Capitol Federal Financial, Inc. (CFFN) — Form 10-Q
Business context and period: The company is a bank holding company whose subsidiary, Capitol Federal Savings Bank, accounts for almost all consolidated assets and liabilities. This report covers the fiscal third quarter and nine months ended June 30, 2022; balance-sheet comparisons are with September 30, 2021. Dollar amounts below are rounded to millions unless stated otherwise.
Financial performance and position
| Metric | Three months ended June 30, 2022 | Nine months ended June 30, 2022 |
|---|---|---|
| Interest and dividend income | $69.4 | $196.1 |
| Net interest income | $50.0 | $142.7 |
| Net income | $21.2 | $65.0 |
| Diluted EPS | $0.16 | $0.48 |
| Net interest margin | 1.79% | 1.82% |
| Efficiency ratio | 50.61% | 51.99% |
- For the nine-month period, net income rose 12.9% from $57.5 million and diluted EPS increased from $0.42. Net interest income increased 10.2% to $142.7 million.
- Quarterly net income was up 16.3% year over year, from $18.2 million, but down from $21.6 million in the prior quarter. Sequentially, net interest margin increased from 1.69% to 1.79%.
- Management reported nine-month NIM of 2.04% excluding the leverage strategy, compared with 1.88% a year earlier. The reported margin was lower year over year, 1.82% versus 1.88%, partly reflecting that strategy.
- At June 30, total assets were $9.48 billion; net loans were $7.24 billion, deposits $6.33 billion, borrowings $1.87 billion, and stockholders’ equity $1.13 billion. Since September 30, loans rose $155.1 million while deposits fell $267.5 million and borrowings increased $287.0 million.
- Nine-month cash flows were $63.4 million provided by operating activities, $11.3 million provided by investing activities, and $90.2 million used in financing activities. Cash and cash equivalents ended at $54.8 million, down $15.5 million from the start of the period.
- Stockholders’ equity declined $110.5 million from September 30, primarily reflecting lower AOCI from falling AFS securities values and dividends. AFS securities were carried at $1.69 billion, with $137.2 million of gross unrealized losses; AOCI was a $101.9 million loss.
- Asset quality remained strong by reported measures: nonperforming assets were 0.09% of total assets, and loans 30–89 days delinquent were 0.16% of net loans. The nine-month period included $220,000 of net recoveries. The allowance for credit losses was $16.3 million, or 0.22% of net loans.
- The Bank’s CBLR was 9.4% and the Company’s was 10.6%, above the stated 9% minimum. The Bank reported a one-year negative gap of $1.33 billion, or 14.0% of assets.
Changes, outlook, and risks
- Earnings drivers: Lower deposit interest expense and higher income from FHLB stock and cash supported net interest income. Loan and MBS interest income was affected by portfolio mix, yields, and slower prepayments. Nine-month noninterest income fell 25.2%, mainly because the prior-year period included a $7.4 million Visa Class B share sale gain. Prior-year expenses also included a $4.8 million loss on termination of interest-rate swaps.
- Funding and leverage strategy: Deposit outflows, concentrated largely in the June quarter, were replaced with FHLB advances. The Bank used a short-term borrowing strategy to invest proceeds in cash and required FHLB stock; it generated $1.8 million of net income year to date. In July, the borrowing level for this strategy was raised to $2.60 billion from up to $2.10 billion, and management said it would continue while profitable. Higher borrowing costs or lower returns could reduce its benefit.
- Rate and securities risk: Management cited uncertainty around deposit retention and said higher-cost borrowings may be needed if outflows continue. The filing’s modeled net interest income fell 0.95% under an immediate +200-basis-point rate shock; modeled market value of portfolio equity fell 32.13%. These are sensitivity estimates, not forecasts. Management attributed securities losses to higher market yields and said it did not expect to be required to sell the affected securities before recovery of amortized cost.
- Credit assumptions: The nine-month negative provision reflected reductions in commercial-loan qualitative factors, partly offset by loan growth. The quarter itself had a $937,000 provision, reflecting a recessionary economic forecast and commercial loan growth. Management’s selected forecast assumed unemployment gradually rising to 4.3% by June 30, 2023; a less favorable outlook or loan performance could require additional provisions.
- Management outlook: Management anticipated an approximately 21% effective tax rate for fiscal 2022 and intended to continue paying out 100% of fiscal-year earnings as dividends, subject to capital, regulatory and liquidity considerations. A new core processing system was targeted for implementation by September 2023 and may increase third-party expenses in the remainder of fiscal 2022 and fiscal 2023.
- Other matters: The filing reported no changes to previously disclosed risk factors, and management did not expect pending ordinary-course legal proceedings to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether deposit outflows continue, how deposit pricing and retention evolve, and the resulting cost and availability of FHLB funding.
- Whether the leverage strategy remains profitable as market rates and FHLB stock dividends change, including the effect of the July increase in strategy borrowings.
- Changes in AFS unrealized losses, AOCI, and capital under continued rate movements, alongside the Bank’s ability to meet regulatory capital requirements.
- Credit quality trends, commercial loan concentrations and commitments, and the assumptions supporting the allowance for credit losses.
- Regulatory permissions and capital capacity supporting planned dividends and any future share repurchases; the Federal Reserve approval for repurchases was stated to run through August 2022.
- Costs and execution progress for the core-system conversion and any effect on expenses or customer operations.