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CFFN > SEC Filings for CFFN > Form 10-Q on 3-May-2013All Recent SEC Filings

Show all filings for CAPITOL FEDERAL FINANCIAL INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CAPITOL FEDERAL FINANCIAL INC


3-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The Company and its wholly-owned subsidiary may from time to time make written or oral "forward-looking statements," including statements contained in documents filed or furnished by the Company with the SEC. These forward-looking statements may be included in this Quarterly Report on Form 10-Q and the exhibits attached to it, in the Company's reports to stockholders, in the Company's press releases, and in other communications by the Company, which are made in good faith by us pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements about our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause our future results to differ materially from the plans, objectives, goals, expectations, anticipations, estimates and intentions expressed in the forward-looking statements:

our ability to continue to maintain overhead costs at reasonable levels;

our ability to continue to originate a significant volume of one- to four-family mortgage loans in our market areas or to purchase loans through correspondents;

our ability to invest funds in wholesale or secondary markets at favorable yields as compared to the related funding source;

our ability to access cost-effective funding;

the future earnings and capital levels of the Bank and the continued non-objection by our primary federal banking regulators, to the extent required, to distribute capital from the Bank to the Company, which could affect the ability of the Company to pay dividends in accordance with its dividend policy;

fluctuations in deposit flows, loan demand, and/or real estate values, as well as unemployment levels, which may adversely affect our business;

the credit risks of lending and investing activities, including changes in the level and direction of loan delinquencies and charge-offs, changes in property values, and changes in estimates of the adequacy of the ACL;

results of examinations of the Bank and the Company by their respective primary federal banking regulators, including the possibility that the regulators may, among other things, require us to increase our ACL;

the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;

the effects of, and changes in, trade, fiscal policies and laws, and monetary and interest rate policies of the Board of Governors of the Federal Reserve System ("FRB");

the effects of, and changes in, foreign and military policies of the United States government;

inflation, interest rate, market and monetary fluctuations;

the timely development and acceptance of our new products and services and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services;

the willingness of users to substitute competitors' products and services for our products and services;

our success in gaining regulatory approval of our products and services and branching locations, when required;

the impact of changes in financial services laws and regulations, including laws concerning taxes, banking, securities, consumer protection and insurance and the impact of other governmental initiatives affecting the financial services industry;

implementing business initiatives may be more difficult or expensive than anticipated;

technological changes;

acquisitions and dispositions;

changes in consumer spending and saving habits; and

our success at managing the risks involved in our business.

This list of important factors is not all inclusive. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company or the Bank.

As used in this Form 10-Q, unless we specify otherwise, "the Company," "we," "us," and "our" refer to Capitol Federal Financial, Inc., a Maryland corporation. "Capitol Federal Savings," and "the Bank," refer to Capitol Federal Savings Bank, a federal savings bank and the wholly-owned subsidiary of Capitol Federal Financial, Inc.

The following discussion and analysis is intended to assist in understanding the financial condition, results of operations, liquidity and capital resources of the Company. It should be read in conjunction with the consolidated financial statements and notes presented in this report. The discussion includes comments relating to the Bank, since the Bank is wholly-owned by the Company and comprises the majority of its assets and is the principal source of income for the Company. This discussion and analysis should be read in conjunction with management's discussion and analysis included in the Company's 2012 Annual Report on Form 10-K filed with the SEC.


Executive Summary

The following summary should be read in conjunction with our Management's Discussion and Analysis of Financial Condition and Results of Operations in its entirety.

