Capitol Federal Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2022. The company is a bank holding company whose wholly owned Capitol Federal Savings Bank accounts for nearly all consolidated assets and liabilities. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Key financial results and condition
| Metric | Three months ended March 31, 2022 | Six months ended March 31, 2022 |
|---|---|---|
| Net interest income | $47.1 million | $92.7 million |
| Provision for credit losses | $(3.2) million | $(6.6) million |
| Net income | $21.6 million | $43.8 million |
| Diluted EPS | $0.16 | $0.32 |
| Net interest margin | 1.69% | 1.83% |
At March 31, 2022, total assets were $9.53 billion, net loans $7.11 billion, AFS securities $1.78 billion, deposits $6.61 billion, borrowings $1.58 billion, and stockholders’ equity $1.17 billion. Equity was 12.3% of consolidated assets. The Bank’s Community Bank Leverage Ratio was 9.7%, above the 9% minimum cited in the filing.
Six-month operating cash flow was $36.5 million; investing cash flow was positive $108.0 million and financing cash flow was negative $42.3 million. Cash, cash equivalents and restricted cash increased $102.2 million to $172.4 million; balance-sheet cash and cash equivalents were $166.9 million.
Asset quality remained relatively strong: loans 30–89 days delinquent were 0.15% of net loans; loans 90 or more days delinquent or in foreclosure were 0.16%; nonaccrual loans were 0.17%. The allowance for credit losses was $15.3 million, or 0.22% of loans, and the six-month period recorded net recoveries of $45,000.
Changes versus comparable periods
- Six-month net income rose 11.4% from $39.3 million to $43.8 million; diluted EPS increased from $0.29 to $0.32. Net interest income increased 6.7%, while the negative provision for credit losses was larger.
- Six-month NIM declined from 1.90% to 1.83%. Excluding the leverage strategy, management reported NIM of 2.00%, versus 1.90% a year earlier, citing lower funding costs that more than offset lower asset yields.
- Six-month non-interest income fell 37.8%, chiefly because the prior-year period included a $7.4 million gain on sale of Visa Class B shares. Non-interest expense fell 8.5%, partly because the prior year included a $4.8 million loss on termination of interest rate swaps.
- Compared with December 31, 2021, total assets declined 0.8% and deposits declined 0.5%; net loans were nearly flat. AFS securities’ fair value declined to $1.78 billion from $1.89 billion, largely reflecting higher market yields. AOCI worsened to a loss of $75.9 million from a loss of $23.3 million at December 31.
Outlook, management commentary and risks
- The Bank reimplemented a temporary leverage strategy during the quarter, borrowing up to $2.10 billion in short-term FHLB funding and placing net proceeds at the Federal Reserve Bank of Kansas City. Borrowings were repaid before quarter-end. The strategy contributed $545,000 of quarterly net income; management said it would continue while profitable. It reduced reported quarterly NIM by about 32 basis points, according to the company’s non-GAAP reconciliation.
- Management anticipated an approximately 21% effective tax rate for fiscal 2022. It plans to implement a new core processing system by September 2023; related third-party costs may increase later in fiscal 2022 and in fiscal 2023. No specific full-year earnings or revenue guidance was provided.
- Interest-rate exposure is material. The one-year repricing gap was negative $1.46 billion, or 15.3% of assets. A modeled immediate 200-basis-point rate increase reduced projected four-quarter net interest income by 0.29%; modeled market value of portfolio equity fell 30.3% in that scenario.
- The AFS portfolio had $98.1 million of gross unrealized losses at March 31, 2022, versus $12.6 million at September 30, 2021. Management attributed the losses to higher market yields, reported no securities credit-loss allowance, and said it did not intend to sell and was not more likely than not to be required to sell before recovery.
- Deposit costs were declining, but management cautioned that non-maturity deposit balances may not persist; outflows could require higher-cost borrowing. The Bank had $1.54 billion of eligible, unused securities collateral and $1.55 billion of certificates of deposit scheduled to mature within 12 months.
- The company paid $52.9 million in dividends during the six months and stated its intention to maintain a 100% earnings payout for fiscal 2022, subject to financial, capital and regulatory constraints. It also had $44.7 million remaining under its repurchase authorization; Federal Reserve approval for repurchases extended through August 2022.
- Management identified economic conditions, inflation and interest rates, loan delinquencies and real estate values, deposit flows, funding access, competition, cybersecurity, regulation and execution of business initiatives among the risks. It said pending legal actions were unlikely to materially affect financial condition, results or liquidity; no risk-factor changes from the prior annual report were reported.
Important facts for investors to verify
- Whether the leverage strategy remains profitable and how its reported earnings, funding needs and effect on NIM evolve.
- Whether deposit balances remain stable as rates rise and certificates mature, and the resulting cost and availability of replacement funding.
- How AFS unrealized losses and further rate changes affect tangible equity, liquidity, and any potential need to sell securities.
- Whether loan quality, commercial loan concentrations and the assumptions supporting the reduced credit-loss provision remain consistent with actual performance.
- Whether capital levels and regulatory permissions support planned dividends and any future share repurchases.