 36 basis points, from 1.79% for the prior year to 1.43% for the current year. Excluding the effects of the leverage strategy, the net interest margin decreased 49 basis points, from 2.04% for the prior year to 1.55% for the current year. The decrease in the net interest margin excluding the effects of the leverage strategy was due mainly to an increase in the cost of borrowings and deposits, which exceeded the increase in loan yields.

Interest and Dividend Income

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

The increase in interest income on loans receivable was due to an increase in the weighted average yield and the average balance of the loan portfolio. The increase in the average balance was mainly in the correspondent one-to four-family and commercial real estate loan portfolios. The increase in the weighted average yield was due primarily to originations and purchases at higher market yields, as well as disbursements on commercial construction loans at rates higher than the overall portfolio rate and upward repricing of existing adjustable-rate loans due to higher market interest rates. The increase in interest income on cash and cash equivalents was due to a higher yield on cash as a result of an increase in FRB interest rates. The increase in dividend income on FHLB stock was due mainly to a higher FHLB dividend rate compared to the prior year period, along with an increase in the average balance of FHLB stock due to an increase in FHLB borrowings not associated with the leverage strategy.

Interest Expense

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

The increase in interest expense on borrowings was due primarily to an increase in the average balance and weighted average rate on borrowings not associated with the leverage strategy, along with an increase in the weighted average rate on the borrowings associated with the leverage strategy compared to the prior year. Interest expense on borrowings not associated with the leverage strategy increased due to new borrowings added between periods, at market interest rates higher than the overall portfolio rate, to replace maturing advances and to fund operational needs. Interest expense on borrowings associated with the leverage strategy increased $21.2 million compared to the prior year due to increase usage of the leverage strategy in the current year. The increase in interest expense on deposits was due to an increase in the weighted average rate paid on the deposit portfolio, primarily retail certificates of deposit and money market accounts.

Provision for Credit Losses

The Bank recorded a provision for credit losses during the current year of $6.8 million, compared to a release of provision of $4.6 million during the prior year. The provision for credit losses in the current year was comprised of a $7.5 million increase in the ACL for loans and a $656 thousand decrease in reserves for off-balance sheet credit exposures. The provision for credit losses associated with the ACL was due primarily to the outlook for worsening economic forecast conditions in the current fiscal year compared to the prior fiscal year, along with a reduction in the projected prepayment speeds used in the model for all loan categories. The release of provision for credit losses associated with the reserve for off-balance sheet credit exposures was due primarily to refining our methodology to account for the estimated credit losses on unfunded commercial construction-to-permanent loans and commitments for the time period after construction is expected to be completed.

Non-Interest Income

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

The decrease in deposit service fees was due primarily to waiving certain fees for several weeks after the digital transformation, a change in the fee structure of certain deposit products after the digital transformation, and an increase in debit card expenses. The increase in insurance commissions was due primarily to annual contingent insurance commissions received being higher than anticipated and the related accrual adjustments, along with overall commissions being higher in the current year due mainly to growth and strong retention on personal policies and continued success growing our commercial policies. The net loss from securities transactions relates to the Bank's securities strategy discussed above. The decrease in other non-interest income was due mainly to the prior year including gains on a loan-related financial derivative agreement, with no such market value gains in the current year, along with a decrease in income on bank-owned life insurance compared to the prior year due to a reduction in the yield and death benefits received between the two periods.

Non-Interest Expense

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

The decrease in salaries and employee benefits was attributable mainly to lower incentive compensation in the current fiscal year, along with a reduction in loan commissions due to lower loan origination activity, and an increase in capitalized payroll costs related to the digital transformation project. The increase in information technology and related expenses was due mainly to third-party project management expenses associated with the Bank's digital transformation project, along with higher software licensing expenses due to agreement renewals at higher costs and new agreements associated with the digital transformation. The decrease in advertising and promotional expense was due mainly to the timing of campaigns. The increase in federal insurance premium expense was due mainly to an increase in the FDIC assessment rate. The increase in office supplies and related expense was due primarily to an increase in postage, along with the write-off of the Bank's remaining inventory of unissued non-contactless debit cards, which have now become obsolete. The increase in other non-interest expense was due mainly to expenses associated with the collateral received on the Bank's interest rate swap agreements.

The Company's efficiency ratio was (361.38)% for the current year compared to 52.39% for the prior year. Excluding the effects of the securities strategy, the efficiency ratio would have been 65.31% for the current year. The change in the efficiency ratio, excluding the securities strategy, was due primarily to lower net interest income.

