Capitol Federal Financial, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015; comparisons are primarily with FY2014. Capitol Federal is a Kansas-focused retail bank whose core business is originating and purchasing residential mortgage loans and funding them through deposits and borrowings.
Key financial results and position
| Metric | FY2015 / September 30, 2015 | Comparison |
|---|---|---|
| Net income | $78.1 million; diluted EPS $0.58 | Net income +0.5% from $77.7 million; EPS was $0.56 in FY2014 |
| Interest income / net interest income | $297.4 million / $189.8 million | Net interest income +3.1% from $184.1 million |
| Net interest margin | 1.73% GAAP | 2.00% in FY2014; excluding the daily leverage strategy, management reported 2.07% in both years |
| Non-interest income / expense | $21.1 million / $94.4 million | Income down 7.9%; expense up 4.2% |
| Loans receivable, net | $6.63 billion | Up $391.9 million, or 6.3% |
| Total assets | $9.84 billion | Down slightly from $9.87 billion |
| Deposits | $4.83 billion | Up $177.2 million, or 3.8% |
| Borrowings | $3.27 billion FHLB borrowings, including $700 million drawn on the line; $200 million repurchase agreements | FHLB borrowings down $99.2 million year over year |
| Cash and cash equivalents | $772.6 million | Down $38.2 million; $667.1 million related to the daily leverage strategy |
| Operating cash flow | $86.6 million | Compared with $91.8 million in FY2014 |
| Credit quality | Non-performing loans $25.9 million (0.39% of loans); non-performing assets $30.3 million (0.31% of assets) | NPL ratio improved from 0.40%; NPA ratio increased from 0.29% |
| Allowance for credit losses | $9.4 million; 0.14% of loans and 36.4% of non-performing loans | $9.2 million and 0.15% of loans in FY2014 |
| Capital | Bank Tier 1 leverage ratio 11.3%; total capital ratio 30.3% | Bank remained well capitalized |
Material changes versus FY2014
- Net income edged higher, while EPS growth was helped mainly by fewer shares outstanding following repurchases.
- The daily leverage strategy materially expanded average interest-earning assets and borrowings. It contributed $2.8 million of net income, but reduced reported net interest margin to 1.73%; management said the strategy’s income contribution was expected to decline in FY2016.
- Loans grew as originations, refinances, correspondent purchases, and participations outpaced repayments. The bank used cash flows from its securities portfolios largely to fund loan growth.
- MBS declined $340.0 million to $1.46 billion; investment securities declined $24.2 million to $566.8 million.
- Stockholders’ equity fell $76.7 million, primarily reflecting $114.2 million of cash dividends and $46.4 million of share repurchases, partly offset by net income.
- Non-interest expense increased, including higher technology, federal insurance premium, and affordable-housing partnership costs. The efficiency ratio rose to 44.74% from 43.72%.
Outlook, risks, and unusual items
- Outlook: No formal earnings or revenue guidance was provided. Management intended to continue the daily leverage strategy in FY2016, with full repayment of the FHLB line balance at each quarter-end. It expected lower strategy-related net income. Management also anticipated approximately $1.7 million more non-interest income from a new $50 million BOLI policy, higher selected operating expenses, and an approximately 32% effective tax rate.
- Capital returns: Management stated its intent to distribute 100% of FY2016 earnings through regular and true-up dividends, subject to results, capital needs, and regulatory limits. A new $70 million repurchase plan was announced after year-end.
- Interest-rate exposure: A +200-basis-point parallel shock was estimated to reduce four-quarter net interest income by 2.27% and market value of portfolio equity by 18.41%. Long-term, largely fixed-rate mortgage assets and shorter-term funding create exposure to rate and yield-curve changes.
- Credit and concentration risks: About 79% of the one- to four-family portfolio was secured by property in Kansas and Missouri. The bank also flagged increasing multifamily, commercial real estate, and construction lending as higher-risk exposures; these loans were a small but growing share of the portfolio.
- Funding and liquidity: The daily leverage strategy depends on FHLB line availability and regulatory/wholesale borrowing approvals. The bank had $1.09 billion of certificates of deposit scheduled to mature within one year and relied on deposit retention and replacement funding assumptions.
- Other items: The bank paid $3.4 million in FHLB prepayment penalties when refinancing advances. It purchased $50 million of BOLI during FY2015. Management reported no material other-than-temporary securities impairments and no pending litigation expected to materially affect results. Cybersecurity, regulatory, competition, local economic, and real-estate risks were disclosed.
Most important facts for investors to verify
- Whether reported earnings and margins remain sustainable without the daily leverage strategy’s contribution, and how the strategy performs as funding costs change.
- Deposit retention and replacement funding at renewal, use and terms of FHLB borrowings, and the availability of the elevated FHLB borrowing limit.
- Loan growth quality, especially correspondent purchases and newer commercial real estate/construction exposures; monitor delinquencies, TDRs, charge-offs, and allowance adequacy.
- How interest-rate changes affect net interest income, securities values, prepayments, and capital.
- Whether dividends and repurchases remain supportable given earnings, capital-distribution restrictions, liquidity, and the stated 100% payout intent.
- FY2016 expense, BOLI income, and tax-rate assumptions versus management’s commentary.