We have been, and intend to continue to be, a community-oriented financial institution offering a variety of financial services to meet the needs of the communities we serve. We attract retail deposits from the general public and invest those funds primarily in permanent loans secured by first mortgages on owner-occupied, one- to four-family residences. To a lesser extent, we also originate consumer loans, loans secured by first mortgages on non-owner-occupied one- to four-family residences, multi-family and commercial real estate loans, and construction loans. While our primary business is the origination of one- to four-family mortgage loans funded through retail deposits, we also purchase whole one- to four-family mortgage loans from correspondent and nationwide lenders, and invest in certain investment securities and MBS using funding from retail deposits, advances from FHLB, and repurchase agreements. The Company is significantly affected by prevailing economic conditions including federal monetary and fiscal policies and federal regulation of financial institutions. Retail deposit balances are influenced by a number of factors including interest rates paid on competing personal investment products, the level of personal income, and the personal rate of savings within our market areas. Lending activities are influenced by the demand for housing and other loans, our loan underwriting guidelines compared to those of our competitors, as well as interest rate pricing competition from other lending institutions. The primary sources of funds for lending activities include deposits, loan repayments, investment income, borrowings, and funds provided from operations.

The Company's results of operations are primarily dependent on net interest income, which is the difference between the interest earned on loans, MBS, investment securities, and cash, and the interest paid on deposits and borrowings. On a weekly basis, management reviews deposit flows, loan demand, cash levels, and changes in several market rates to assess all pricing strategies. The Bank generally prices its first mortgage loan products based on secondary market and competitor pricing. Generally, deposit pricing is based upon a survey of competitors in the Bank's market areas, and the need to attract funding and retain maturing deposits. The majority of our loans are fixed-rate products with maturities up to 30 years, while the majority of our deposits have maturity or repricing dates of less than two years.

The Federal Open Market Committee of the Federal Reserve (the "FOMC") noted in their March 2013 statement and minutes that economic activity has returned to moderate growth following a pause late last year. Although the unemployment rate remains elevated, labor market conditions have shown signs of improvement in recent months. The FOMC stated that household spending and business fixed investment have advanced, and that the housing sector continues to strengthen. Rising home prices are strengthening household balance sheets by increasing wealth and progressively affording homeowners the ability to refinance their mortgages at lower rates. The FOMC views this dynamic as potentially leading to a virtuous cycle that could help support household spending and financial market conditions over time. For the most part, inflation has been running somewhat below the FOMC's longer-run objective and longer-term inflationary expectations have remained stable. The FOMC decided to continue its existing policy of reinvesting principal payments from its holdings of agency debt and agency MBS in agency MBS and will continue to purchase additional longer-term Treasury securities at a pace of $45 billion per month and agency MBS at a pace of $40 billion per month. The FOMC expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The FOMC believes that these actions, taken together, will maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. The FOMC remarked that it will continue to maintain the overnight lending rate at zero to 0.25% as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the FOMC's 2% longer-run goal, and longer-term inflation expectations continue to be well anchored.

Economic conditions in the Bank's local market areas have a significant impact on the ability of borrowers to repay loans and the value of the collateral securing these loans. As of March 2013, the unemployment rate was 5.6% for Kansas and 6.7% for Missouri, compared to the national average of 7.6% based on information from the Bureau of Economic Analysis. The unemployment rate remains relatively low in our market areas, compared to the national average, due to diversified industries within our market areas, primarily in the Kansas City metropolitan statistical area, but it is higher than the historical average. Our Kansas City market area, which comprises the largest segment of our loan portfolio and deposit base, has an average household income of approximately $79 thousand per annum, based on 2012 estimates from the American Community Survey, which is a statistical survey by the U.S. Census Bureau. The average household income in our combined market areas is approximately $68 thousand per annum, with 92% of the population at or above the poverty level, also based on the 2012 estimates from the American Community Survey. The Federal Housing Finance Agency ("FHFA") price index for Kansas and Missouri has not experienced significant fluctuations during the past 10 years, unlike other market areas of the United States, which indicates relative stability historically in property values in our local market areas.


Total assets increased $15.4 million, from $9.38 billion at September 30, 2012 to $9.39 billion at March 31, 2013, due primarily to a $107.2 million increase in the loan portfolio and a $97.5 million increase in other assets, partially offset by a $95.6 million decrease in the securities portfolio and a $93.1 million decrease in cash and cash equivalents. The increase in other assets was due primarily to a $100.0 million FHLB advance commitment, which settled in early April 2013.

