Capitol Federal Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2021. The company is a bank holding company whose business is conducted primarily through Capitol Federal Savings Bank. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance and condition
- Quarterly earnings: Net income was $20.4 million, or $0.15 per diluted share, versus $4.3 million, or $0.03, in the year-ago quarter. Net interest income was $43.1 million; net interest margin was 1.88%, down 31 basis points year over year. The quarter included a $7.4 million gain on Visa Class B shares and a $4.8 million loss on terminating interest-rate swaps.
- Six-month earnings: Net income was $39.3 million, or $0.29 per diluted share, compared with $26.8 million, or $0.19, a year earlier. Net interest income declined 10.8% to $86.9 million and net interest margin fell 29 basis points to 1.90%. The improvement in earnings primarily reflected a $4.5 million negative provision for credit losses, versus a $22.3 million provision in the prior-year period.
- Income and costs: Six-month interest and dividend income decreased 16.6% to $132.5 million, while interest expense fell 25.9% to $45.7 million. Non-interest income increased to $17.5 million, including the Visa gain; non-interest expense rose 13.4% to $59.7 million, including the swap termination loss and a $1.2 million branch-property write-down. The six-month efficiency ratio increased to 57.19% from 48.97%.
- Balance sheet: Total assets were $9.70 billion at March 31, up 2.2% from September 30, 2020. AFS securities rose 34.3% to $2.10 billion, while net loans declined 3.2% to $6.97 billion, mainly as correspondent-loan payoffs exceeded purchases. Deposits increased 7.4% to $6.65 billion, primarily in non-maturity accounts; borrowings decreased 11.6% to $1.58 billion.
- Cash flow: For the six months, operating activities provided $32.1 million, investing activities used $302.4 million, and financing activities provided $202.1 million. Cash, cash equivalents and restricted cash totaled $171.5 million at period end, down $68.3 million since September 30, 2020.
- Credit and capital: The loan allowance was $23.4 million, or 0.33% of loans; the separate reserve for off-balance-sheet credit exposures was $6.1 million. Non-performing loans were $15.2 million, or 0.22% of loans, versus $8.8 million and 0.12% a year earlier. GAAP equity was $1.28 billion, 13.2% of assets; the Bank’s Community Bank Leverage Ratio was 12.2% and the Company’s was 13.4%.
Material changes and unusual items
- The company sold all its Visa Class B shares, recognizing a $7.4 million gain.
- The Bank terminated $200 million of interest-rate swaps associated with advances it intended to prepay, recognizing a $4.8 million pretax loss. Management estimated an approximately 15-month earn-back period. It also prepaid $200 million of FHLB advances at a 2.23% weighted-average rate and replaced them with advances at a 0.69% contractual rate; $5.0 million of prepayment penalties are being recognized over the new advances’ lives.
- Adoption of CECL on October 1, 2020 reduced the loan allowance by $4.8 million, established a $7.8 million off-balance-sheet reserve, and reduced retained earnings by $2.3 million, net of tax. The current-period negative provision reflected an improved economic forecast, partly offset by qualitative reserves for continued uncertainty.
- Unrealized AFS securities losses increased as market yields rose. Management reported no credit-loss allowance on these securities and said it did not intend, and was not likely required, to sell them before recovery of amortized cost.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management anticipated a fiscal 2021 effective tax rate of approximately 21%.
- Management said loan yields could continue to decline in the near term amid prepayments, refinances and loan endorsements, while reinvestment in lower-yielding securities could pressure net interest margin. Loan rates began to rise in late February 2021, but asset yields may reprice downward faster than funding costs.
- COVID-19-related economic uncertainty, unemployment, uneven industry recovery, real-estate values, foreclosure moratoria, and the performance of modified loans remain credit risks. Two commercial loans totaling $50.7 million were added to special mention; both had resumed full payments, but management continued to monitor underlying conditions.
- Interest-rate sensitivity is material: the one-year repricing gap was negative $652 million at March 31. In the company’s modeled parallel +200-basis-point scenario, four-quarter net interest income was projected 1.47% above base, while market value of portfolio equity was projected 20.47% below base. These are model scenarios, not management earnings guidance.
- The Bank had $1.72 billion of eligible, unused securities collateral for borrowing or other liquidity needs. Management expected most retail certificates maturing within 12 months to renew or move to other Bank products, but gave no assurance. The Bank had $640 million of borrowings scheduled to mature within 12 months.
- The Bank and Company reported CBLR ratios above applicable minimums. Management intends to continue a 100% earnings payout for fiscal 2021, subject to financial condition, capital requirements and regulatory limits. A $0.085-per-share quarterly dividend was announced for payment in May 2021. Pending litigation was not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the improvement in reported earnings is sustainable apart from the Visa gain, negative credit-loss provision and prior-year comparison.
- Trends in net interest margin, loan yields, deposit pricing, loan prepayments and reinvestment yields.
- Performance of modified and special-mention commercial loans, non-performing assets, and the assumptions and reserves underlying CECL.
- Execution and realized savings from FHLB refinancing and swap actions, including the timing of remaining maturities and the estimated earn-back period.
- Interest-rate sensitivity, deposit retention and the capacity to fund commitments and dividends while maintaining regulatory capital and liquidity.