Capitol Federal Financial, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended June 30, 2023; fiscal year ends September 30. Comparisons are primarily with the corresponding 2022 periods or September 30, 2022. Amounts below are in U.S. dollars.
Business context and financial performance
The company is a bank holding company whose results are driven primarily by Capitol Federal Savings Bank. Its lending is concentrated in one- to four-family residential mortgages, with commercial real estate and construction lending also contributing to growth.
| Metric | Three months ended June 30, 2023 | Nine months ended June 30, 2023 |
|---|---|---|
| Net interest income | $34.8 million; down 30.5% year over year | $122.5 million; down 14.1% year over year |
| Net income | $8.3 million, or $0.06 per diluted share; down from $21.2 million, or $0.16 | $38.7 million, or $0.29 per diluted share; down from $65.0 million, or $0.48 |
| Net interest margin | 1.32%, down 47 basis points year over year and 24 basis points sequentially | 1.50%, down 32 basis points year over year |
| Non-interest income / expense | $5.8 million / $29.3 million | $16.2 million / $85.7 million |
| Operating cash flow | Not presented for the quarter alone | $34.1 million, versus $63.4 million |
For the nine-month period, interest income rose 38.5% to $271.5 million, but interest expense rose 179.0% to $149.0 million. Higher deposit and borrowing costs more than offset improved loan yields. The efficiency ratio increased to 61.78% from 51.99% year over year; the quarterly ratio was 72.32%, compared with 50.61% a year earlier.
Balance sheet, funding and asset quality
- At June 30, total assets were $10.29 billion, up $669.2 million from September 30, 2022. Net loans were $7.96 billion, up $499.2 million; AFS securities were $1.44 billion, down $118.4 million.
- Deposits declined $102.0 million to $6.09 billion. Borrowings increased $854.0 million to $2.99 billion, including $500 million borrowed through the Federal Reserve’s Bank Term Funding Program (BTFP). Cash and cash equivalents rose to $329.4 million from $49.2 million.
- Nine-month cash flows were $34.1 million provided by operations, $371.4 million used in investing and $617.6 million provided by financing; cash increased $280.2 million.
- Stockholders’ equity was $1.06 billion, or 10.3% of consolidated assets. The Bank’s community bank leverage ratio was 9.6%, above its 9.0% minimum; its risk-based tier 1 capital ratio was 18.6%.
- Asset quality remained comparatively strong: loans 30–89 days delinquent were 0.18% of net loans; loans 90 or more days delinquent or in foreclosure were 0.07%; non-performing assets were 0.06% of assets. Nine-month net charge-offs were $26,000.
- The allowance for credit losses was $22.4 million, or 0.28% of net loans, versus $16.4 million, or 0.22%, at September 30, 2022. Commercial special-mention loans increased to $45.4 million; management attributed the quarter’s increase mainly to three loans in one relationship, whose performance was beginning to improve.
Material changes, outlook and risks
- Management expects net interest margin compression to continue and estimated it could be up to 10 basis points in the September 2023 quarter. Deposit repricing, migration into higher-cost certificates of deposit, and funding costs are key pressures.
- Management expected total assets to be below $10 billion at September 30, 2023, despite exceeding that level at both March 31 and June 30. It planned to limit asset growth, reduce correspondent mortgage purchases and use cash to repay borrowings. Management noted potential costs and lost interchange revenue if the bank exceeds the threshold for specified periods.
- Management reported deposit runoff as a funding challenge. It estimated $2.68 billion of additional liquidity was available at June 30, while $500 million of BTFP borrowings and $444.7 million of FHLB advances were scheduled to mature within 12 months. Management expected most maturing retail CDs to renew or transfer, but gave no assurance.
- Management used a short-term borrowing-and-cash-deposit leverage strategy during the year. It generated $959,000 of nine-month net income, but was not profitable at times during the latest quarter and can reduce reported net interest margin.
- AFS securities had $180.0 million of gross unrealized losses at June 30, primarily attributed to higher market yields. Management recorded no securities credit-loss allowance, stating it expected principal collection and did not intend, or expect to be required, to sell before recovery.
- Management forecast fiscal 2023 information-technology expense of approximately $24 million, about $6 million above fiscal 2022, largely due to the digital transformation; fiscal 2024 expense was expected to decline approximately $3 million. Fiscal 2023 salaries and benefits were expected to be about $3 million below fiscal 2022, and the effective tax rate was projected at approximately 18%.
- The Bank implemented a new core processing system in early August 2023. A third-party provider disclosed a MOVEit-related breach that exposed certain customer personal information, including Social Security and account numbers. The company said it believed the incident would not materially affect results, but identified potential expense, reputational, litigation and regulatory risks.
- A putative class action alleging improper overdraft fees was dismissed with prejudice in April 2023; the plaintiff appealed. The company stated pending legal matters were not expected to materially affect financial condition, results or liquidity.
Important facts for investors to verify
- Whether deposit pricing, funding needs and the expected margin compression develop as management anticipated.
- Whether the planned balance-sheet actions bring assets below $10 billion and reduce borrowings without impairing loan growth or earnings.
- Commercial real estate and construction exposure, including undisbursed funding commitments, classified loans and the adequacy of credit-loss reserves.
- Liquidity and refinancing plans for BTFP and FHLB maturities, and actual retention of maturing certificates of deposit.
- The financial, legal and customer impact of the third-party data incident and the overdraft-fee appeal.
- Dividend and repurchase capacity, including regulatory limits on distributions from the Bank and the extension of Federal Reserve repurchase approval.