The overall performance of our loan portfolio continued to improve during the current fiscal year. Loans 90 or more days delinquent or in foreclosure decreased $1.3 million, or 6.7%, from $19.5 million at September 30, 2012 to $18.2 million at March 31, 2013. Net charge-offs during the current six month period were $1.3 million, of which $372 thousand related to loans that were discharged in a prior fiscal year under Chapter 7 bankruptcy that had to be, in accordance with OCC regulations, evaluated for collateral value loss, even if the loan was current.

Total liabilities increased $178.9 million, from $7.57 billion at September 30, 2012, to $7.75 billion at March 31, 2013 due largely to a $142.9 million increase in deposits and a $100.0 million FHLB advance commitment, partially offset by the repayment of $50.0 million of repurchase agreements that matured during the current quarter. Stockholders' equity decreased $163.5 million, from $1.81 billion at September 30, 2012 to $1.64 billion at March 31, 2013. The decrease was due primarily to the payment of $125.3 million of dividends and the repurchase of $72.0 million of stock, partially offset by net income of $35.3 million.

Net income for the quarter ended March 31, 2013 was $17.7 million, compared to $19.3 million for the quarter ended March 31, 2012. The $1.6 million, or 8.3%, decrease in net income was due primarily to a decrease in net interest income and an increase in other expenses, partially offset by decreases in provision for credit losses and income tax expense. The net interest margin decreased nine basis points, from 2.06% for the prior year quarter to 1.97% for the current quarter, primarily as a result of continued downward pressure on loan and security yields.

Net income for the six months ended March 31, 2013 was $35.3 million, compared to net income of $38.1 million for the six months ended March 31, 2012. The $2.8 million, or 7.4%, decrease in net income was due primarily to an increase in other expenses and a decrease in net interest income, partially offset by a decrease in income tax expense and provision for credit losses. The net interest margin decreased three basis points, from 2.02% for the prior year six month period to 1.99% for the current year six month period. The decrease in the net interest margin was primarily a result of a decrease in loan and security yields, which more than offset the benefit received from a decrease in the cost of funds between the two periods.

The Bank currently expects to open one new branch in calendar year 2013. The branch will be located in our Kansas City market area. Management continues to consider expansion opportunities in all of our market areas.

Available Information

Financial and other Company information, including press releases, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports can be obtained free of charge from our investor relations website, http://ir.capfed.com. SEC filings are available on our website immediately after they are electronically filed with or furnished to the SEC, and are also available on the SEC's website at www.sec.gov.

Critical Accounting Policies

Our most critical accounting policies are the methodologies used to determine the ACL and fair value measurements. These policies are important to the presentation of our financial condition and results of operations, involve a high degree of complexity, and require management to make difficult and subjective judgments that may require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could cause reported results to differ materially. These critical accounting policies and their application are reviewed at least annually by our audit committee. For a full discussion of our critical accounting policies, see Item 7
- "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2012.


                              Financial Condition

The following table presents selected balance sheet information for the dates
presented.






                         March 31,       December 31,     September 30,       June 30,        March 31,
                            2013             2012             2012              2012             2012
                                                     (Dollars in thousands)
Total assets           $ 9,393,718      $ 9,238,786       $ 9,378,304      $ 9,420,614      $ 9,573,144
Cash and cash
equivalents                 48,574          105,157           141,705          172,948          143,707
AFS securities           1,245,443        1,259,392         1,406,844        1,632,297        1,715,445
HTM securities           1,953,779        1,902,228         1,887,947        2,073,951        2,165,036
Loans receivable, net    5,715,273        5,640,077         5,608,083        5,209,990        5,224,178
Capital stock of FHLB      130,680          130,784           132,971          131,437          130,614
Deposits                 4,693,573        4,582,163         4,550,643        4,592,437        4,657,010
Advances from FHLB       2,634,465        2,532,493         2,530,322        2,527,903        2,525,535
Repurchase agreements      315,000          365,000           365,000          365,000          365,000
Stockholders' equity     1,643,007        1,669,951         1,806,458        1,832,858        1,912,472
Equity to total assets
at end of period              17.5  %          18.1  %           19.3  %          19.5  %          20.0  %

