Capitol Federal Financial, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2017 (fiscal second quarter). Comparisons are with the corresponding 2016 periods unless noted. Dollar amounts are in millions unless stated otherwise.
Business context
The company is a community-oriented savings institution whose principal business is attracting deposits and investing primarily in residential first-mortgage loans. It also originates consumer and commercial real estate loans and holds securities. The Bank accounts for almost all consolidated assets and liabilities.
Key financial metrics
| Metric | Quarter ended March 31, 2017 | Six months ended March 31, 2017 |
|---|---|---|
| Net interest income | $49.1 | $96.4 |
| Net income | $21.6 | $42.2 |
| Basic and diluted EPS | $0.16 | $0.31 |
| Net interest margin | 1.80% | 1.77% |
| Efficiency ratio | 40.16% | 40.61% |
- Quarterly net income rose $0.06 million year over year; six-month net income fell $0.08 million (0.2%). Six-month net interest income declined $0.16 million.
- Six-month interest and dividend income increased 2.0% to $153.0 million, while interest expense rose 5.9% to $56.6 million. Non-interest income declined 11.1% to $10.8 million; non-interest expense declined 7.4% to $43.5 million.
- At March 31, total assets were $9.25 billion, down $20.9 million from September 30, 2016. Net loans were $7.19 billion, up $235.7 million (7% annualized); deposits were $5.27 billion, up $105.2 million. Securities declined $209.0 million.
- Cash and cash equivalents were $240.6 million. Operating cash flow for the six months was $38.5 million; investing activities used $24.2 million and financing activities used $55.4 million. Cash decreased $41.2 million from period start.
- FHLB borrowings were $2.27 billion and repurchase agreements were $200.0 million. Stockholders’ equity was $1.38 billion, or 14.9% of period-end assets. The Bank exceeded regulatory well-capitalized thresholds; its tier 1 leverage ratio was 11.0% and total capital ratio 28.3%.
- Asset quality remained strong: non-performing loans were $26.2 million (0.36% of loans), and non-performing assets were $28.9 million (0.31% of assets). The allowance for credit losses was $8.4 million, 0.12% of loans. The company recorded no provision for credit losses in the quarter or six-month period; six-month net charge-offs were $93,000.
Material changes versus comparable periods
- Quarterly net interest margin improved 2 basis points year over year; six-month margin improved 1 basis point. Excluding the leverage strategy, six-month margin declined 1 basis point to 2.11%.
- Six-month loan interest income rose with average loan growth, but lower yields on loans and mortgage-backed securities and higher deposit costs pressured interest spreads. Deposit interest expense increased 15.3% over the prior-year six-month period.
- Improved efficiency ratios reflected lower non-interest expense. Lower FDIC premiums, reduced debit-card and other costs, and a change in low-income-housing partnership accounting contributed to the decrease.
- BOLI income fell $1.1 million for the six-month period because the prior year included a death benefit not repeated in 2017. The low-income-housing accounting change shifted related expense and tax benefits from non-interest expense to income tax expense; the six-month effective tax rate increased to 33.8% from 31.5%.
- Deposits grew while FHLB borrowings decreased $99.3 million, principally because a $100 million advance matured and was not replaced. Securities cash flows were used in part to fund loan growth.
Outlook, risks and unusual items
- Management estimated a fiscal 2017 effective tax rate of approximately 34% and stated its intent to pay out 100% of fiscal 2017 earnings, subject to financial condition, regulatory capital requirements and limits on Bank distributions. A $0.085-per-share quarterly dividend was announced for payment in May 2017.
- The Bank’s leverage strategy uses short-term FHLB borrowing, up to $2.10 billion, to fund cash and FHLB stock holdings; associated borrowings are generally repaid before quarter-end for regulatory purposes. Management reported strategy-attributable net income of $0.8 million for the quarter and $1.5 million for the six months.
- Interest-rate risk is significant. A modeled immediate +200-basis-point rate shock reduced projected four-quarter net interest income by 0.41% and market value of portfolio equity by 27.31% at March 31. These are scenario estimates, not management earnings guidance.
- Management cited potential risks including interest-rate changes, deposit flows and funding costs, loan origination and purchase volumes, real estate values, borrower credit performance, regulatory actions, and the ability to control expenses. Residential lending is concentrated in Kansas and Missouri; commercial real estate exposure includes construction lending and geographic and property-type concentrations.
- The Bank had $657.3 million of eligible but unused securities collateral for borrowing or liquidity needs. Approximately $1.24 billion of certificates of deposit were scheduled to mature within one year. Management expected most maturing retail CDs to renew or move to other Bank products, but gave no assurance.
- Management reported no material changes to previously disclosed risk factors and did not expect pending litigation to have a material adverse effect. It also reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth can be sustained without further pressure on loan yields, deposit costs or net interest margin.
- Deposit retention and repricing as CDs mature, and the Bank’s ability to manage its substantial FHLB funding and leverage strategy.
- Trends in delinquency, non-performing loans, commercial construction commitments and the adequacy of the credit-loss allowance.
- How interest-rate changes affect projected earnings and portfolio values, given the reported sensitivity under rising-rate scenarios.
- Whether regulatory approval, capital levels and holding-company liquidity support the stated dividend payout intent.