Capitol Federal Financial(US:CFFN)2023-02-07 16:00PART I - FINANCIAL INFORMATION Item 1. Financial Statements The unaudited consolidated financial statements show decreased net income but increased comprehensive income for the quarter Consolidated Balance Sheets Total assets grew to $9.93 billion, funded by increased borrowings as deposits and stockholders' equity declined Consolidated Balance Sheet Highlights (as of Dec 31, 2022 vs. Sep 30, 2022) | Account | Dec 31, 2022 ($ thousands) | Sep 30, 2022 ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | 9,929,760 | 9,624,897 | 3.2% | | Loans receivable, net | 7,783,358 | 7,464,208 | 4.3% | | AFS securities | 1,528,686 | 1,563,307 | -2.2% | | Total Liabilities | 8,874,965 | 8,528,398 | 4.1% | | Deposits | 6,074,549 | 6,194,866 | -1.9% | | Borrowings | 2,645,195 | 2,132,154 | 24.1% | | Total Stockholders' Equity | 1,054,795 | 1,096,499 | -3.8% | Consolidated Statements of Income Quarterly net income decreased to $16.2 million from $22.2 million year-over-year, driven by a provision for credit losses Income Statement Summary (Three Months Ended Dec 31) | Metric | 2022 ($ thousands) | 2021 ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | 45,828 | 45,614 | 0.5% | | Provision for Credit Losses | 3,660 | (3,439) | N/A | | Non-Interest Income | 5,352 | 5,506 | -2.8% | | Non-Interest Expense | 27,773 | 26,694 | 4.0% | | Net Income | 16,240 | 22,186 | -26.8% | | Diluted EPS | $0.12 | $0.16 | -25.0% | Consolidated Statements of Comprehensive Income Comprehensive income rose to $29.3 million, boosted by positive changes in unrealized gains on AFS securities Comprehensive Income (Three Months Ended Dec 31) | Component | 2022 ($ thousands) | 2021 ($ thousands) | | :--- | :--- | :--- | | Net Income | 16,240 | 22,186 | | Other Comprehensive Income (Loss), net of tax | 13,031 | (7,021) | | Comprehensive Income | 29,271 | 15,165 | Consolidated Statements of Stockholders' Equity Stockholders' equity decreased to $1.05 billion due to dividends and share repurchases exceeding net income Changes in Stockholders' Equity (Three Months Ended Dec 31, 2022) | Item | Amount ($ thousands) | | :--- | :--- | | Beginning Balance (Sep 30, 2022) | 1,096,499 | | Net Income | 16,240 | | Other Comprehensive Income, net of tax | 13,031 | | Repurchase of common stock | (22,196) | | Cash dividends to stockholders | (49,209) | | Ending Balance (Dec 31, 2022) | 1,054,795 | Consolidated Statements of Cash Flows Net cash from financing activities funded investing activities, resulting in a minimal change in cash and cash equivalents Cash Flow Summary (Three Months Ended Dec 31, 2022) | Activity | Net Cash Flow ($ thousands) | | :--- | :--- | | Net cash provided by operating activities | 14,601 | | Net cash (used in) investing activities | (291,109) | | Net cash provided by financing activities | 277,000 | | Net increase in cash and cash equivalents | 492 | Notes to Consolidated Financial Statements The notes detail accounting policies, portfolio compositions, credit quality, and fair value measurements - The company adopted ASU 2022-02, eliminating TDR accounting guidance, with no material impact expected on financial condition or operations51 - The loan portfolio is segmented into one- to four-family, consumer, and commercial loans for credit quality monitoring using loan classification and delinquency status77 - The company uses a leverage strategy involving short-term FHLB advances and FRB deposits to increase earnings163 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses declining net income, net interest margin compression, and strong asset quality amid a challenging rate environment Executive Summary Net income fell due to credit loss provisions and margin compression as rising rates increased funding costs - The rapid increase in short-term rates led by the FRB has caused net interest margin compression, which is anticipated to continue in the near term83200 - Asset quality remained strong, with loans 30-89 days delinquent at 0.10% and loans 90+ days delinquent at 0.10% of total loans127 Financial Condition Asset growth was driven by loans and funded by borrowings, while equity decreased from dividends and buybacks Financial Condition Summary (QoQ) | Account | Dec 31, 2022 ($M) | Sep 30, 2022 ($M) | Change ($M) | | :--- | :--- | :--- | :--- | | Total assets | 9,929.8 | 9,624.9 | 304.9 | | Loans receivable, net | 7,783.4 | 7,464.2 | 319.2 | | Deposits | 6,074.5 | 6,194.9 | (120.4) | | Borrowings | 2,645.2 | 2,132.2 | 513.0 | | Stockholders' equity | 1,054.8 | 1,096.5 | (41.7) | - The company is implementing a new core processing system (digital transformation) expected to be operational by September 2023, which will increase information technology expenses in fiscal year 2023130 Operating Results Net income declined sequentially and year-over-year, impacted by