Assets. Total assets increased $15.4 million, from $9.38 billion at September 30, 2012 to $9.39 billion at March 31, 2013, due primarily to a $107.2 million increase in the loan portfolio and a $97.5 million increase in other assets, partially offset by a $95.6 million decrease in the securities portfolio and a $93.1 million decrease in cash and cash equivalents. The net increase in the loan portfolio was due primarily to one- to four-family loan originations and correspondent purchases outpacing principal repayments during the current six month period. The increase in other assets was due primarily to a $100.0 million FHLB advance commitment, which settled in early April 2013. Of the $95.6 million decrease in the securities portfolio, $60.0 million related to securities at the holding company level, the proceeds from which were used to pay dividend to stockholders and repurchase stock. The remaining cash flows from the securities portfolio which were not reinvested along with cash were used, in part, to fund loan activity and repay $50 million of repurchase agreements that matured during the current quarter.

Loans Receivable. The loans receivable portfolio increased $107.2 million, or at an annualized rate of 3.8%, to $5.72 billion at March 31, 2013, from $5.61 billion at September 30, 2012. During the six months ended March 31, 2013, the Bank originated $224.1 million of one- to four-family loans, refinanced $194.2 million of Bank customer one- to four-family loans, and purchased $244.9 million of one- to four-family loans from correspondent lenders. As of March 31, 2013, the Bank had 26 active correspondent lending relationships in 21 states.

As a portfolio lender focused on delivering outstanding customer service while acquiring quality assets, our borrowers' ability to repay has always been paramount in our business model. Although we continue to evaluate the recently issued "qualified mortgage" rules by the Consumer Financial Protection Bureau, we currently anticipate that the impact to our overall book of business will generally be minimal.


The following table presents characteristics of our loan portfolio as of March 31, 2013 and September 30, 2012. The weighted average rate of the loan portfolio decreased 21 basis points from 4.15% at September 30, 2012 to 3.94% at March 31, 2013. The decrease in the weighted average portfolio rate was due primarily to the endorsement and refinancing of loans at current market rates, as well as to the origination and purchase of loans between periods with rates less than the average rate of the existing portfolio. Within the one- to four-family loan portfolio at March 31, 2013, 69% of the loans had a balance at origination of less than $417 thousand.

                                 March 31, 2013          September 30, 2012
                                            Average                   Average
                                Amount        Rate        Amount        Rate
                                           (Dollars in thousands)
Real Estate Loans:
One- to four-family          $ 5,508,452     3.89  %   $ 5,392,429     4.10  %
Multi-family and commercial       46,579     5.62           48,623     5.64
Construction                      64,572     3.87           52,254     4.08
Total real estate loans        5,619,603     3.90        5,493,306     4.11

Consumer Loans:
Home equity                      137,380     5.36          149,321     5.42
Other                              6,072     4.50            6,529     4.77
Total consumer loans             143,452     5.32          155,850     5.39

Total loans receivable         5,763,055     3.94  %     5,649,156     4.15  %

Less:
Undisbursed loan funds            32,619                    22,874
ACL                               10,072                    11,100
Discounts/unearned loan fees      22,149                    21,468
Premiums/deferred costs          (17,058)                  (14,369)
Total loans receivable, net  $ 5,715,273               $ 5,608,083

Included in the loan portfolio at March 31, 2013 were $123.5 million, or 2.2% of the total loan portfolio, of adjustable-rate mortgage ("ARM") loans that were originated as interest-only. Of these interest-only loans, $103.4 million were purchased in bulk loan packages from nationwide lenders, primarily during fiscal year 2005. Interest-only ARM loans do not typically require principal payments during their initial term, and have initial interest-only terms of either five or 10 years. The $103.4 million of purchased interest-only ARM loans held at March 31, 2013, had a weighted average credit score of 725 and a weighted average LTV ratio of 71% as of March 31, 2013. At March 31, 2013, $63.2 million, or 51%, of the interest-only loans were still in their interest-only payment term and $4.2 million, or 16% of non-performing loans, were interest-only ARMs.


