Capitol Federal Financial(CFFN) - 2023 Q4 - Annual Report

Part I Item 1. Business Capitol Federal Financial, Inc. operates as a community-oriented financial institution, primarily attracting public deposits to fund residential mortgage and commercial loans through its subsidiary, Capitol Federal Savings Bank - The company's core business involves attracting deposits from the public and businesses to primarily invest in first mortgage loans for one- to four-family residences and commercial loans[115] - The company operates a network of 51 branches (46 traditional, 5 in-store) across Kansas and Missouri, serving metropolitan areas like Topeka, Wichita, and Kansas City[6] - Management's strategy focuses on six key areas: Lending, Deposit Services, Cost Control, Asset Quality, Capital Position, and Stockholder Value, which includes a regular quarterly cash dividend of $0.085 per share for fiscal year 2024[17] - As a federally chartered savings bank, the Bank is regulated by the Office of the Comptroller of the Currency (OCC), with deposits insured by the FDIC, and the holding company is regulated by the Federal Reserve Board (FRB)[19][20] - As of September 30, 2023, the company had 632 full-time equivalent employees, a decrease from 707 in the prior year, largely due to efficiencies gained from a new core processing system and natural attrition[159] Item 1A. Risk Factors The company identifies several material risks to its business, including macroeconomic factors, lending-specific risks, operational risks from cybersecurity and third-party vendors, strong competition, and a highly regulated environment - Changes in interest rates are a primary risk, as the company's long-term, fixed-rate assets may not reprice as quickly as its shorter-term liabilities, potentially compressing net interest income[162][150] - An economic downturn, particularly in its geographic markets, could increase loan delinquencies and losses, as the business is concentrated in one- to four-family and commercial real estate loans[165] - The company faces significant cybersecurity risks, including potential system failures, security breaches, and cyberattacks on its own systems or those of its third-party service providers, which could lead to financial loss and reputational damage[53][38] - A security incident at a third-party service provider (MOVEit) in June 2023 compromised personally identifiable information of some Bank customers, highlighting vendor-related risks[167] - The company operates in a highly regulated environment, and changes in laws or regulations by the OCC, FRB, FDIC, and CFPB could adversely impact operations and profitability[58][69] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[63] Item 2. Properties As of September 30, 2023, the company operates 46 traditional branch offices and five in-store branches, with the Bank owning its home office and 35 branch offices - The company's physical footprint consists of 51 locations, with the majority (36, including the home office) being owned properties[64] Item 3. Legal Proceedings The company is involved in various legal actions in the normal course of business but does not expect them to have a material adverse effect, with a putative class action lawsuit regarding overdraft fees dismissed in the Bank's favor but currently under appeal - Management believes that pending legal actions are unlikely to have a material adverse effect on the company's financial condition or results[71] - A class action lawsuit alleging improper overdraft fees was dismissed with prejudice on April 5, 2023, but the decision is currently under appeal by the plaintiffs[175] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[84] Part II Item 5. Market for Registrant%27s Common Equity%2C Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock (CFFN) is traded on the NASDAQ Global Select Market, with 250,594 shares repurchased in Q4 FY2023 and $21.2 million remaining for repurchase, while its stock performance has underperformed relevant indices over the last five years - The company's common stock is listed on the NASDAQ under the symbol CFFN[72] Share Repurchase Activity (Q4 FY2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Sep 1 - Sep 30, 2023 | 250,594 | $4.97 | | Total Q4 2023 | 250,594 | $4.97 | - As of September 30, 2023, $21.2 million was available for share repurchases under the current plan, with Federal Reserve approval extending through August 2024[73] Stock Performance Comparison ($100 Investment on 9/30/2018) | Index | 9/30/2018 | 9/30/2023 | | :--- | :--- | :--- | | Capitol Federal Financial, Inc. | $100.00 | $53.25 | | NASDAQ Composite Index | $100.00 | $171.65 | | S&P U.S. BMI Banks Index | $100.00 | $99.73 | Item 7. Management%27s Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2023, the company executed a strategic securities transaction, selling $1.30 billion of its portfolio, resulting in a $192.6 million impairment loss and a net loss of $101.7 million, while facing net interest margin compression to 1.43% and growing total assets to $10.18 billion with strong asset quality - In October 2023, the company initiated a strategic sale of $1.30 billion in securities, representing 94% of its portfolio, which led to a $192.6 million impairment loss recognized in FY2023[79] - The securities strategy is expected to increase FY2024 EPS by approximately $0.30 and net interest margin by 60 basis points by allowing reinvestment into higher-yielding assets and repayment of debt[79][91] FY 2023 Key Financial Results vs. FY 2022 | Metric | FY 2023 | FY 2022 | | :--- | :--- | :--- | | Net (Loss) Income | ($101.7 million) | $84.5 million | | Diluted EPS | ($0.76) | $0.62 | | Diluted EPS (ex-securities strategy) | $0.33 | N/A | | Net Interest Margin | 1.43% | 1.79% | Balance Sheet Summary (as of Sep 30) | Item | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $10.18 billion | $9.62 billion | +5.7% | | Loans Receivable, net | $7.97 billion | $7.46 billion | +6.8% | | Deposits | $6.05 billion | $6.19 billion | -2.3% | | Borrowings | $2.88 billion | $2.13 billion | +35.0% | | Stockholders' Equity | $1.04 billion | $1.10 billion | -4.8% | - Asset quality remained strong at September 30, 2023, with loans 30-89 days delinquent at 0.21% of total loans and net charge-offs at 0.00% for the year[44] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with a liability-sensitive position