Business context and reporting period
Capitol Federal Financial, Inc. is a community-oriented bank holding company whose principal subsidiary gathers retail deposits and primarily originates or purchases residential mortgage loans. This Form 10-Q covers the fiscal quarter and six months ended March 31, 2013; comparative periods are the three and six months ended March 31, 2012. Dollar amounts below are in U.S. dollars.
Key financial metrics
| Metric | Three months ended March 31, 2013 | Six months ended March 31, 2013 |
|---|---|---|
| Net interest income | $44.3 million | $90.0 million |
| Provision for credit losses | $0 | $0.2 million |
| Net income | $17.7 million | $35.3 million |
| Diluted earnings per share | $0.12 | $0.24 |
| Net interest margin | 1.97% | 1.99% |
- Quarterly comparison: Net income decreased 8.3% from $19.3 million a year earlier. Net interest income declined 6.6%; lower loan and securities yields were the main pressure, partly offset by lower funding costs. Other expenses rose 5.7% to $23.2 million.
- Six-month comparison: Net income fell 7.4% from $38.1 million, and net interest income declined 3.1%. Net interest margin was down 3 basis points from 2.02%; the average yield on interest-earning assets fell 27 basis points to 3.38%, while the average cost of interest-bearing liabilities fell 35 basis points to 1.68%.
- Balance sheet at March 31, 2013: Assets were $9.39 billion, loans receivable net were $5.72 billion, and securities were $3.20 billion at carrying value. Deposits were $4.69 billion; FHLB advances, net, were $2.63 billion and repurchase agreements were $315 million. Stockholders’ equity was $1.64 billion, or 17.5% of assets.
- Cash flows for the six months: Operating activities provided $43.7 million; investing activities used $26.8 million; financing activities used $110.1 million. Cash and cash equivalents declined $93.1 million to $48.6 million.
- Credit quality: Non-performing loans were $26.3 million, or 0.46% of total loans; non-performing assets were $33.0 million, or 0.35% of assets. The allowance for credit losses was $10.1 million, 0.18% of total loans and 38.2% of non-performing loans. Six-month net charge-offs were $1.3 million.
Material changes versus comparable periods
- Compared with March 31, 2012, quarterly net interest income declined $3.1 million as asset yields fell faster than funding costs. The quarterly net interest margin decreased 9 basis points, from 2.06% to 1.97%.
- Six-month interest and dividend income fell $15.4 million, while interest expense fell $12.6 million. Other expenses increased $3.9 million, partly offset by lower credit-loss provisions and income tax expense.
- From September 30, 2012, loans net increased $107.2 million and deposits increased $142.9 million. Cash declined $93.1 million and stockholders’ equity declined $163.5 million, primarily reflecting dividends and share repurchases.
- Non-performing loans decreased from $31.8 million at September 30, 2012, while OREO declined from $8.0 million to $6.7 million. Total TDRs were $51.1 million, compared with $52.0 million at September 30, 2012.
Outlook, management commentary, risks and unusual items
- Management expected to open one branch in the Kansas City market during calendar 2013 and continued to consider expansion opportunities. The filing does not provide earnings or revenue guidance.
- Management estimated a fiscal 2013 effective tax rate of approximately 34%. It anticipated fiscal 2013 expense increases versus fiscal 2012, including $4.8 million in salaries and benefits, $2.6 million in IT and occupancy, and $1.1 million in advertising, partly offset by an estimated $1.0 million decrease in other expenses. For fiscal 2014, management anticipated lower salaries and benefits as ESOP-related costs decline.
- Management said loan portfolio performance continued to improve, but expected delinquent loans, non-performing loans and OREO could remain within the range seen over the prior year. The portfolio is concentrated in residential mortgages, particularly in Kansas and Missouri; risks include unemployment, property values, borrower repayment capacity and changes in credit conditions.
- Interest-rate risk is significant. At March 31, 2013, the modeled change in net interest income was -0.22% for a +100-basis-point rate shock and -5.95% for +300 basis points; modeled market value of portfolio equity declined 5.03% and 26.69%, respectively. These are scenario estimates, not management earnings forecasts.
- Liquidity sources included $1.32 billion of reported excess FHLB borrowing capacity and $1.87 billion of eligible, unused securities collateral. The Bank had $575 million of FHLB advances scheduled to mature within 12 months, and $1.15 billion of certificates of deposit due within one year. A $100 million, six-year FHLB advance at a fixed 1.29% rate settled in early April 2013.
- The company paid $125.3 million of dividends in the six-month period, including a $0.52-per-share True Blue dividend and a $0.18-per-share special year-end dividend. It repurchased $72.0 million of stock during the period and had $142.9 million remaining under its $175 million repurchase plan as of April 12, 2013. A regular quarterly dividend of $0.075 per share was declared after quarter-end. Future distributions depend on financial condition and regulatory limits on Bank-to-parent capital distributions.
- Management reported no material subsequent events, no material change in disclosed risk factors, and effective disclosure controls. Routine legal proceedings were described as immaterial. The allowance for credit losses and fair value measurements involve significant management estimates; regulators may require additional reserves or charge-offs.
Most important facts an investor should verify
- Whether asset-yield pressure continues to outpace reductions in deposit and borrowing costs, and how this affects net interest margin and earnings.
- Trends in non-performing loans, TDRs, charge-offs and the allowance for credit losses, including the effect of regulatory reporting requirements.
- Deposit retention and refinancing needs, particularly the large certificate maturities and scheduled FHLB advance maturities, as well as liquidity and borrowing capacity.
- The sustainability of dividends and share repurchases given lower earnings, reduced equity, and regulatory restrictions on capital distributions.
- Actual exposure to rising interest rates and prepayment changes, compared with the filing’s modeled net interest income and portfolio-equity scenarios.