Capitol Federal Financial, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended September 30, 2023. This is an annual report, not a report for calendar-year Q4 alone. Capitol Federal is a Kansas-based community bank focused on residential mortgage lending, with commercial lending and deposit services.
Financial performance and condition
| Metric | FY2023 / September 30, 2023 | Comparison |
|---|---|---|
| Net income (loss) | $(101.7) million; $(0.76) per diluted share | FY2022 net income was $84.5 million, or $0.62 per share |
| Net interest income | $153.3 million | Down $39.3 million from $192.6 million |
| Net interest margin | 1.43% | Down 36 basis points from 1.79%; excluding leverage strategy, 1.55% versus 2.04% |
| Total assets | $10.18 billion | Up 5.7% from $9.62 billion |
| Loans receivable, net | $7.97 billion | Up 6.8%; growth was chiefly commercial real estate and correspondent residential loans |
| Deposits | $6.05 billion | Down 2.3%; non-maturity deposits declined as certificates of deposit grew |
| Borrowings | $2.88 billion | Up 35.0%; included $2.38 billion of FHLB advances and $500 million of BTFP funding |
| Stockholders’ equity | $1.04 billion; 10.3% of assets | Down 4.8% from $1.10 billion |
| Cash flow | $47.5 million operating; $(329.1) million investing; $478.0 million financing | Cash and cash equivalents ended at $245.6 million, up from $49.2 million |
The GAAP loss chiefly reflects a $192.6 million impairment loss recognized in FY2023 on AFS securities management intended to sell. Excluding the securities strategy, management reported FY2023 earnings per share of $0.33. The company recorded a $6.8 million provision for credit losses, versus a $4.6 million provision release in FY2022. Total non-interest expense was $113.9 million, up 1.0%.
Credit indicators remained low: loans 30–89 days delinquent were 0.21% of net loans; loans 90 or more days delinquent or in foreclosure were 0.11%; and net charge-offs were approximately 0.00% of average loans. The allowance for credit losses was $23.8 million, or 0.30% of loans, up from $16.4 million, or 0.22%.
The Bank reported regulatory capital ratios above well-capitalized thresholds, including a 16.0% risk-based Tier 1 ratio and 16.5% total capital ratio. Management estimated $2.71 billion of additional liquidity available at year-end and reported an unused $2.11 billion FHLB line of credit. The Bank had $1.49 billion of certificates of deposit scheduled to mature within 12 months; $789 million of deposits were estimated to be uninsured.
Material changes and unusual items
- Rising rates drove deposit and borrowing costs higher than asset yields, compressing margins. Interest expense rose 137.5%, while interest and dividend income rose 28.7%.
- In October 2023, the Bank sold $1.30 billion of securities, representing 94% of its securities portfolio. Proceeds funded $632 million of securities yielding 5.75%, repayment of $500 million of BTFP borrowings, and cash retained at the Federal Reserve. A further $13.3 million pretax loss related to the sale was expected in FY2024 Q1.
- The Bank repaid the $500 million BTFP borrowing in October 2023. Management expected the securities actions to reduce assets to approximately $9.70 billion by December 31, 2023 and improve earnings and margin; these are expectations, not reported outcomes.
- The Bank implemented a new core processing and digital banking system in August 2023. Management cited lower staffing needs through natural attrition, while technology expense rose with implementation and licensing costs.
- Commercial loans grew to $1.29 billion from $966 million. The larger commercial exposure includes real estate and construction loans across multiple states and carries different credit risks than the residential portfolio.
Outlook, risks and contingencies
For FY2024, management’s static estimate for the securities strategy was an approximately $0.30 increase in earnings per share and a 60-basis-point increase in net interest margin after reinvestment and debt repayment. The expected earn-back period was 3.9 years. Management also forecast salaries and benefits to rise about $5 million, IT expense to fall about $3 million, and deposit service fee income to fall about $1 million versus FY2023. It expected an effective tax rate of approximately 19%–20%. The Board’s stated intention was to pay regular quarterly dividends of $0.085 per share; future distributions remain subject to earnings, capital, liquidity, and regulatory constraints.
Key risks include interest-rate and funding pressure, deposit retention and repricing, commercial real estate and other commercial credit exposure, economic and property-market deterioration, and liquidity needs. The filing also describes cybersecurity and third-party risks: a service provider notified the Bank in June 2023 that customer information, including Social Security and account numbers, had been compromised in the MOVEit vulnerability incident. The provider made notifications to potentially affected customers; the Bank reported additional safeguards and response actions.
A putative class action alleges improper overdraft fees. The court dismissed the complaint with prejudice in April 2023, and plaintiffs appealed. Management stated that pending legal matters were not expected to have a material adverse effect. Deloitte issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- Whether the securities sale, reinvestment, and repayment of BTFP borrowings achieved the projected FY2024 margin and earnings benefits, and how actual results compare with the 3.9-year earn-back estimate.
- Whether the company reached its approximately $9.70 billion asset target and remained below the $10 billion regulatory thresholds it discussed.
- Deposit trends, renewal rates and costs for maturing certificates, uninsured deposit levels, and access to wholesale funding.
- Commercial real estate portfolio performance, criticized or non-performing loans, provision needs, and the assumptions supporting the allowance for credit losses.
- Developments in the overdraft-fee appeal and any financial, regulatory, or customer impacts from the MOVEit data incident.
- Whether FY2024 dividend plans remain supported by earnings, liquidity, capital, and the Bank’s ability to make distributions to the holding company.