Capitol Federal Financial, Inc.® (NASDAQ: CFFN) (the "Company"), the parent company of Capitol Federal Savings Bank (the "Bank"), announced results today for the quarter ended June 30, 2023. For best viewing results, please view this release in Portable Document Format (PDF) on our website, http://ir.capfed.com.
Highlights for the quarter include:
- net income of $8.3 million;
- basic and diluted earnings per share of $0.06;
- net interest margin of 1.32% (1.39% excluding the effects of the leverage strategy);
- paid dividends of $0.085 per share; and
- on July 25, 2023, announced a cash dividend of $0.085 per share, payable on August 18, 2023 to stockholders of record as of the close of business on August 4, 2023.
Comparison of Operating Results for the Three Months Ended June 30, 2023 and March 31, 2023
For the quarter ended June 30, 2023, the Company recognized net income of $8.3 million, or $0.06 per share, compared to net income of $14.2 million, or $0.11 per share, for the quarter ended March 31, 2023. The decrease in net income was due primarily to higher deposit interest expense in the current quarter, partially offset by lower income tax expense. The net interest margin decreased 24 basis points, from 1.56% for the prior quarter to 1.32% for the current quarter. Excluding the effects of the leverage strategy discussed in the "Leverage Strategy" section below, the net interest margin decreased 32 basis points, from 1.71% for the prior quarter to 1.39% for the current quarter. The decrease in the net interest margin excluding the effects of the leverage strategy was due mainly to an increase in the cost of deposits. Management anticipates the reduction in the net interest margin will continue in the near term. See additional discussion in "Fiscal Year 2023 Outlook" below.
Interest and Dividend Income
The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent. The weighted average yield on loans receivable increased nine basis points and the weighted average yield on cash and cash equivalents increased 61 basis points compared to the prior quarter.
For the Three Months Ended | |||||||||||||
June 30, | March 31, | Change Expressed in: | |||||||||||
2023 | 2023 | Dollars | Percent | ||||||||||
(Dollars in thousands) | |||||||||||||
INTEREST AND DIVIDEND INCOME: | |||||||||||||
Loans receivable | $ | 71,918 | $ | 69,319 | $ | 2,599 | 3.7 | % | |||||
Cash and cash equivalents | 10,009 | 10,977 | (968 | ) | (8.8 | ) | |||||||
Mortgage-backed securities ("MBS") | 4,562 | 4,748 | (186 | ) | (3.9 | ) | |||||||
Federal Home Loan Bank Topeka ("FHLB") stock | 3,260 | 3,607 | (347 | ) | (9.6 | ) | |||||||
Investment securities | 895 | 895 | — | — | |||||||||
Total interest and dividend income | $ | 90,644 | $ | 89,546 | $ | 1,098 | 1.2 | ||||||
The increase in interest income on loans receivable was due to an increase in the weighted average yield, along with an increase in the average balance of commercial loans and correspondent one-to four-family loans. The increase in the weighted average yield was due primarily to originations and purchases/participations at higher market yields, as well as disbursements on commercial construction loans at rates higher than the overall portfolio rate and upward repricing of existing adjustable-rate loans due to higher market interest rates. The decrease in interest income on cash and cash equivalents was due mainly to a decrease in the average balance of cash associated with the leverage strategy compared to the prior quarter due to a reduction in the leverage strategy usage in the current quarter, partially offset by an increase in the average balance of operating cash, as proceeds from the Federal Reserve's Bank Term Funding Program ("BTFP") have been held in cash as management evaluates funding and balance sheet management options, and an increase in the yield earned on balances held at the Federal Reserve Bank of Kansas City ("FRB of Kansas City") due to higher market interest rates. The decrease in dividend income on FHLB stock was due mainly to a decrease in the average balance of FHLB stock associated with the leverage strategy, partially offset by an increase in the dividend rate paid by FHLB.
Interest Expense
The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent. The weighted average rate paid on deposits increased 59 basis points and the weighted average rate paid on borrowings not associated with the leverage strategy increased 23 basis points compared to the prior quarter.
