Capitol Federal Financial, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended September 30, 2022. Capitol Federal is a Kansas-focused community bank whose business is primarily residential mortgage lending, with growing commercial lending. References to “Q4 2022” should not be read as a standalone quarterly report; this filing reports full-year results.
Key financial results
| Metric | FY2022 / September 30, 2022 | Prior comparable period |
|---|---|---|
| Net income | $84.5 million; $0.62 per share | $76.1 million; $0.56 per share |
| Net interest income | $192.6 million | $175.0 million |
| Net interest margin | 1.79%; 2.04% excluding leverage strategy (non-GAAP) | 1.90% |
| Total assets | $9.62 billion | $9.63 billion |
| Loans receivable, net | $7.46 billion | $7.08 billion |
| Deposits | $6.19 billion | $6.60 billion |
| Borrowings | $2.13 billion | $1.58 billion |
| Stockholders’ equity | $1.10 billion; 11.4% of assets | $1.24 billion; 12.9% of assets |
| Operating cash flow | $97.3 million | $74.5 million |
Net interest income rose 10.1%. Total interest and dividend income was $279.5 million, up 8.3%; interest expense was $86.9 million, up 4.5%. Non-interest income was $22.8 million, down 18.7%, while non-interest expense declined 2.4% to $112.9 million. The efficiency ratio improved to 52.39% from 56.91%. The company reported a $4.6 million negative provision for credit losses, compared with a $8.5 million negative provision in FY2021.
Net cash from operating activities was $97.3 million; investing activities used $167.6 million and financing activities provided $49.2 million. Cash and cash equivalents ended at $49.2 million, down $21.1 million during the year. The filing does not present a standalone “free cash flow” measure.
Changes, liquidity, and asset quality
- Loans grew $383.1 million, or 5.4%, mainly in correspondent residential loans and commercial lending. Deposits fell $402.5 million, primarily from certificate-of-deposit runoff; management began raising offered CD and money-market rates during the third quarter.
- Borrowings increased $549.3 million to fund deposit outflows and loan growth. At year-end, borrowings were primarily FHLB advances; the Bank also had $863.0 million of eligible, unused securities collateral and access to FHLB and Federal Reserve funding.
- Higher market rates reduced the fair value of available-for-sale securities. Unrealized losses increased $211.3 million, reducing AOCI by $159.8 million after tax. The filing reports no credit-loss allowance on those securities and says the Bank did not intend, and was not likely required, to sell them before recovery.
- Credit indicators remained low: 30–89 day delinquencies were 0.09% of net loans; loans 90 or more days delinquent or in foreclosure were 0.12%; non-performing assets were 0.10% of assets. Net charge-offs were effectively 0.00% of average loans, with net recoveries for the year. The loan ACL was $16.4 million, or 0.22% of loans, down from $19.8 million, or 0.28%.
- Consolidated equity declined 11.7%, mainly from the AOCI impact of higher rates. Management reported the Bank’s equity-to-assets ratio at 9.9% and stated that the Bank and Company met applicable regulatory capital requirements; the Bank’s CBLR was 9.0%.
Outlook, risks, and unusual items
- Management expects funding costs to continue rising faster than asset yields in the near term. The Bank’s one-year repricing gap was negative $1.14 billion, or 11.9% of assets. Its modeled net interest income declined 0.6% under an immediate +200 basis-point rate shock, and modeled market value of portfolio equity declined 30.1% under that scenario. These are model estimates, not earnings guidance.
- The Bank used a short-term FHLB-funded leverage strategy during FY2022, borrowing up to $2.60 billion and repaying the strategy borrowings before quarter-end. It contributed $3.1 million of net income but reduced reported net interest margin. Management expects use of the strategy may be lower if operational borrowing needs rise.
- For FY2023, management expects information technology expense to rise approximately $7 million to about $25 million, salary and benefit expense to increase about $3.5 million, and FDIC insurance expense to increase about $2 million. It anticipates an effective tax rate of approximately 20%–21%. IT expense is expected to decline about $3 million in FY2024 from FY2023 levels.
- A new core processing system is expected to go live by September 2023. Management expects improved digital services and efficiencies, but identifies possible implementation disruption, cost, customer-service, and reputational risks.
- The Board’s stated intention for FY2023 was to distribute 100% of earnings through quarterly dividends and a year-end true-up, subject to financial condition, capital needs, and regulatory limits. The FY2022 true-up dividend of $0.28 per share was announced after year-end. The company also announced plans to resume repurchases; it repurchased 1.37 million shares through November 17, 2022 at an average $8.09 per share.
- On November 2, 2022, the Bank was served with a putative class action alleging improper overdraft fees on certain debit-card settlements and re-presented payments. The Bank disputes the claims and intends to defend them. Management said other pending litigation was not expected to materially affect the financial statements.
- Principal risks include interest-rate and securities valuation exposure, deposit competition and outflows, commercial real estate and commercial borrower credit risk, economic deterioration, cybersecurity and third-party technology risk, and dependence on regulatory approval for Bank-to-parent capital distributions.
Important facts for investors to verify
- How deposit balances, deposit pricing, and FHLB borrowing needs evolved after September 30, 2022, including the effect on net interest margin and liquidity.
- Whether the FY2022 leverage strategy remains profitable and how its use affects reported versus adjusted performance measures.
- Subsequent fair-value and AOCI changes in the securities portfolio, and whether unrealized losses affect capital or liquidity plans.
- Commercial real estate concentrations, unfunded commitments, credit quality, and the adequacy of the ACL under changing economic forecasts.
- Execution, timing, and costs of the core-system conversion, together with the FY2023 expense outlook.
- Dividend sustainability and regulatory capacity for capital distributions and share repurchases; also monitor developments in the overdraft-fee litigation.