Capitol Federal Financial, Inc. — FY2020 Form 10-K
Business context and period. This annual report covers the fiscal year ended September 30, 2020; unaudited quarterly data are also provided, including the fourth quarter. Capitol Federal is a Kansas-based community bank focused primarily on residential mortgage lending, with commercial banking and trust services. Its subsidiary bank operated 54 branches. The financial statements received an unqualified audit opinion, and the auditor also reported effective internal control over financial reporting.
Key financial results
| Metric | FY2020 / September 30, 2020 | FY2019 / September 30, 2019 |
|---|---|---|
| Net income | $64.5 million | $94.2 million |
| Diluted earnings per share | $0.47 | $0.68 |
| Net interest income | $189.3 million | $206.4 million |
| Net interest margin | 2.12% | 2.26% |
| Provision for credit losses | $22.3 million | $0.75 million |
| Total assets | $9.49 billion | $9.34 billion |
| Net loans | $7.20 billion | $7.42 billion |
| Deposits | $6.19 billion | $5.58 billion |
| Borrowings | $1.79 billion | $2.24 billion |
| Stockholders’ equity | $1.28 billion | $1.34 billion |
Net cash provided by operating activities was $92.9 million. Investing activities used $151.3 million and financing activities provided $44.4 million; cash, cash equivalents and restricted cash decreased $14.0 million. Period-end cash and cash equivalents were $185.1 million. The efficiency ratio rose to 50.74% from 46.83%; return on average assets declined to 0.69% from 0.99%, and return on average equity to 4.92% from 6.94%.
At year-end, the Bank had a 12.4% community bank leverage ratio (CBLR), and the Company had a 13.7% CBLR. The Bank reported borrowings equal to 19% of its regulatory assets, $1.22 billion in eligible unused securities collateral, and no brokered deposits or repurchase agreements outstanding.
Changes versus the prior year
- Net income fell 31.5%, mainly reflecting lower net interest income and a $21.6 million increase in the credit-loss provision; lower income tax expense partly offset the decline.
- Net interest income decreased 8.3%. Lower asset yields—especially on correspondent residential loans—more than offset lower borrowing costs. The weighted average loan yield declined to 3.63% from 3.77%.
- The allowance for credit losses increased to $31.5 million from $9.2 million. Management increased loss factors across loan categories and added a COVID-19 factor for commercial loans.
- Deposits grew 10.9%, driven in part by stimulus payments, reduced consumer spending, PPP proceeds and a new business relationship. Loans declined $213.9 million, while securities increased.
- Borrowings declined 20.1% as deposits were used to repay or not renew some FHLB advances and other funding. Equity decreased $51.5 million, mainly because of dividends and share repurchases.
- The Company repurchased $23.8 million of shares and paid $0.68 per share in dividends. It deferred its customary $0.25-per-share True Blue dividend amid economic uncertainty.
Outlook, risks and unusual items
- COVID-19 and credit risk: The Bank modified $239.5 million of residential loans and $410.9 million of commercial loans. At September 30, $39.8 million of residential and $367.4 million of commercial balances remained in deferral periods. Forbearance balances were not reported as delinquent during the deferral period, so reported asset-quality measures may not yet reflect borrower stress. Management warned the allowance could rise if conditions worsen.
- Commercial exposure: Commercial loans were $829.7 million, approximately 12% of total loans. COVID-19-sensitive exposures included senior housing, hotels, retail and office properties. Commercial loans modified under the pandemic program were concentrated in some of these categories.
- Asset quality: Nonperforming loans were $12.5 million, or 0.17% of loans, versus $7.6 million, or 0.10%, a year earlier. Loans 30–89 days delinquent were 0.13%, down from 0.20%. Management cautioned that assistance programs and modifications could mask subsequent deterioration.
- Margins and rates: Management expected continued pressure on net interest margin from lower yields on new loans and securities, refinancing and endorsement activity, prepayments, and premium amortization. The leverage strategy was suspended because its funding-versus-cash yield spread was unprofitable.
- Capital returns: Management stated its intention to distribute 100% of FY2021 earnings through regular and true-up dividends, subject to results, regulatory requirements and the Bank’s ability to distribute capital. A $0.13-per-share FY2020 true-up dividend was announced after year-end. The FY2020 dividend payout ratio was 145.43%, above reported earnings per share.
- Accounting change: The new expected-credit-loss standard (CECL) became effective October 1, 2020. Management’s preliminary estimate was an ACL of $26.8 million and a $7.8 million reserve for unfunded commitments on adoption, with a $2.3 million after-tax cumulative reduction to retained earnings; estimates remained subject to change.
- Other exposures: The filing identifies interest-rate and mortgage-prepayment risk, commercial real-estate and business credit risk, LIBOR transition risk (including $500.7 million of LIBOR-indexed residential loans and $465.0 million of LIBOR-linked swaps), cybersecurity/vendor risk, and the possibility of regulatory limits on dividends. Pending legal matters were not expected by management to have a material adverse effect.
For FY2021, management estimated an effective tax rate of approximately 21%–22%. The filing does not provide earnings or revenue guidance.
Important facts for investors to verify
- Whether borrowers exiting COVID-19 deferrals remain current, especially in commercial property sectors and any loans seeking additional assistance.
- How CECL adoption compares with management’s preliminary allowance and unfunded-commitment estimates, and whether subsequent economic forecasts require further reserves.
- Whether deposit balances tied to stimulus, PPP proceeds and the new business relationship persist, and how deposit repricing and funding needs affect margins.
- Whether dividend and repurchase plans remain consistent with earnings, capital needs and regulatory approvals; review the elevated FY2020 payout ratio and deferred True Blue dividend.
- How the LIBOR transition affects the identified loans and swaps, including contract fallback terms and potential earnings or legal impacts.