For the Three Months Ended | ||||||||||||
June 30, | March 31, | Change Expressed in: | ||||||||||
2023 | 2023 | Dollars | Percent | |||||||||
(Dollars in thousands) | ||||||||||||
INTEREST EXPENSE: | ||||||||||||
Borrowings | $ | 31,449 | $ | 31,447 | $ | 2 | — | % | ||||
Deposits | 24,445 | 16,140 | 8,305 | 51.5 | ||||||||
Total interest expense | $ | 55,894 | $ | 47,587 | $ | 8,307 | 17.5 | |||||
During the current quarter, interest expense on borrowings associated with the leverage strategy decreased $3.3 million due to a reduction in usage of the leverage strategy. This was almost entirely offset by an increase in interest expense on borrowings not associated with the leverage strategy, due primarily to BTFP borrowings which have been held in cash as management evaluates funding and balance sheet management options. The increase in interest expense on deposits was due primarily to increases in the weighted average rate paid and average balance of the certificate of deposit portfolio and an increase in the weighted average rate paid on money market accounts. Early in the current quarter, management increased the rates offered on the Bank's money market accounts in an effort to slow the outflow of deposit balances.
Provision for Credit Losses
For the quarter ended June 30, 2023, the Bank recorded a provision for credit losses of $1.3 million, compared to a provision for credit losses of $891 thousand for the prior quarter. The provision for credit losses in the current quarter was comprised of a $2.5 million increase in the allowance for credit losses ("ACL") for loans, partially offset by a $1.2 million decrease in the reserve for off-balance sheet credit exposures. The provision for credit losses associated with the ACL was due primarily to worsening economic forecast conditions compared to the prior quarter, commercial loan growth, and a reduction in prepayment speeds related to the commercial loan portfolio. The release of provision for credit losses associated with the reserve for off-balance sheet credit exposures was due primarily to refining our methodology to account for the estimated credit losses on unfunded commercial construction-to-permanent loans and commitments for the time period after construction is expected to be completed.
Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change measured in dollars and percent.
For the Three Months Ended | ||||||||||||
June 30, | March 31, | Change Expressed in: | ||||||||||
2023 | 2023 | Dollars | Percent | |||||||||
(Dollars in thousands) | ||||||||||||
NON-INTEREST INCOME: | ||||||||||||
Deposit service fees | $ | 3,404 | $ | 3,122 | $ | 282 | 9.0 | % | ||||
Insurance commissions | 888 | 877 | 11 | 1.3 | ||||||||
Other non-interest income | 1,522 | 1,084 | 438 | 40.4 | ||||||||
Total non-interest income | $ | 5,814 | $ | 5,083 | $ | 731 | 14.4 | |||||
The increase in other non-interest income was due mainly to an increase in income on bank-owned life insurance related to the receipt of death benefits during the current quarter.
Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change measured in dollars and percent.
For the Three Months Ended | |||||||||||||
June 30, | March 31, | Change Expressed in: | |||||||||||
2023 | 2023 | Dollars | Percent | ||||||||||
(Dollars in thousands) | |||||||||||||
NON-INTEREST EXPENSE: | |||||||||||||
Salaries and employee benefits | $ | 13,200 | $ | 12,789 | $ | 411 | 3.2 | % | |||||
Information technology and related expense | 6,118 | 5,789 | 329 | 5.7 | |||||||||
Occupancy, net | 3,556 | 3,568 | (12 | ) | (0.3 | ) | |||||||
Regulatory and outside services | 1,436 | 1,305 | 131 | 10.0 | |||||||||
Advertising and promotional | 1,447 | 1,333 | 114 | 8.6 | |||||||||
Federal insurance premium | 1,231 | 1,246 | (15 | ) | (1.2 | ) | |||||||
Deposit and loan transaction costs | 615 | 690 | (75 | ) | (10.9 | ) | |||||||
Office supplies and related expense | 546 | 631 | (85 | ) | (13.5 | ) | |||||||
Other non-interest expense | 1,187 | 1,280 | (93 | ) | (7.3 | ) | |||||||
Total non-interest expense | $ | 29,336 | $ | 28,631 | $ | 705 | 2.5 | ||||||
The increase in salaries and employee benefits was mainly related to merit increases during the current quarter. The increase in information technology and related expense was due primarily to an increase in professional services related to the Company's digital transformation, discussed below, and other technology-related projects.
