Capitol Federal Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2023; comparisons are primarily with the three months ended December 31, 2022. Dollar amounts below are in millions unless stated otherwise. The company operates through Capitol Federal Savings Bank, with a major focus on one- to four-family residential lending and a growing commercial loan portfolio.
Financial performance
| Metric | Quarter ended Dec. 31, 2023 | Prior-year quarter |
|---|---|---|
| Interest and dividend income | $91.7 | $91.3 |
| Net interest income | $39.6 | $45.8 |
| Net income | $2.5 | $16.2 |
| Basic and diluted EPS | $0.02 | $0.12 |
| Net interest margin | 1.71% | 1.61% |
| Non-interest expense | $28.5 | $27.8 |
| Efficiency ratio | 92.86% | 54.27% |
Net income fell 84% year over year. The principal unusual item was a $13.3 million net loss on securities sales tied to the company’s securities strategy; the company reported that the loss reduced current-quarter earnings by approximately $10 million after tax, or $0.08 per share. Excluding the strategy’s effect, management reported EPS of $0.10 and an efficiency ratio of 64.73% (non-GAAP measures). Interest expense rose 14.5%, primarily reflecting higher deposit costs, while the provision for credit losses declined to $0.1 million from $3.7 million.
Net interest margin increased year over year, but excluding the prior-year quarter’s leverage strategy it declined from 1.88% to 1.71%, as higher deposit and borrowing costs outpaced asset-yield increases. Operating cash flow was negative $5.3 million; investing activities provided $678.5 million, largely reflecting securities-sale proceeds, and financing activities used $598.4 million. Cash and cash equivalents increased $74.8 million to $320.4 million.
Financial condition, liquidity and capital
- Total assets were $9.58 billion at December 31, down $601.4 million from September 30, 2023, mainly following the securities strategy. Net loans were $7.95 billion, down $23.4 million during the quarter.
- Deposits were $6.02 billion, down $29.6 million from September 30. Borrowings were $2.37 billion, down $506.1 million, primarily after repayment of $500 million of Bank Term Funding Program borrowings. Stockholders’ equity was $1.03 billion; equity was 10.8% of assets.
- The strategy sold $1.30 billion of securities with a 1.22% weighted-average yield and 3.6-year average duration, purchased $632 million yielding 5.75%, and used $500 million to repay borrowings. Remaining cash was held at the Federal Reserve Bank of Kansas City pending potential use for commercial lending or other bank operations.
- Management estimated $2.70 billion of additional available liquidity. The Bank’s regulatory capital ratios exceeded well-capitalized requirements; its tier 1 leverage ratio was 8.9%.
- The allowance for credit losses was $24.2 million, or 0.30% of net loans. Loans 30–89 days delinquent were 0.24% of net loans; loans 90 or more days delinquent or in foreclosure were 0.13%. Nonperforming assets were 0.11% of assets, and quarterly net charge-offs were approximately $1,000.
Material changes, outlook and risks
- The portfolio continued shifting from one- to four-family lending toward commercial lending: commercial loans increased $42.1 million during the quarter, while one- to four-family loans declined $66.4 million. Management said it continued to reduce correspondent loan purchases.
- Management expects fiscal 2024 FDIC insurance premiums to be approximately $1.5 million higher than in fiscal 2023 and anticipates an approximately 18% effective tax rate. It intends to pay regular dividends of $0.085 per quarter, or $0.34 per share for fiscal 2024; additional dividends may be considered if earnings exceed that amount, subject to financial and regulatory factors.
- Interest-rate exposure remains important. The one-year repricing gap was negative $679.7 million, or 7.1% of assets. The company’s model projected cumulative four-quarter net interest income up 10.0% under an immediate 200-basis-point increase and down 10.6% under a 200-basis-point decrease; these are model scenarios, not management earnings guidance.
- Management cited risks including deposit competition and funding costs, liquidity access, interest rates, economic conditions, real estate values, loan delinquencies, and the adequacy of credit-loss reserves. Delinquencies increased in some purchased residential and commercial loan categories; management attributed the residential trend partly to the expiration of government payment assistance programs and said it was working with affected commercial borrowers.
- A putative class action alleging improper overdraft fees remains on appeal after the trial court dismissed the complaint with prejudice. Management believes pending legal actions are unlikely to materially affect financial condition, results, or liquidity. The filing reported no changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether higher-yielding replacement securities and cash deployment offset the realized securities loss and support future net interest income.
- Deposit retention, certificate repricing and funding costs, particularly as $1.71 billion of certificates were scheduled to mature within 12 months.
- Commercial real estate exposure, loan commitments and subsequent delinquency or credit-loss trends.
- Whether the stated liquidity availability, capital strength and regulatory permissions remain sufficient to support lending, dividends and share repurchases.
- The status of the overdraft-fee appeal and any material developments in the litigation.