Capitol Federal Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended March 31, 2020 (unaudited). Capitol Federal is a Kansas-focused savings bank, with a loan portfolio concentrated in one- to four-family residential lending. The company identifies COVID-19 as a significant factor affecting customers, operations, credit estimates and results.
Key financial metrics
| Metric | Three months ended March 31, 2020 | Six months ended March 31, 2020 |
|---|---|---|
| Net interest income | $48.7 million | $97.4 million |
| Provision for credit losses | $22.1 million | $22.3 million |
| Net income | $4.3 million; diluted EPS $0.03 | $26.8 million; diluted EPS $0.19 |
| Net interest margin | 2.19% | 2.19% |
| Efficiency ratio | 49.05% | 48.97% |
Balance sheet at March 31, 2020: Total assets were $9.37 billion; net loans $7.48 billion; AFS securities $1.24 billion; deposits $5.77 billion; borrowings $2.12 billion; and stockholders’ equity $1.29 billion. The allowance for credit losses (ACL) was $31.2 million, or 0.42% of loans, versus $9.2 million, or 0.12%, at September 30, 2019. The company reported a 13.7% equity-to-assets ratio; management reported Bank equity to assets of 12.2%.
Cash flows for the six months: Operating activities provided $38.4 million, investing activities used $105.8 million, and financing activities used $11.6 million. Cash, cash equivalents and restricted cash totaled $174.7 million at period-end; balance-sheet cash and cash equivalents were $118.4 million. The Bank had $30 million outstanding on its Federal Reserve Bank of Kansas City credit line.
Changes versus comparable periods
- Quarterly net income fell from $24.6 million ($0.18 per diluted share) in the prior-year quarter to $4.3 million ($0.03), primarily because of the $22.1 million credit-loss provision. Six-month net income declined 45.3% from $48.9 million ($0.36 per share) a year earlier.
- Quarterly net interest income decreased 7.5% year over year to $48.7 million; the net interest margin narrowed 14 basis points to 2.19%. For the six-month period, net interest income decreased 7.2% and margin narrowed 11 basis points. Management attributed margin pressure mainly to lower loan yields and higher deposit costs.
- Net loans increased $60.1 million from September 30, 2019, while deposits grew $192.8 million and borrowings declined $124.1 million. Total assets increased $31.2 million. Equity decreased $48.5 million, principally reflecting $70.4 million of dividends, partly offset by earnings.
- Non-performing loans were $8.8 million, or 0.12% of total loans, at March 31, 2020, compared with $7.6 million (0.10%) at September 30, 2019. Delinquent loans 30–89 days past due were $18.0 million, or 0.24% of net loans.
Outlook, commentary and risks
- Credit and COVID-19: Management increased historical and qualitative loss factors in response to deteriorating economic conditions. It said the ACL was adequate based on information then available, but further deterioration or insufficient government relief could require additional provisions. Commercial loans represented $772.7 million; management identified $162.5 million, or 21% of commercial balances, as most exposed to near-term operating cash-flow or collateral concerns, particularly hotels and single-use properties.
- Borrower support and PPP: By April 30, the Bank had processed residential and consumer modifications covering $139.7 million, with additional residential requests pending. It had processed $200.0 million of commercial modifications, with another $165.8 million in process. These modifications generally provided payment forbearance or interest-only periods and were not treated as TDRs under the guidance described in the filing. The Bank processed 575 PPP applications totaling $40.7 million; $34.1 million had been funded by April 30. Expected PPP fees were approximately $1.7 million, and management anticipated more than 75% of balances would be forgiven, based on borrower discussions.
- Interest rates and lending: The Federal Reserve returned to a zero-interest-rate policy in March. Management expects loan yields to continue declining as lower-rate originations and refinancings enter the portfolio; it said margin should remain stable, with downside risk from prepayments and premium amortization. The Bank suspended new correspondent one- to four-family loan purchases, while continuing to process existing pipeline commitments. Management said material loan-portfolio growth for the remainder of fiscal 2020 was unlikely.
- Funding, capital and dividends: The Bank refinanced $350 million of FHLB advances from a 2.42% weighted-average contractual rate into new advances at 1.43%, paying $4.2 million in prepayment penalties that are amortized over the new advances’ lives. The Bank’s CBLR was 12.4%, above the 8% minimum applicable for 2020 under the temporary rule. Management reported no liquidity or capital concerns in its April stress tests. The regular quarterly dividend of $0.085 per share was maintained; the annual $0.25 True Blue dividend was deferred amid uncertainty. Management said it intended to continue paying out 100% of earnings, subject to financial and regulatory conditions.
- Other outlook: Management estimated fiscal 2020 salary and benefit expense would increase about $1.0 million over fiscal 2019, below its original estimate, citing delayed technology work, reduced hiring and COVID-related expense actions. It anticipated an effective tax rate of approximately 20% for fiscal 2020. These statements are forward-looking and subject to substantial uncertainty.
- Other matters: Management reported no material adverse effect expected from pending litigation, no material changes to previously disclosed risk factors apart from the COVID-19 supplement, and effective disclosure controls as of March 31, 2020. The company noted remote-work-related cybersecurity and operational risks, uncertainty in loan performance and PPP guarantee compliance, and possible future pressure on credit quality, earnings, capital and liquidity.
Most important facts for investors to verify
- How subsequent COVID-19 developments affected the $31.2 million ACL, charge-offs, delinquencies and the commercial exposures identified by management.
- Actual performance and repayment outcomes for modified loans, including the status of pending modifications and concentrations in hotels, senior housing and other vulnerable property types.
- PPP loan funding, forgiveness, fee recognition and any SBA guarantee or litigation issues.
- Whether deposit costs continue to decline enough to offset falling loan and securities yields, and the effect of refinancing and prepayment activity on net interest margin.
- Liquidity and funding needs as certificates of deposit and FHLB advances mature, and the effect of the deferred True Blue dividend and regulatory limits on capital distributions.