Capitol Federal Financial, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, three months ended December 31, 2018. Comparisons are principally with the three months ended December 31, 2017; balance-sheet comparisons are with September 30, 2018. Amounts are in U.S. dollars.
Key financial results
| Metric | Quarter ended Dec. 31, 2018 | Comparable prior-year period |
|---|---|---|
| Net interest income | $52.3 million | $49.4 million |
| Net interest margin | 2.27% | 1.83% |
| Non-interest income | $5.4 million | $5.4 million |
| Non-interest expense | $26.8 million | $22.0 million |
| Income before tax | $30.9 million | $32.7 million |
| Net income / diluted EPS | $24.4 million / $0.18 | $31.8 million / $0.24 |
| Operating cash flow | $14.3 million | $43.3 million |
- Net income declined 23.4%. The prior-year quarter included a $7.5 million tax benefit from revaluing deferred taxes after enactment of the Tax Act; the effective tax rate was 2.6% then versus 21.2% this quarter.
- Net interest income rose 5.9%, with higher loan income, including from commercial loans added in the CCB acquisition, partly offset by higher deposit costs. Excluding the leverage strategy, net interest margin was 2.32%, up from 2.20% a year earlier.
- Non-interest expense increased 21.5%, led by salaries, technology and integration costs, occupancy, and acquisition-related intangible amortization. The efficiency ratio increased to 46.40% from 40.26%.
- Cash flows from investing were $81.6 million; financing activities used $151.1 million. Cash, cash equivalents and restricted cash declined $55.2 million to $83.9 million. Balance-sheet cash and cash equivalents were $81.7 million; the cash-flow figure also includes restricted cash.
Financial position, liquidity and asset quality
- Total assets were $9.30 billion, down $145.8 million from September 30, 2018. Net loans were $7.53 billion, up modestly from $7.51 billion. Commercial loans grew $48.2 million during the quarter, while correspondent and bulk-purchased residential loans declined.
- Deposits were $5.56 billion, down $45.5 million; borrowings totaled $2.28 billion, broadly unchanged. Stockholders’ equity was $1.35 billion, down $45.7 million, primarily reflecting $65.4 million of dividends, partly offset by quarterly earnings. Equity was 14.5% of consolidated assets.
- Management’s liquidity target for securities and cash was approximately 15% of assets; the reported ratio was 14.2%. The Bank had $642 million of eligible, unused securities collateral. $1.34 billion of certificates of deposit were scheduled to mature within one year.
- The allowance for credit losses was $8.6 million, or 0.11% of loans. No provision was recorded; net recoveries were $95,000. Non-performing loans were $13.7 million (0.18% of loans), up from $11.0 million at September 30, 2018. Non-performing assets were $15.2 million, or 0.16% of assets.
- The Bank exceeded regulatory capital requirements: its Tier 1 leverage ratio was 12.6%, Common Equity Tier 1 ratio 25.0%, Tier 1 capital ratio 25.0%, and total capital ratio 25.2%. Management cited 13.1% as the Bank’s equity-to-assets ratio and a long-term appropriate capital level.
Outlook, commentary and risks
- For fiscal 2019, management projected non-interest income increases of approximately $450,000 from BOLI and $550,000 from trust asset management compared with fiscal 2018. It expected salaries and benefits to be approximately $5.6 million higher, IT expense $4.0 million higher, occupancy $1.8 million higher, and deposit intangible amortization of approximately $2.4 million. Management estimated a fiscal 2019 effective tax rate of approximately 22%.
- Management intended to continue a policy of distributing 100% of earnings to stockholders, subject to financial condition, regulatory capital requirements and the Bank’s ability to distribute capital. A regular dividend of $0.085 per share was announced for payment in February 2019. The Company had $70 million remaining under its repurchase plan and repurchased no shares during the quarter.
- The Bank suspended its leverage strategy at times when spreads between FHLB borrowing costs and cash returns were negative. Management said the strategy was not in place at quarter-end. Interest-rate risk remains significant: modeled net interest income declined 4.36% under an immediate +200-basis-point rate shock; modeled market value of portfolio equity declined 20.92%.
- Key exposures include interest-rate and deposit repricing risk; the concentration of residential lending in Kansas and Missouri; commercial loan growth and construction commitments; and the ability to maintain cost-effective funding and realize CCB acquisition benefits. $925 million of FHLB advances were scheduled to mature within 12 months, including advances hedged with swaps. Management planned to redeem the remaining CCB-related junior subordinated debentures in the first half of fiscal 2019.
- Management stated pending litigation was not expected to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors and no material changes to commitments or off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether CCB-related revenue and commercial loan growth offset expected acquisition, staffing and technology costs.
- Deposit retention and repricing, certificate maturities, FHLB refinancing, and the economics and use of the leverage strategy.
- Trends in non-performing loans, commercial construction exposures, and the adequacy of the allowance as commercial lending expands.
- Whether projected fiscal 2019 expense, income and tax-rate assumptions are achieved, and whether dividends remain supportable and receive required regulatory non-objection.