Capitol Federal Financial, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended September 30, 2021 (not a standalone calendar fourth-quarter report). Capitol Federal is a Kansas-focused community bank whose principal business is residential mortgage lending, funded mainly by deposits and FHLB advances.
Financial performance and condition
| Metric | FY2021 / September 30, 2021 | Prior comparable period |
|---|---|---|
| Net income; diluted EPS | $76.1 million; $0.56 | FY2020: $64.5 million; $0.47 |
| Net interest income | $175.0 million | FY2020: $189.3 million |
| Net interest margin | 1.90% | FY2020: 2.12% |
| Non-interest income | $28.1 million | FY2020: $19.6 million |
| Non-interest expense; efficiency ratio | $115.6 million; 56.91% | FY2020: $106.0 million; 50.74% |
| Total assets | $9.63 billion | September 30, 2020: $9.49 billion |
| Net loans; AFS securities | $7.08 billion; $2.01 billion | Loans: $7.20 billion; securities: $1.56 billion |
| Deposits; borrowings | $6.60 billion; $1.58 billion | Deposits: $6.19 billion; borrowings: $1.79 billion |
| Stockholders’ equity | $1.24 billion; 12.9% of assets | $1.28 billion; 13.5% of assets |
| Operating cash flow | $74.5 million | FY2020: $92.9 million |
Interest and dividend income fell 15.3% to $258.2 million, while interest expense declined 28.1% to $83.2 million. Lower asset yields and a shift of loan cash flows into lower-yielding securities pressured net interest income and margin. The allowance for credit losses (ACL) was $19.8 million; reserves for off-balance-sheet exposures were $5.7 million. Net charge-offs were $0.5 million, about 0.01% of average loans.
Cash and cash equivalents were $42.3 million at year-end. Cash, cash equivalents and restricted cash totaled $70.3 million in the cash-flow statement; this broader measure decreased $169.4 million during the year. The Bank reported $1.68 billion in eligible, unused securities collateral for borrowing or other liquidity needs. Regulatory leverage ratios were 11.5% for the Bank and 12.9% for the Company, above the 8.5% CBLR requirement applicable in 2021.
Material changes versus FY2020
- Net income rose 17.9%, primarily because the Bank recorded an $8.5 million negative provision for credit losses in FY2021 versus a $22.3 million provision in FY2020. Lower net interest income partly offset this benefit.
- The ACL declined from $31.5 million at September 30, 2020 to $19.8 million at September 30, 2021. The company adopted CECL on October 1, 2020; its adoption reduced the opening ACL by $4.8 million and added a $7.8 million off-balance-sheet reserve, so comparisons in credit-loss measures are not fully like-for-like.
- Loans declined 1.7%, while AFS securities increased 29.1%. Deposits grew 6.6%, mainly in non-maturity accounts, and borrowings fell 11.5% as deposit growth funded securities purchases and repayment of maturing advances.
- The net interest margin narrowed by 22 basis points. The efficiency ratio worsened, reflecting lower net interest income and higher expenses, including swap-termination and FDIC premium costs.
Outlook, risks and unusual items
- Management said it intended for FY2022 to distribute 100% of Company earnings through regular quarterly dividends of $0.085 per share and a year-end true-up, subject to financial, capital and regulatory conditions. After year-end, a $0.22-per-share FY2021 true-up dividend was announced. The filing estimated an FY2022 effective tax rate of 21%–22%, absent tax-law changes.
- FY2021 included a $7.4 million gain from the sale of Visa Class B shares and a $4.8 million pretax loss from terminating cash-flow hedges. The Bank also prepaid $400 million of FHLB advances, paying $5.1 million in penalties, largely to be recognized over the replacement advances’ lives.
- COVID-19 remains a credit and operating risk. At year-end, $146.4 million of commercial and $2.7 million of residential loans remained in COVID-related deferral periods; the filing notes slower recovery among hotel and convention-center borrowers. Foreclosure proceedings on owner-occupied residential loans remained suspended.
- Interest-rate exposure is significant. The one-year gap was negative $664.1 million (6.9% of assets), although modeled net interest income increased in rising-rate scenarios based partly on assumptions about deposit repricing. Modeled market value of portfolio equity fell 19.4% under a 200-basis-point rate increase.
- Other stated risks include deposit outflows and replacement funding costs, commercial real-estate concentration and geographic exposure, cybersecurity and third-party risks, and transition of LIBOR-linked contracts. The Company identified $268.6 million of adjustable-rate residential loans tied to LIBOR with maturities after December 31, 2021.
Management considered pending ordinary-course litigation unlikely to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; the ACL estimate was identified as a critical audit matter because of significant judgment in qualitative adjustments.
Important facts for investors to verify
- Whether deposit growth persists or reverses as customers resume normal spending, and the cost of any replacement funding.
- Whether credit quality, commercial borrower performance and COVID-modified loan outcomes support the lower ACL and credit-loss provision.
- How net interest income and portfolio value respond to actual rate changes versus management’s deposit repricing and prepayment assumptions.
- Whether the announced dividend payout policy remains supportable under earnings, capital requirements and regulatory distribution limits.
- Progress in transitioning LIBOR-linked loans, advances and derivatives, and any resulting customer disputes or earnings impact.