margin compression and credit loss provisions Quarterly Operating Results Comparison | Metric ($ thousands) | Q4 2022 | Q3 2022 | Q4 2021 | | :--- | :--- | :--- | :--- | | Net Interest Income | 45,828 | 49,898 | 45,614 | | Provision for Credit Losses | 3,660 | 1,060 | (3,439) | | Net Income | 16,240 | 19,492 | 22,186 | | Diluted EPS | $0.12 | $0.14 | $0.16 | Interest Expense Comparison (YoY) | Category | Q4 2022 ($ thousands) | Q4 2021 ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Borrowings | 33,608 | 7,585 | 343.1% | | Deposits | 11,904 | 9,267 | 28.5% | | Total Interest Expense | 45,512 | 16,852 | 170.1% | - The provision for credit losses in the current quarter was $3.7 million, driven by commercial loan growth and slower prepayment speeds81240 Fiscal Year 2023 Projections Management projects continued margin pressure, higher IT expenses from digital transformation, and a lower effective tax rate - Information technology and related expenses are expected to be approximately $6.5 million higher in fiscal year 2023 compared to fiscal year 2022, reaching about $24.5 million251 - The effective tax rate for fiscal year 2023 is anticipated to be approximately 19%, revised down from 20-21% due to lower projected pretax income307 Liquidity and Capital Resources The company maintains strong liquidity and capital, with a CBLR of 9.2% and a policy of a 100% earnings payout - The Bank's CBLR was 9.2% and the Company's was 10.0% as of December 31, 2022, both exceeding the 9.0% minimum requirement to be considered well-capitalized312 - The Board intends to continue the policy of a 100% earnings payout to stockholders for fiscal year 2023, contingent on financial condition and regulatory requirements209 - The Bank has access to a line of credit at FHLB and the FRB of Kansas City's discount window for additional liquidity282 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with simulations showing negative impacts to NII and MVPE in rising rate scenarios - At December 31, 2022, the one-year gap was $(1.02) billion, or (10.3)% of total assets, indicating a liability-sensitive position289315 - In rising interest rate scenarios, the MVPE is negatively impacted because the expected average lives of mortgage-related assets increase, heightening their market value sensitivity to rate changes95318 Estimated Change in Net Interest Income (NII) and Market Value of Portfolio Equity (MVPE) | Rate Change (bps) | Change in NII (%) | Change in MVPE (%) | | :--- | :--- | :--- | | +300 | -2.46% | -42.28% | | +200 | -1.58% | -28.85% | | +100 | -0.71% | -14.59% | | 0 | 0.00% | 0.00% | | -100 | +0.33% | +14.31% | | -200 | +0.08% | +43.31% | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - The CEO and CFO concluded that as of December 31, 2022, the Company's disclosure controls and procedures were effective320 - No material changes to the Company's internal control over financial reporting occurred during the quarter ended December 31, 202297 PART II - OTHER INFORMATION Item 1. Legal Proceedings Pending legal actions arising from normal business operations are not expected to have a material adverse effect - The Company states that pending legal actions are not expected to have a material adverse effect on its financial condition or operations322 Item 1A. Risk Factors No material changes to risk factors were reported since the last annual filing on Form 10-K - No changes were reported to the risk factors from the most recent Form 10-K98 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 2.7 million shares, with $22.5 million remaining available under the current repurchase plan - As of December 31, 2022, $22.5 million remained authorized for repurchase under the existing plan, which has Federal Reserve approval through August 2023110228 Stock Repurchase Activity (Q4 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2022 | 238,800 | $8.05 | | Nov 2022 | 1,528,463 | $8.13 | | Dec 2022 | 961,896 | $8.16 | | Total | 2,729,159 | $8.13 | Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period - This item is not applicable99101 Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period - This item is not applicable100324 Item 5. Other Information This item is not applicable to the company for the reporting period - This item is not applicable324 Item 6. Exhibits This section lists filed exhibits, including governance documents, compensation plans, and financial data in XBRL format - The exhibits include governance documents, compensation plans, and required certifications under the Sarbanes-Oxley Act111325 - Financial statements and notes are formatted in Inline eXtensible Business Reporting Language (XBRL)328 Signatures Signatures The report was duly signed by the company's CEO and CFO on February 8, 2023 - The report was signed and authorized on February 8, 2023, by the company's CEO and CFO112329