indicated by a one-year cumulative gap of $(1.19) billion or (11.7)% of total assets, projecting a 4.0% increase in net interest income in a +200 bp rate shock but a 25.7% decrease in MVPE - Interest rate risk is the company's most significant market risk, managed by the Board and ALCO through forecasting the impact of various rate scenarios on net interest income and Market Value of Portfolio Equity (MVPE)[495][496] - The one-year cumulative gap was $(1.19) billion, or (11.7)% of total assets, at September 30, 2023, indicating a liability-sensitive position where more liabilities than assets will reprice in the next 12 months[45][502] Net Interest Income Sensitivity Analysis (as of Sep 30, 2023) | Rate Change (bps) | Estimated Change in NII ($ thousand) | Estimated Change in NII (%) | | :--- | :--- | :--- | | +300 | +8,036 | +6.0% | | +200 | +5,346 | +4.0% | | +100 | +2,689 | +2.0% | | 0 (Base) | 133,458 | 0.0% | | -100 | -3,084 | -2.3% | | -200 | -6,963 | -5.2% | Market Value of Portfolio Equity (MVPE) Sensitivity Analysis (as of Sep 30, 2023) | Rate Change (bps) | Estimated Change in MVPE ($ thousand) | Estimated Change in MVPE (%) | | :--- | :--- | :--- | | +300 | -386,972 | -38.0% | | +200 | -261,818 | -25.7% | | +100 | -131,046 | -12.9% | | 0 (Base) | 1,019,688 | 0.0% | | -100 | +125,716 | +12.3% | | -200 | +283,093 | +27.8% | Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal years 2021-2023, with Deloitte & Touche LLP providing an unqualified opinion on both the financial statements and internal controls, highlighting the Allowance for Credit Losses (ACL) as a critical audit matter - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting as of September 30, 2023[549][542] - The auditor identified the Allowance for Credit Losses (ACL) as a critical audit matter due to the significant management estimates and judgments required, particularly regarding economic forecasts and qualitative factor adjustments[313][330] Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Sep 30, 2022 | | :--- | :--- | :--- | | Total Assets | $10,177,461 | $9,624,897 | | Loans receivable, net | $7,970,949 | $7,464,208 | | AFS securities | $1,384,482 | $1,563,307 | | Total Liabilities | $9,133,407 | $8,528,398 | | Deposits | $6,051,220 | $6,194,866 | | Borrowings | $2,879,125 | $2,132,154 | | Total Stockholders' Equity | $1,044,054 | $1,096,499 | Consolidated Income Statement Highlights (in thousands) | Account | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Net Interest Income | $153,272 | $192,594 | $175,001 | | Provision for Credit Losses | $6,838 | ($4,630) | ($8,510) | | Non-Interest Income | ($171,455) | $22,830 | $28,086 | | Non-Interest Expense | $113,934 | $112,851 | $115,569 | | Net (Loss) Income | ($101,659) | $84,453 | $76,082 | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - None[515] Item 9A. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of September 30, 2023, with no material changes during the fourth quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of the fiscal year-end[516] - Management concluded that the company maintained an effective system of internal control over financial reporting as of September 30, 2023[520] - No changes in internal control over financial reporting occurred during the quarter ended September 30, 2023, that materially affected, or are reasonably likely to materially affect, internal controls[522] Item 9B. Other Information During the quarter ended September 30, 2023, no director or officer adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement - No director or officer adopted or terminated a Rule 10b5-1 trading plan during the fourth fiscal quarter[522] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[524] Part III Item 10. Directors%2C Executive Officers and Corporate Governance Information regarding the company's directors, executive officers, corporate governance, and audit committee is incorporated by reference from the company's definitive proxy statement for its upcoming Annual Meeting of Stockholders - Required information for this item is incorporated by reference from the company's definitive proxy statement to be filed for its January 2024 Annual Meeting of Stockholders[525][526] - The company has adopted a written code of ethics applicable to all employees and directors, which is available on its website[527] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement for its upcoming Annual Meeting of Stockholders - Required information concerning compensation is incorporated by reference from the company's definitive proxy statement[528] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership by certain beneficial owners and management is incorporated by reference from the company's definitive proxy statement, with 349,374 shares to be issued upon option exercise and 5,938,504 shares remaining available for future issuance under equity compensation plans as of September 30, 2023 - Required information concerning security ownership is incorporated by reference from the company's definitive proxy statement[552] Equity Compensation Plan Information (as of Sep 30, 2023) | Category | Shares to be Issued Upon Exercise | Weighted-Average Exercise Price | Shares Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by stockholders | 349,374 | $12.50 | 5,938,504 | Item 13. Certain Relationships and Related Transactions%2C and Director Independence Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's definitive proxy statement for its upcoming Annual Meeting of Stockholders - Required information for this item is incorporated by reference from the company's definitive proxy statement[554] Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's definitive proxy statement for its upcoming Annual Meeting of Stockholders - Required information concerning principal accountant fees and services is incorporated by reference from the company's definitive proxy statement[555] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the documents filed as part of the Form 10-K report, including the financial statements, notes, and various exhibits such as the company's charter, bylaws, and certifications - This item lists the financial statements, financial statement schedules (all of which were omitted as not applicable), and exhibits filed with the report[556][557] Item 16. Form 10-K Summary The company has not provided a summary for its Form 10-K - None[557]