Capitol Federal Financial, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended December 31, 2015. Balance-sheet comparisons are with September 30, 2015; operating results are compared with the three months ended December 31, 2014 and September 30, 2015. Amounts are in U.S. dollars.
Business context and financial results
Capitol Federal is a community-oriented bank focused primarily on residential mortgage lending, funded by retail deposits and supplemented by FHLB borrowings and repurchase agreements. The filing is unaudited; interim results are not necessarily indicative of full-year results.
| Metric | Q1 FY2016 | Comparable period / change |
|---|---|---|
| Net interest income | $48.0 million | Down $54,000 (0.1%) year over year; up $42,000 sequentially |
| Net interest margin | 1.75% | 1.76% year over year; excluding daily leverage strategy, 2.11% versus 2.11% |
| Net income | $20.7 million | Up $246,000 (1.2%) year over year; up 10.3% sequentially |
| EPS, basic and diluted | $0.16 | $0.15 year over year |
| Non-interest income / expense | $5.6 million / $23.6 million | Income up $309,000; expense up $448,000 year over year |
| Efficiency ratio | 44.05% | 43.42% year over year; improved from 47.31% sequentially |
| Cash flow from operations | $26.2 million | $28.9 million in the prior-year quarter |
Year-over-year earnings growth reflected higher non-interest income and lower income tax expense, partly offset by higher non-interest expense. The effective tax rate was 30.8%, versus 31.7% a year earlier. Return on average assets was 0.74% and return on average equity was 5.86%.
Financial position, liquidity and capital
- Assets: $9.13 billion at December 31, down $710.7 million from September 30. Net loans increased $40.1 million to $6.67 billion; deposits rose $140.0 million to $4.97 billion.
- Borrowings: FHLB borrowings were $2.47 billion, down $799.2 million; repurchase agreements remained $200.0 million. Total liabilities were $7.74 billion. The reduction in FHLB funding primarily reflected quarter-end removal of the daily leverage strategy.
- Cash and cash flows: Cash and cash equivalents were $232.4 million at quarter-end, down $540.3 million during the quarter. Investing activities provided $175.5 million, while financing activities used $741.9 million, including $800.0 million net repayments of borrowings and $44.6 million of dividends paid.
- Equity and capital: Stockholders’ equity was $1.39 billion; equity was 15.2% of period-end assets. The Bank and Company exceeded regulatory capital requirements. The Bank’s Tier 1 leverage ratio was 11.3%, and total capital ratio was 30.8%.
- Liquidity: Management reported $888.8 million of eligible, unused securities collateral and $70.3 million held by the parent company on deposit at the Bank. At quarter-end, public unit deposits were $349.2 million and there were no brokered deposits. $1.18 billion of certificates of deposit were scheduled to mature within one year.
Changes, asset quality and notable items
- Management removed the daily leverage strategy at quarter-end and reinstated the full $2.10 billion strategy on January 4, 2016. It intended to remove it at each quarter-end and reinstate it at the start of the next quarter during FY2016. Reported period-end assets and funding therefore reflect this timing; average balances include the strategy’s effects.
- Loans were primarily one- to four-family residential mortgages. During the quarter, the Bank originated and refinanced $195.6 million of loans and purchased $118.6 million of correspondent loans; total loan originations, refinancings, purchases and participations were $323.1 million.
- Non-performing loans were $25.7 million, or 0.39% of loans; non-performing assets were $31.2 million, or 0.34% of assets. The allowance for credit losses was $9.2 million, or 0.14% of loans. No credit-loss provision was recorded in the quarter.
- Unrealized securities losses increased as market yields rose. Management concluded the impairments were temporary and reported no other-than-temporary impairment. AFS securities’ quarter-end fair value was $637.0 million; HTM securities’ fair value was $1.21 billion.
- The company paid $44.5 million in dividends, including a $0.25-per-share fiscal 2015 true-up and a regular quarterly dividend of $0.085 per share. It stated an intent to distribute 100% of FY2016 earnings, subject to financial, regulatory and other considerations. A $70 million share repurchase plan was announced; no shares were repurchased in the quarter.
Outlook, risks and contingencies
- No earnings or revenue guidance was provided. Management estimated an FY2016 effective tax rate of approximately 32%.
- Management cited the ability to maintain overhead, sustain loan production, deploy funds at attractive yields and access cost-effective funding as important factors. Risks also include deposit and loan-demand changes, local real-estate and economic conditions, credit losses, regulation, litigation, and interest-rate movements.
- In the Bank’s modeled parallel-rate scenarios, a 300-basis-point increase reduced projected four-quarter net interest income by 3.86% and market value of portfolio equity by 31.67%. These are model estimates, not earnings forecasts; management noted that higher rates can cause liabilities to reprice faster than assets.
- Low-income housing partnership investments were $51.1 million, with $21.8 million of unfunded commitments, mostly expected to be funded through 2018. Management did not expect pending litigation to have a material adverse effect. No material subsequent events or changes to reported risk factors were identified.
Important facts for investors to verify
- How the planned quarterly removal and reinstatement of the daily leverage strategy affects reported assets, funding costs, net interest margin and earnings.
- Whether loan growth and deposit retention continue, and how certificate maturities and rising-rate competition affect funding costs.
- Trends in non-performing loans, charge-offs, collateral values and allowance adequacy, particularly given the residential mortgage concentration.
- Whether the stated dividend distribution intent remains consistent with regulatory capital distribution limits and the Bank’s capital position.
- Execution costs and completion timing for the Kansas City operations-center remodel, and funding of low-income housing partnership commitments.