Capitol Federal Financial, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011. This is an annual filing, not a standalone fourth-quarter report. The company is a bank holding company whose principal subsidiary, Capitol Federal Savings Bank, operates a Kansas- and Missouri-focused retail savings and mortgage-lending business.
Financial position and performance
- Profit and margins: The supplied filing text refers to the incorporated annual report for the consolidated income statements and MD&A, but does not provide clear values for revenue, net income, earnings per share, net interest margin, or operating margins.
- Cash flow: Cash-flow statements are incorporated by reference, but the supplied text does not provide clear cash-flow figures.
- Loans and lending: Gross loans were $5.20 billion at September 30, 2011, down $13.4 million from 2010; net loans were $5.15 billion. One- to four-family mortgages represented 94.7% of gross loans. FY 2011 loan originations and refinances were $837.2 million, versus $645.1 million in FY 2010; purchases and participations were $182.0 million, versus $119.1 million.
- Credit quality: Non-performing loans declined to $26.5 million (0.51% of net loans) from $32.0 million (0.62%) in 2010. Non-performing assets were $37.8 million, or 0.40% of total assets, versus $41.9 million, or 0.49%. Loans 30–89 days delinquent increased to $26.8 million from $24.7 million. Troubled debt restructurings totaled $50.4 million, substantially affected by adoption of new accounting guidance as well as borrower financial difficulties.
- Credit-loss reserve: The allowance for credit losses was $15.5 million, 0.30% of gross loans and 58% of non-performing loans, versus $14.9 million, 0.29% and 47%, respectively, in 2010. The provision was $4.1 million, down from $8.9 million; net charge-offs were $3.5 million, down from $4.0 million.
- Deposits and liquidity: Deposits totaled $4.50 billion, up $108.9 million during the year, compared with a $157.7 million increase in 2010. Non-certificate deposits rose to 41.6% of deposits from 37.8%. Brokered deposits were $83.7 million (about 2% of deposits); public-unit deposits were $106.4 million (about 2.5%). A standalone liquidity ratio or cash balance is not clearly provided in the supplied text.
- Debt and funding: The Bank had $2.38 billion of Federal Home Loan Bank advances and $515.0 million of repurchase agreements at year-end. Repurchase agreements were about 5.5% of total assets and were collateralized by securities with a fair value of $597.3 million. The Company redeemed $53.6 million of junior subordinated debentures in April 2011.
- Securities: Investment securities totaled $1.44 billion and mortgage-backed securities totaled $2.41 billion. Together they were $3.86 billion, approximately 41% of assets. The Bank reported no securities identified as other-than-temporarily impaired.
- Capital: The Bank reported $1.37 billion of Tier 1 capital and $1.38 billion of total risk-based capital. Its leverage, Tier 1 risk-based, and total risk-based capital ratios were 15.1%, 37.9%, and 38.3%, respectively; the Bank was classified as well capitalized.
Material changes versus FY 2010
- The December 2010 mutual-to-stock conversion raised $1.18 billion gross and $1.13 billion net. Half of the net proceeds, $567.4 million, was contributed to the Bank. The filing says proceeds funded securities purchases and other corporate uses.
- Investment and mortgage-backed securities expanded materially, with MBS increasing $804.2 million. Total loans were nearly flat, compared with a $437.6 million decline in FY 2010.
- Loan originations and refinances increased, while the provision for credit losses and net charge-offs declined. Non-performing loans also decreased, although early-stage delinquencies rose.
- Deposits grew more slowly than in FY 2010. The annual filing reports a $113.0 million special year-end/welcome dividend paid in calendar 2011; it also says stock repurchases were restricted during the first year after the reorganization and that no repurchase plan was then in place.
Outlook, risks, and unusual items
- Management identified no numerical earnings or balance-sheet guidance in the supplied text. It planned to open two branches in the Kansas City market area in FY 2012 and continued to consider expansion opportunities.
- Key exposures include a concentration in residential mortgages and in Kansas and Missouri real estate, economic and unemployment weakness, housing-price declines, borrower delinquencies, and the adequacy of the credit-loss allowance.
- Interest-rate risk is significant: many earning assets are long-term fixed-rate mortgages, while funding costs can reprice sooner. The Bank reported a positive one-year cumulative gap of 18.6% of assets, which management said would tend to benefit net interest income if rates rise and adversely affect it if rates fall.
- The securities portfolio’s large exposure to agency-backed securities carries risks related to changes in the roles or guarantees of Fannie Mae and Freddie Mac; mortgage-backed securities also face prepayment and valuation risks.
- The filing notes uncertainty over the potential cost of servicing or foreclosure deficiencies involving 93 purchased loans serviced by institutions subject to regulatory enforcement actions. The Bank had not been notified of identified deficiencies, and management could not estimate any potential cost.
- Dodd-Frank implementation, deposit-insurance costs, regulatory changes, competition, and the Bank’s ability to distribute capital to the parent and support dividends were additional risks. Management considered pending legal proceedings unlikely to have a material adverse effect.
Important facts for investors to verify
- Review the incorporated annual report for FY 2011 and FY 2010 revenue, net income, EPS, net interest margin, operating expenses, and cash flows; these figures are not clear in the supplied text.
- Assess whether the $15.5 million allowance adequately covers loan losses, particularly in older nationwide-purchased mortgage vintages, and monitor early-stage delinquencies, TDRs, and foreclosed real estate.
- Verify the sensitivity of earnings and capital to interest-rate movements, mortgage prepayments, and fair-value changes in the $3.86 billion securities portfolio.
- Monitor funding costs, deposit retention, FHLB advances, repurchase agreements, and the maturity profile of certificates of deposit.
- Confirm dividend capacity and any post-moratorium stock-repurchase authorization, given regulatory limits on Bank-to-parent distributions.
- Track the status and potential cost of the mortgage-servicing and foreclosure reviews, and the effects of Dodd-Frank and deposit-insurance assessments.