Capitol Federal Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and financial position
The company is a bank holding company whose principal subsidiary is Capitol Federal Savings Bank. Residential one- to four-family lending is its primary lending business, with additional commercial and consumer lending. Results reflect the COVID-19 pandemic, sharply lower interest rates, refinancing activity, and related borrower assistance.
- Assets were $9.56 billion, up 2.3% from September 30, 2019, mainly from higher cash balances.
- Net loans were $7.39 billion, down 0.4%. Deposits were $6.07 billion, up 8.7%; borrowings were $1.99 billion, down 11.2%.
- Cash and cash equivalents were $396.2 million on the balance sheet. Cash, cash equivalents, and restricted cash totaled $454.2 million at period-end on the cash flow statement.
- Stockholders’ equity was $1.30 billion, or 13.6% of consolidated assets. The Bank reported a 12.4% Community Bank Leverage Ratio (CBLR); management cited a 12.2% Bank equity-to-assets ratio.
Results and key metrics
| Metric | Three months ended June 30, 2020 | Nine months ended June 30, 2020 |
|---|---|---|
| Net interest income | $46.3 million | $143.7 million |
| Net interest margin | 2.07% | 2.15% |
| Provision for credit losses | None | $22.3 million |
| Non-interest income | $4.4 million | $14.6 million |
| Non-interest expense | $26.2 million | $78.8 million |
| Net income | $19.5 million | $46.3 million |
| Diluted EPS | $0.14 | $0.34 |
For the nine months, operating cash flow was $69.1 million, investing cash flow was $2.8 million, and financing cash flow was $128.5 million. Cash, cash equivalents, and restricted cash increased $200.5 million. Cash dividends paid during the period totaled $82.1 million.
Material changes versus comparable periods
- Quarterly net income fell from $22.9 million to $19.5 million year over year; diluted EPS declined from $0.17 to $0.14. Net interest income fell 10.4%, and net interest margin declined 22 basis points to 2.07%. Lower loan yields, including higher premium amortization from correspondent-loan payoffs, were key factors.
- Nine-month net income declined 35.6% from $71.8 million to $46.3 million, and EPS fell from $0.52 to $0.34. The principal drivers were a $21.9 million year-over-year increase in credit-loss provision and lower net interest income.
- Nine-month net interest income decreased 8.3% and net interest margin fell 15 basis points to 2.15%. Lower asset yields were partly offset by reduced borrowing costs; deposit interest expense increased 7.3%.
- The allowance for credit losses rose from $9.2 million at September 30, 2019 to $31.2 million at June 30, 2020, largely reflecting COVID-19 economic uncertainty. Nonperforming loans were $10.2 million, or 0.14% of loans, versus $7.6 million, or 0.10%, at September 30, 2019.
- Deposits grew substantially, driven partly by government stimulus payments, PPP-related deposits, commercial deposit growth, and deferred tax payments. Management used excess liquidity to reduce borrowings.
Outlook, management commentary, risks, and unusual items
- Management expected net interest margin pressure to continue, citing lower rates on new and refinanced loans and securities, loan prepayments, and premium amortization. It did not expect the loan portfolio to increase materially during the remainder of fiscal 2020.
- The Bank had processed COVID-19 modifications for 896 residential loans totaling $233.4 million, 94 consumer loans totaling $2.6 million, and 229 commercial loans with $392.8 million of gross exposure, including undisbursed amounts. Management warned that forbearance could mask future credit deterioration as relief periods expire.
- The Bank had funded 700 PPP loans totaling $42.6 million; these loans are SBA-guaranteed. The filing notes potential SBA guarantee and litigation risks if origination, funding, servicing, or forgiveness requirements are disputed.
- Management said stress tests identified no capital or liquidity concerns and considered the allowance adequate at June 30, while warning that worsening conditions or insufficient government relief could require further provisions and reduce earnings.
- The annual True Blue dividend was deferred because of economic uncertainty; the regular quarterly dividend remained $0.085 per share. Management stated its intent to seek regulatory non-objection and pay the deferred dividend when conditions are more certain, and to continue a 100% earnings payout policy, subject to regulatory and financial constraints.
- The Bank prepaid $350 million of higher-cost FHLB advances and replaced them with lower-cost, longer-term advances, paying $4.2 million in penalties to be recognized over the new advances’ lives. Its leverage strategy was suspended because the spread was unprofitable.
- For the upcoming CECL accounting change, preliminary model results indicated an allowance and unfunded-commitment reserve between $20 million and the existing level of approximately $32 million. Management cautioned that estimates may change before adoption.
- Management expected the fourth-quarter fiscal 2020 effective tax rate to be approximately 21%, and the full-year rate approximately 20%. It also estimated fourth-quarter FDIC insurance premium expense of about $620,000.
Important facts for investors to verify
- Whether COVID-19 modification extensions translate into higher delinquencies, nonperforming loans, charge-offs, or additional allowance provisions.
- How deposit balances and funding costs evolve as stimulus-related and other unusually high inflows normalize, and as certificates of deposit mature.
- Whether lower yields, prepayments, refinancing, and premium amortization continue to pressure net interest income and margin.
- Changes in exposure and credit performance in commercial real estate, particularly senior housing, hotels, retail, office, and single-use properties.
- The final CECL allowance and reserve impact at adoption, compared with the preliminary $20 million-to-$32 million range.
- Regulatory approval and the timing of any deferred True Blue dividend, alongside the sustainability of regular dividends and capital ratios.