Income Tax Expense

The following table presents pretax income, income tax expense, and net income for the time periods presented, along with the change measured in dollars and percent and effective tax rate.

The income tax benefit in the current year was a result of the pretax loss. The pretax loss, combined with the Company's permanent differences, contributed to the increase in the effective tax rate. Generally, the Company's permanent differences lower the effective tax rate when the Company has pretax income and tax expense, but as a result of the current year pretax loss, the Company's permanent differences have the impact of raising the effective tax rate. Management anticipates the effective tax rate for fiscal year 2024 will be approximately 19% to 20%.

Financial Condition as of September 30, 2023

The following table summarizes the Company's financial condition at the dates indicated.

As part of the securities strategy, $1.30 billion of AFS securities were designated for sale as of September 30, 2023. The $192.7 million of unrealized loss, which includes $11.4 million of premium write-downs, associated with these securities was recognized as a net loss from securities transactions in the fiscal year 2023 consolidated income statement. Subsequent to September 30, 2023 but before the date of this earnings release, the Bank sold the securities for an additional $13.3 million of net loss which is also reflected in net loss from securities transactions in the fiscal year 2023 consolidated income statement. The total net loss related to the securities transactions was $206.0 million. The net loss associated with the sale of the securities and the write-down of premiums is a subsequent event that is required to be reported in the fiscal year 2023 consolidated income statement.

During the current quarter, total assets decreased $116.3 million as operating cash and cash flows from the securities portfolio were used to pay off a maturing FHLB advance and fund deposit outflows. While the total loan portfolio balance remained relatively unchanged, there was a shift in the portfolio mix as commercial loans increased $63.4 million while one- to four-family loans decreased $55.3 million, including a $35.9 million decrease in one- to four-family correspondent loans. The Bank continues to reduce purchases of correspondent loans with the intention of having correspondent purchases near zero, which will result in a continued decrease in the balance of that portfolio.

Total liabilities decreased $99.4 million during the current quarter as a maturing $100.0 million FHLB advance was not renewed, along with a $41.6 million decrease in deposits, partially offset by an increase in advances by borrowers due to timing of the receipt of borrower funds and payment of property taxes and an increase in other liabilities for new commitments to fund low income housing partnership investments. The decrease in deposits was primarily in retail non-maturity deposits and public unit certificates of deposit, partially offset by an increase in retail certificates of deposit. The increase in retail certificates of deposit was in terms less than 17 months.

Total assets increased $552.9 million from September 30, 2022 to September 30, 2023. The increase was mainly composed of a $506.7 million increase in the loan portfolio and a $196.4 million increase in operating cash, partially offset by a $178.8 million decrease in securities. The growth in the loan portfolio was primarily funded with proceeds from borrowings.

Total liabilities increased $605.0 million from September 30, 2022 to September 30, 2023 due to a $747.0 million increase in borrowings, partially offset by a $143.6 million decrease in deposits. The increase in borrowings was composed of $500.0 million in BTFP borrowings at a rate of 4.70% and the remaining amounts were FHLB advances. The decrease in deposits during the current year was mainly in non-maturity deposits which decreased $670.1 million, largely retail money market accounts, partially offset by a $460.4 million increase in retail certificates of deposit and a $53.6 million increase in public unit certificates of deposit. During the March 2023 quarter, the Bank held a certificate of deposit promotional campaign, which resulted in $177.3 million in new retail certificates of deposit with the majority of the funds coming from customer transfers from existing deposits within the Bank. The additional decrease in non-maturity deposit balances was likely due to depositors moving funds to alternative, higher yielding investment products and/or withdrawing funds for customer spending. The majority of the growth in the retail certificate of deposit portfolio in the current fiscal year were in terms less than 17 months. Management continues to competitively price certain short-term retail certificate of deposit products to encourage customers to move to shorter-term options. If rates were to decrease in the near future, the Bank would be able to reprice those balances to lower market rates at maturity.

For short-term liquidity needs, the Bank has access to a line of credit at the FHLB in addition to the FRB of Kansas City discount window. The Bank's FHLB borrowing limit was 50% of the Bank's Call Report total assets as of September 30, 2023. The amount that can be borrowed from the FRB of Kansas City's discount window is based upon the fair value of securities pledged as collateral. Management estimated that the Bank had $2.71 billion in additional liquidity available at September 30, 2023 based on the Bank's blanket collateral agreement with FHLB and unencumbered securities.

