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Harvard Winters

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  • Advice For Capitol Federal Financial, Inc.: Pay More Special Dividends And Stop The Share Buybacks [View article]
    I think if CFFN could add $1 BN of assets yielding 4%, and fund those assets with $1 BN of liabilities costing 3.5%, even though the 0.33% net after-tax yield on those new assets would depress current RoAA, such addition would be a positive for RoATCE and TCE/TA and I would support it.

    If CFFN buys in $1 worth of stock and assets shrink by $1, that's one thing. If it buys in $1 worth of stock and assets shrink by $1.25 (meaning an additional $0.25 of assets and liabilities roll off), that's completely different, and worse. Qualitatively, the latter is what's happening at CFFN.

    My point with respect to TBV-PS is that CFFN's share price appreciation has come from multiple expansion. I agree that late in 2008 CFFN's share price had to be supported by the expectation of the second stage conversion, which would eventually increase TBV-PS and lower the multiple. But the fact is that CFFN's stock enjoyed a very real, very material price increase leading up to this. No conversion on the horizon means no giant price/TBV-PS expansion, and therefore probably no major share price increase either.

    I would encourage you to model your view of the future in Excel. I estimate that a long-term investor buying shares today will earn an IRR of about 4%. You might say CFFN is low risk and therefore such a low return is acceptable. If you did say this, I'd disagree.
    Feb 28 10:13 AM | Likes Like |Link to Comment
  • Advice For Capitol Federal Financial, Inc.: Pay More Special Dividends And Stop The Share Buybacks [View article]
    If an institution is grossly over-capitalized the way CFFN has been since year-end 2010, it's possible for equity to shrink and assets to grow at the same time. Just add liabilities. But we've seen asset shrinkage, over a very long period of time.

    That's an indication to you that management is conservative? It's an indication to me that the institution won't ever grow.

    CFFN's regular dividend is $0.075 per quarter, so the current dividend yield is 2.5%. Assuming you mean a 5% dividend yield when you say mid-single digit, your intrinsic return forecast of 13-16% assumes 8-11% price appreciation. With materially shrinking TBV-PS, that means you're betting on material multiple expansion, which I guess is supposed to come from RoATCE improvement.

    CFFN traded as high as 4.3x TBV-PS in September 2008, which I'd attribute to the expectation of the second-stage conversion. Maybe you think CFFN's multiple is poised for expansion. You can call that long-term thinking, but I can't agree.
    Feb 27 02:54 PM | Likes Like |Link to Comment
  • Advice For Capitol Federal Financial, Inc.: Pay More Special Dividends And Stop The Share Buybacks [View article]
    CFFN's quarterly RoAA hasn't consistently been over 1.00% since calendar year 2002. Ancient history. When it was over 1.00%, it wasn't because net interest margin was higher than now, it was because overhead expense relative to total assets was lower than now. CFFN runs pretty lean today. Do you expect them to run leaner?

    I think it will be a challenge for CFFN to hit a 1.00% RoAA, and even if it does, it will take CFFN years to reduce its excess capital so that a 1.00% RoAA will translate into a 10.00% RoATCE. CFFN's price/TBV-PS multiple today seems to reflect a belief that both of these things will happen soon. How long do you think it will take CFFN to disgorge all that excess capital? Five years or more seems likely.

    Another question: given that CFFN is underleveraged (not enough assets relative to equity), why are its deposits/liabilities and loans/assets both lower than those of its properly-leveraged peers? Shouldn't CFFN's figures be higher?

    I didn't mention growth in my last note. CFFN's total assets aren't growing. From 3/31/2002 to 9/30/2010, a period of eight and a half years, CFFN's total assets shrunk by 3.6%. The second stage conversion gave assets a nice one-time increase of 15%, but since that increase, assets have shrunk by 5.7%.

    Do you really want CFFN to repurchase shares at 1.09x TBV-PS when the institution is clearly shrinking?

    I'm not sure how CFFN can buy in shares at 8% above TBV-PS, earn a 4% RoATCE, and counteract the TBV-PS dilution. All they can do is mitigate it. Of course, the larger the buyback, the more RoATCE will creep up, assuming that the multiple expansion you're hoping for doesn't happen.

    I doubt that MTB or BBT would be interested in CFFN. Most bank M&A is geographically motivated. I think the only interested parties are large institutions with an existing presence in Missouri or Kansas. That's a short list. Maybe CBSH takes a look. CFFN is too small for USB or BAC, in my opinion.
    Feb 26 12:04 PM | Likes Like |Link to Comment
  • Advice For Capitol Federal Financial, Inc.: Pay More Special Dividends And Stop The Share Buybacks [View article]
    Thank you for your note.

    CFFN's returns have been subpar. A 1.00% RoAA bank or thrift (about average) with 7% TCE/TA (about average for large institutions) delivers RoATCE of 14.3%. For the 2001-2012 fiscal years, the highest RoATCE CFFN delivered was 9.25%, in FY 2002. FY 2001's 7.69% RoATCE was the second highest. It's downhill from there. You are correct that CFFN's excess capital has depressed its ROATCE for the last two fiscal years, but RoATCE was low even before this.

    If you ignore leverage and compare CFFN's RoAA to that of other large thrifts (I used WAFD, EVER, NWBI and PFS), you see that CFFN lags these other thrifts materially.

    I concede that CFFN's asset quality is superior to that of thrifts in general. Do you think investors should be happy with a 4% RoATCE because of this? If someone came to you with a business plan for a thrift that promised the operating performance that CFFN has delivered, would you fund it?

    CFFN's all-time high closing share price of $22.14 occurred on Sept 23, 2008, over four years ago. CFFN closed yesterday at $11.87, 54% of the all-time high. CFFN's TCE/TA is 18%, so it is overcapitalized by a factor of two. Let's say it got rid of half of its common equity tomorrow via an $835 million share buyback program, all executed at Friday's closing price of $11.87. That would reduce TCE/TA to 9.9%. TBV-PS would fall from $10.98 to $10.21, or by 7%, not surprising since CFFN now trades at 1.08x TBV-PS. RoATCE would increase from 4% to 8% if and only if assets with a 0% pre-tax yield are sold to fund the buyback. If 4% yield assets are sold, RoATCE increases only to 5.40%. Of course, the buyback would be highly accretive to EPS. That's a problem with EPS accretion analysis rather than a reason to undertake the buyback, in my opinion.

    Buybacks won't get CFFN even close to a 10% RoATCE. But even if they did, that's still a mediocre RoATCE, one that wouldn't in my opinion warrant a price/TBV-PS multiple much higher than 1.0x.

    So why will CFFN's stock price grow if TBV-PS is shrinking? You must be hoping for further multiple expansion. I think that's risky.

    With respect to M&A, whom would you consider the three most interested acquirors of CFFN?

    I'm happy to elaborate on any of the points above, and I welcome your further comments.
    Feb 23 01:33 PM | Likes Like |Link to Comment
  • Capitol Federal Financial, Inc. - The Most Overvalued Depository Institution? [View article]
    The only thing that's wrong with it is that if you buy an overvalued stock, you're more likely to earn a subpar return, perhaps even a negative one. There are far more attractive stocks to own in the bank space.
    Jun 26 01:09 PM | Likes Like |Link to Comment
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