The following table presents the balance, percentage of total one- to four-family loans, weighted average credit score, LTV ratio, and average balance per loan for our one- to four-family loans as of the dates presented. Credit scores are updated in the last month of the quarter and are obtained from a nationally recognized consumer rating agency. The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent bank appraisal, if available. In most cases, the most recent appraisal was obtained at the time of origination.

                                           March 31, 2013                                       September 30, 2012
                                         % of     Credit            Average                     % of     Credit            Average
                          Balance       Total     Score     LTV     Balance      Balance       Total     Score     LTV     Balance
                                                                  (Dollars in thousands)
Originated              $ 4,020,666     73.0  %     763    65  %    $   125    $ 4,032,581     74.8  %     763    65  %    $   124
Correspondent purchased     764,862     13.9        763    66           341        575,502     10.7        761    65           326
Bulk purchased              722,924     13.1        749    67           316        784,346     14.5        749    67           316
                        $ 5,508,452    100.0  %     761    65  %    $   150    $ 5,392,429    100.0  %     761    65  %    $   147

The following table presents the rates and weighted average lives ("WAL") in years, which reflects prepayment assumptions, of our loan portfolio as of the dates indicated. The terms listed under fixed-rate one- to four-family loans represent original terms-to-maturity. The terms listed under adjustable-rate one- to four-family loans represent initial terms-to-repricing. Yields include the amortization of fees, costs, and premiums and discounts, all of which are considered adjustments to the yield.

                                   March 31, 2013                 December 31, 2012                March 31, 2012
                               Amount       Rate     WAL       Amount       Rate     WAL       Amount       Rate     WAL
                                                               (Dollars in thousands)
Fixed-rate one- to
four-family:
<= 15 years                 $ 1,125,356    3.70  %   3.5    $ 1,087,787    3.84  %   2.9    $ 1,055,293    4.23  %   3.1
> 15 years                    3,237,793    4.29      5.4      3,176,924    4.40      4.2      3,110,361    4.73      5.1
All other fixed-rate loans      118,288    5.37      3.3        115,526    5.53      3.0        113,713    6.24      1.7  (1)
Total fixed-rate loans        4,481,437    4.17      4.8      4,380,237    4.29      3.8      4,279,367    4.65      4.5

Adjustable-rate one- to
four-family:
<= 36 months                    443,269    2.68      3.7        452,328    2.70      3.7        126,124    3.49      3.3
> 36 months                     702,034    3.15      3.2        712,517    3.21      2.8        718,298    3.39      3.4
All other adjustable-rate
loans                           136,315    4.69      0.3        142,811    4.69      0.3        151,507    4.65      1.7  (1)
Total adjustable-rate loans   1,281,618    3.15      3.0      1,307,656    3.20      2.8        995,929    3.59      3.2
Total loans receivable      $ 5,763,055    3.94  %   4.4    $ 5,687,893    4.04  %   3.6    $ 5,275,296    4.45  %   4.3

(1) The 1.7 years presented at March 31, 2012 is for all other fixed-rate and adjustable-rate loans combined as the individual WAL for each category was not available.


The following tables present the annualized prepayment speeds of our one- to four-family loan portfolio for the quarter ended March 31, 2013, by interest rate tier. The balances represent unpaid principal balances, excluding charge-offs, and including LIP, construction loans and non-performing loans. The terms presented in the tables below represent the original terms for our fixed-rate one-to four-family loans, and current terms to repricing for our adjustable-rate one- to four-family loans. Loan endorsements and refinances are considered prepayments and therefore are included in the prepayment speeds below. During the quarter ended March 31, 2013, $3.4 million of adjustable-rate one- to four-family loans were endorsed to fixed-rate loans. The annualized prepayment speeds are presented with and without endorsements. Additionally, annualized prepayment speeds for our originated, correspondent purchased and bulk purchased portfolios for the quarter ended March 31, 2013, is also presented below.

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