As of September 30, 2023, approximately $789.0 million of the Bank's deposit portfolio was uninsured, of which approximately $425.1 million related to commercial and retail deposit accounts and the remainder was mainly comprised of fully collateralized public unit deposits and intercompany accounts. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements.

The following table summarizes loan originations and purchases, deposit activity, and borrowing activity, along with certain related weighted average rates, during the periods indicated. The borrowings presented in the table have original contractual terms of one year or longer.

Leverage Strategy

At times, the Bank has utilized a leverage strategy to increase earnings which entails entering into short-term FHLB advances and depositing the proceeds from the borrowings, net of the required FHLB stock holdings, at the FRB of Kansas City. The borrowings are repaid prior to quarter end. The average balance of leverage strategy borrowings was $239.1 million and $604.4 million during the quarters ended September 30, 2023 and June 30, 2023, respectively, and $924.4 million for the year ended September 30, 2023. At times during the current quarter, the leverage strategy was not profitable and therefore was not utilized, resulting in a decrease in the average outstanding balance of leverage strategy borrowings compared to the prior quarter. Net income attributable to the leverage strategy was $38 thousand and $997 thousand for the quarter and year ended September 30, 2023, respectively. 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. Management continues to monitor the net interest rate spread and overall profitability of the leverage strategy.

Stockholders' Equity

Stockholders' equity totaled $1.03 billion at September 30, 2023. During the year ended September 30, 2023, the Company paid cash dividends totaling $83.2 million. These cash dividends totaled $0.620 per share and consisted of a $0.28 per share cash true-up dividend related to fiscal year 2022 earnings and four regular quarterly cash dividends of $0.085 per share.

On October 24, 2023, the Company announced a regular quarterly cash dividend of $0.085 per share, or approximately $11.3 million, payable on November 17, 2023 to stockholders of record as of the close of business on November 3, 2023.

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, 2023, the Bank's tier 1 leverage ratio was 8.4%, which exceeded the minimum requirement. The tier 1 leverage ratio is based on average assets. The leverage strategy increases average assets which in turn reduces the Bank's tier 1 leverage ratio.

At September 30, 2023, Capitol Federal Financial, Inc., at the holding company level, had $83.4 million in cash on deposit at the Bank. For fiscal year 2024, it is the intention of the Board of Directors to pay out the regular quarterly cash dividend of $0.085 per share. 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 level.

During the current quarter, the Company repurchased 250,594 shares of common stock at an average price of $4.97 per share. There remains $21.2 million authorized under the existing stock repurchase plan for additional purchases of the Company's common stock. Shares may be repurchased from time to time based upon market conditions, available liquidity and other factors. This plan has no expiration date; however, the FRB of Kansas City's existing approval for the Company to repurchase shares expires in August 2024.

The following table presents a reconciliation of total to net shares outstanding as of September 30, 2023.

Fiscal Year 2024 Outlook

Information technology and related expenses are anticipated to be $3 million lower in fiscal year 2024 as compared to fiscal year 2023 due to a reduction in professional services costs related to the digital transformation. Now that the digital transformation is complete, the professional services are no longer necessary. Additionally, income from deposit service fees is anticipated to be approximately $1 million lower in fiscal year 2024 as compared to fiscal year 2023 due to changes in the fee structure of certain deposit products after the digital transformation, which is in line with industry trends.

Capitol Federal Financial, Inc. is the holding company for the Bank. The Bank has 51 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.

Forward-Looking Statements

Except for the historical information contained in this press release, the matters discussed herein 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: 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 and the effects of inflation or a potential recession, whether caused by Federal Reserve action or otherwise; the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor or depositor sentiment; demand for loans in the Company's and its correspondent banks' market areas; the future earnings and capital levels of the Bank, which could 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 Securities and Exchange Commission (SEC). Actual results may differ materially from those currently expected. These forward-looking statements represent the Company's judgment as of the date of this release. The Company disclaims, however, any intent or obligation to update these forward-looking statements.

SUPPLEMENTAL FINANCIAL INFORMATION

Average Balance Sheets

The following tables present the average balances of our assets, liabilities, and stockholders' equity, and the related annualized weighted average yields and rates on our interest-earning assets and interest-bearing liabilities for the periods indicated, as well as selected performance ratios and other information for the periods shown. Weighted average yields are derived by dividing income (annualized for the three-month periods) by the average balance of the related assets, and weighted average rates are derived by dividing expense (annualized for the three-month periods) by the average balance of the related liabilities, for the periods shown. Average outstanding balances are derived from average daily balances. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yields/rates. Weighted average yields on tax-exempt securities are not calculated on a fully taxable equivalent basis.