The Company's efficiency ratio was 72.32% for the current quarter compared to 60.86% for the prior quarter. The change in the efficiency ratio was due primarily to lower net interest income. The efficiency ratio is a measure of a financial institution's total non-interest expense as a percentage of the sum of net interest income (pre-provision for credit losses) and non-interest income. A higher value indicates that it is costing the financial institution more money to generate revenue, relative to the net interest margin and non-interest income.
Income Tax Expense
The following table presents pretax income, income tax expense, and net income for the time periods presented, along with the change measured in dollars and percent and the effective tax rate.
For the Three Months Ended | |||||||||||||||
June 30, | March 31, | Change Expressed in: | |||||||||||||
2023 | 2023 | Dollars | Percent | ||||||||||||
(Dollars in thousands) | |||||||||||||||
Income before income tax expense | $ | 9,904 | $ | 17,520 | $ | (7,616 | ) | (43.5 | )% | ||||||
Income tax expense | 1,602 | 3,331 | (1,729 | ) | (51.9 | ) | |||||||||
Net income | $ | 8,302 | $ | 14,189 | $ | (5,887 | ) | (41.5 | ) | ||||||
Effective Tax Rate | 16.2 | % | 19.0 | % | |||||||||||
The decrease in income tax expense was due primarily to lower pretax income in the current quarter and partially to a lower effective tax rate. The decrease in effective tax rate was due primarily to lower projected pretax income, as the Company's permanent differences, which generally reduce our tax rate, have a larger impact on the overall effective rate.
Comparison of Operating Results for the Nine Months Ended June 30, 2023 and 2022
The Company recognized net income of $38.7 million, or $0.29 per share, for the current year period compared to net income of $65.0 million, or $0.48 per share, for the prior year period. The decrease in net income was due primarily to lower net interest income, along with recording a provision for credit losses of $5.9 million for the current year period compared to a release of provision of $5.7 million for the prior year period, partially offset by lower income tax expense. The net interest margin decreased 32 basis points, from 1.82% for the prior year period to 1.50% for the current year period. Excluding the effects of the leverage strategy, the net interest margin decreased 38 basis points, from 2.04% for the prior year period to 1.66% for the current year period. The decrease in the net interest margin excluding the effects of the leverage strategy was due mainly to an increase in the cost of borrowings and deposits, which exceeded the increase in loan yields.
Interest and Dividend Income
The following table presents the components of interest and dividend income for the time periods presented, along with the change measured in dollars and percent.
For the Nine Months Ended | |||||||||||||
June 30, | Change Expressed in: | ||||||||||||
2023 | 2022 | Dollars | Percent | ||||||||||
(Dollars in thousands) | |||||||||||||
INTEREST AND DIVIDEND INCOME: | |||||||||||||
Loans receivable | $ | 206,056 | $ | 168,086 | $ | 37,970 | 22.6 | % | |||||
Cash and cash equivalents | 37,657 | 4,931 | 32,726 | 663.7 | |||||||||
MBS | 14,121 | 14,494 | (373 | ) | (2.6 | ) | |||||||
FHLB stock | 11,025 | 6,166 | 4,859 | 78.8 | |||||||||
Investment securities | 2,671 | 2,423 | 248 | 10.2 | |||||||||
Total interest and dividend income | $ | 271,530 | $ | 196,100 | $ | 75,430 | 38.5 | ||||||
The increase in interest income on loans receivable was due to an increase in the average balance and weighted average yield of the loan portfolio. The increase in the average balance was mainly in the correspondent one-to four-family and commercial real estate loan portfolios. The increase in the weighted average yield was due primarily to originations and purchases at higher market yields, as well as disbursements on commercial construction loans at rates higher than the overall portfolio rate and upward repricing of existing adjustable-rate loans due to higher market interest rates. The increase in interest income on cash and cash equivalents was due mainly to a higher yield on cash related to an increase in FRB interest rates. The increase in dividend income on FHLB stock was due mainly to a higher FHLB dividend rate compared to the prior year period, along with an increase in the average balance of FHLB stock due to an increase in FHLB borrowings.
Interest Expense
The following table presents the components of interest expense for the time periods presented, along with the change measured in dollars and percent.
For the Nine Months Ended | ||||||||||||
June 30, | Change Expressed in: | |||||||||||
