Capitol Federal Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2017; filed August 9, 2017. Amounts below are in U.S. dollars. Capitol Federal is a community-oriented savings institution, primarily funding residential mortgage lending with deposits and borrowings.
Key financial results
| Metric | Three months ended June 30, 2017 | Comparison | Nine months ended June 30, 2017 | Comparison |
|---|---|---|---|---|
| Net interest income | $49.4 million | +3.0% year over year | $145.7 million | +$1.3 million |
| Net income | $21.4 million | +$0.8 million year over year | $63.5 million | +$0.7 million; +1.2% |
| Diluted EPS | $0.16 | Up from $0.15 | $0.47 | Unchanged |
| Net interest margin | 1.81% | Up 8 basis points | 1.78% | Up 3 basis points |
| Efficiency ratio | 41.30% | Improved from 43.72% | 40.84% | Improved from 43.40% |
Quarterly interest income rose 5.4% year over year, while interest expense rose 9.7%. Lower non-interest expense supported earnings: it fell 2.9% for the quarter and 5.9% year to date. The year-to-date effective tax rate increased to 33.7% from 31.5%; management attributed the increase mainly to the changed accounting treatment for affordable-housing partnerships.
Financial position, cash flow and credit
- Balance sheet at June 30: Assets were $9.10 billion, down $164.0 million from September 30, 2016. Net loans were $7.24 billion, up $282.6 million; deposits were $5.27 billion, up $103.7 million. Securities declined $284.2 million and cash and cash equivalents fell $151.5 million to $130.2 million.
- Funding and capital: FHLB borrowings were $2.17 billion, down $198.9 million; repurchase agreements remained $200.0 million. Stockholders’ equity was $1.36 billion, down $34.0 million, primarily reflecting $106.6 million of cash dividends, partly offset by earnings. Bank regulatory capital ratios exceeded “well-capitalized” thresholds; the Bank’s Tier 1 leverage ratio was 10.7% and total capital ratio was 27.4%.
- Cash flows, nine months: Operating activities provided $57.1 million, versus $62.1 million in the prior-year period. Investing activities provided $8.3 million, compared with $11.3 million used; financing activities used $216.9 million. Cash and equivalents decreased $151.5 million.
- Credit quality: The allowance for credit losses was $8.5 million, or 0.12% of loans; no provision was recorded. Non-performing loans were $21.9 million, or 0.30% of loans, versus $29.1 million at September 30, 2016. Non-performing assets were 0.26% of assets. Management reported $54,000 of net charge-offs for the nine-month period.
Material changes, outlook and risks
- Management attributed improved margin primarily to shifting assets from lower-yielding securities toward higher-yielding loans, partly offset by lower loan yields and rising deposit costs. Loan growth was concentrated in correspondent-purchased residential loans; commercial real estate loans also grew.
- The Bank’s leverage strategy uses short-term FHLB funding, FHLB stock and cash held at the Federal Reserve. It contributed $715,000 of net income in the quarter and $2.2 million year to date. Management described it as having minimal interest-rate and liquidity impact, but the strategy depends on funding costs, FHLB stock dividends and regulatory borrowing approvals.
- Management estimated the fiscal 2017 effective tax rate at approximately 34%. It said it intended to continue a 100% earnings payout to stockholders in fiscal 2017, subject to financial condition, capital requirements and regulatory limits. A regular dividend of $0.085 per share was declared after quarter-end. No specific earnings or margin guidance was provided.
- Interest-rate exposure is significant. In the filing’s modeled rising-rate scenarios, a 200-basis-point increase was projected to reduce four-quarter net interest income by 1.79% and portfolio equity market value by 28.17%. These are model estimates, not forecasts; outcomes depend on rates, prepayments and deposit behavior.
- Management anticipated most maturing retail certificates would renew or move to other Bank products and most public-unit deposits would be replaced, while noting there was no assurance. About $1.20 billion of certificates were scheduled to mature within a year.
- The Bank held $54.7 million in affordable-housing partnership investments and had $20.4 million of related unfunded commitments. Its accounting method changed in fiscal 2017, affecting expense and tax presentation and reducing comparability with the prior year.
- Management said pending legal matters were not expected to have a material adverse effect and reported no material change in previously disclosed risk factors. Key stated risks include interest-rate and funding changes, loan demand and credit quality, real-estate values, regulatory actions, and the ability to maintain expenses and dividends.
Important facts for investors to verify
- Whether loan growth and asset-mix changes can sustain net interest income as funding and deposit costs rise.
- Actual renewal and replacement rates for the substantial certificate and public-unit deposit maturities.
- Credit trends in correspondent residential and growing commercial real-estate portfolios, including construction commitments and geographic concentrations.
- The assumptions behind interest-rate sensitivity estimates and continued approval for leverage-strategy borrowings above the standard FHLB limit.
- Dividend sustainability, including the Bank’s capacity and regulatory ability to distribute capital to the holding company.
- The ongoing earnings and tax effects of affordable-housing investments and their unfunded commitments.