Capitol Federal Financial, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended December 31, 2021; balance-sheet comparisons are to September 30, 2021. The company is a savings-and-loan holding company whose bank subsidiary accounts for almost all consolidated assets and liabilities. Figures below are in U.S. dollars.
Financial performance and position
- Profitability: Net income was $22.2 million ($0.16 per share), up 17.4% from $18.9 million ($0.14) a year earlier and up from $18.6 million in the preceding quarter. Net interest income was $45.6 million, up 4.1% year over year. Net interest margin rose to 1.99% from 1.92% a year earlier and 1.97% in the prior quarter. Return on average assets was 0.93%; return on average equity was 7.18%.
- Revenue, costs and margins: Interest and dividend income declined 8.4% year over year to $62.5 million, but interest expense fell 30.9% to $16.9 million as deposit and borrowing costs decreased. Non-interest income increased 8.6% to $5.5 million; non-interest expense decreased 1.4% to $26.7 million. The efficiency ratio improved to 52.22% from 55.37%.
- Credit costs and asset quality: The company recorded a $3.4 million negative provision for credit losses, versus a $1.5 million negative provision a year earlier. The release reflected improved economic conditions and the reclassification of two large commercial loans from special mention to pass. ACL was $17.5 million, or 0.25% of loans, versus $26.1 million, or 0.37%, a year earlier. Net recoveries were $31,000. Nonaccrual loans were 0.16% of loans; nonperforming assets were 0.12% of total assets.
- Cash flow: Operating activities provided $20.3 million. Investing activities provided $93.3 million, principally from securities repayments and maturities; financing activities used $25.3 million, including $41.4 million of dividends. Cash, cash equivalents and restricted cash totaled $158.5 million at quarter-end; balance-sheet cash and cash equivalents were $135.5 million.
- Balance sheet and liquidity: Total assets were $9.61 billion, down 0.2% from September 30. Net loans were $7.10 billion, deposits $6.65 billion, and borrowings $1.58 billion. Deposits increased $50.6 million during the quarter, while securities declined $124.0 million to $1.89 billion. The bank reported $1.61 billion of eligible securities unused as borrowing collateral and $75 million of term borrowings scheduled to mature within 12 months.
- Capital and shareholder distributions: Stockholders’ equity was $1.22 billion, or 12.7% of assets, down from $1.24 billion; the decline reflected dividends and lower AOCI, partly offset by quarterly earnings. Bank and company CBLR ratios were 11.6% and 12.8%, respectively. The quarter included $41.4 million of dividends, or $0.305 per share, including a $0.22 true-up and the regular $0.085 dividend. No shares were repurchased.
Material changes and management commentary
- Year-over-year earnings improved chiefly because lower funding costs more than offset lower asset yields, and the negative credit-loss provision was larger. Sequentially, net income rose $3.6 million, supported by the larger negative provision and lower non-interest expense.
- Management cited ongoing uncertainty about how long elevated non-maturity deposits will remain; outflows could require higher-cost borrowings or use of maturing securities. Certificates of deposit totaling $1.63 billion were scheduled to mature within 12 months.
- Although the reported one-year interest-rate gap was negative $928 million (9.7% of assets), management projected net interest income would increase in rising-rate scenarios, relying on historical deposit pricing behavior. The modeled four-quarter change in net interest income was +2.51% for a 100-basis-point increase and +3.63% for a 200-basis-point increase. Conversely, modeled market value of portfolio equity fell 21.0% under a 200-basis-point increase.
- After quarter-end, the bank reimplemented its previously inactive leverage strategy in January 2022, entering into $1.80 billion of short-term FHLB advances. Management said use would continue while profitable; the strategy’s borrowing level may fluctuate.
- Management expected the fiscal 2022 effective tax rate to be approximately 21% and stated the board intended to continue paying out 100% of company earnings to stockholders, subject to financial, regulatory and other constraints. The filing provides no formal earnings guidance.
Risks, contingencies and unusual items
- The loan portfolio is concentrated in one- to four-family residential lending, particularly Kansas and Missouri; commercial real estate exposure also includes senior housing, retail and hotels. Management identified economic conditions, real estate values, unemployment, loan delinquencies, COVID-19 effects, deposit flows, funding costs and interest-rate movements as risks.
- Commercial loans with modifications still in deferral totaled $143.5 million in gross balance, including undisbursed amounts. The foreclosure suspension for owner-occupied residential loans was lifted in January 2022; $5.5 million of nonaccrual one- to four-family loans had proceedings pending or deferred.
- AFS securities had $22.5 million of gross unrealized losses at quarter-end, attributed to higher market yields. Management recorded no credit-loss allowance, stating it expected principal collection and did not intend, nor expect to be required, to sell before recovery.
- The company reported ordinary-course legal proceedings and considered a material adverse effect unlikely. It reported no changes to previously disclosed risk factors, and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the January 2022 $1.80 billion FHLB borrowing strategy remains profitable and how it affects subsequent funding costs, leverage and liquidity.
- Whether deposit balances persist and maturing certificates renew, particularly given management’s stated uncertainty about non-maturity deposits.
- Whether credit quality and the reduced allowance remain appropriate as COVID-19-related commercial loan modifications exit deferral and residential foreclosure activity resumes.
- How rising rates affect both net interest income and the value of the securities and mortgage-related asset portfolios; the modeled interest-rate outcomes depend on assumptions about deposit repricing and prepayments.
- Whether dividends and any future repurchases remain supportable under bank capital-distribution limits and regulatory requirements.