Capitol Federal Financial, Inc.® Reports Fiscal Year 2022 Results

TOPEKA, Kan., October 26, 2022--(BUSINESS WIRE)--Capitol Federal Financial, Inc.^® (NASDAQ: CFFN) (the "Company"), the parent company of Capitol Federal Savings Bank (the "Bank"), announced results today for the fiscal year ended September 30, 2022. 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 $19.5 million;

• basic and diluted earnings per share of $0.14;

• net interest margin of 1.71% (2.07% excluding the effects of the leverage strategy);

• annualized loan growth of 12.6%;

• paid dividends of $0.085 per share; and

• on October 25, 2022, announced a cash dividend of $0.085 per share, payable on November 18, 2022 to stockholders of record as of the close of business on November 4, 2022.

Highlights for the fiscal year include:

• net income of $84.5 million;

• basic and diluted earnings per share of $0.62;

• net interest margin of 1.79% (2.04% excluding the effects of the leverage strategy);

• loan growth of 5.4%;

• paid dividends of $0.76 per share; and

• on October 26, 2022, announced a fiscal year 2022 cash true-up dividend of $0.28 per share, payable on December 2, 2022 to stockholders of record as of the close of business on November 18, 2022.

Comparison of Operating Results for the Three Months Ended September 30, 2022 and June 30, 2022

For the quarter ended September 30, 2022, the Company recognized net income of $19.5 million, or $0.14 per share, compared to net income of $21.2 million, or $0.16 per share, for the quarter ended June 30, 2022. The decrease in net income was due primarily to higher non-interest expense in the current quarter. The net interest margin decreased eight basis points, from 1.79% for the prior quarter to 1.71% for the current quarter. When the leverage strategy discussed below is in place, it reduces the net interest margin due to the amount of earnings from the transaction in comparison to the size of the transaction. Excluding the effects of the leverage strategy, the net interest margin would have decreased four basis points, from 2.11% for the prior quarter to 2.07% 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 borrowings and deposits, partially offset by an increase in loan yield due to higher market interest rates. Management anticipates the cost of borrowings and deposits may continue to increase at a faster pace than increases in asset yields in the near term.

Leverage Strategy

At times, the Bank has utilized a leverage strategy to increase earnings. The leverage strategy during the current quarter involved borrowing up to $2.60 billion by entering into short-term Federal Home Loan Bank Topeka ("FHLB") advances, compared to $2.10 billion during the prior quarter. The leverage strategy was increased during the current quarter in response to the increase in the dividend rate paid by FHLB. The borrowings were repaid prior to each quarter end. The proceeds from the borrowings, net of the required FHLB stock holdings which yielded 7.75% during the current quarter, were deposited at the Federal Reserve Bank of Kansas City ("FRB of Kansas City"). Net income attributable to the leverage strategy is largely derived from the dividends received on FHLB stock holdings, plus the net interest rate spread between the yield on the cash deposited at the FRB of Kansas City and the rate paid on the related FHLB borrowings, less applicable federal insurance premiums and estimated taxes. Net income attributable to the leverage strategy was $1.3 million during the current quarter and $3.1 million during the current year. Management continues to monitor the net interest rate spread and overall profitability of the strategy. It is expected that the strategy will continue to be utilized as long as it remains profitable and/or the borrowing capacity does not need to be used for other operational purposes.

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 11 basis points and the weighted average yield on mortgage-backed securities ("MBS") increased four basis points compared to the prior quarter.

	For the Three Months Ended
	September 30,			June 30,			Change Expressed in:
	2022			2022			Dollars				Percent
	(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable	$	60,445		$	56,886		$	3,559			6.3	%
MBS		4,912			5,048			(136	)		(2.7	)
Cash and cash equivalents		13,373			3,968			9,405			237.0
FHLB stock		3,865			2,695			1,170			43.4
Investment securities		845			815			30			3.7
Total interest and dividend income	$	83,440		$	69,412		$	14,028			20.2

The increase in interest income on loans receivable was due to an increase in the weighted average yield on the loan portfolio, along with an increase in the average balance of one- to four-family loans and commercial loans. 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 to an increase in the yield earned on balances held at the FRB of Kansas City, the majority of which were related to the leverage strategy, due to an increase in FRB interest rates. The increase in dividend income on FHLB stock was due to an increase in the dividend rate paid by FHLB, as well as an increase in the average balance of FHLB stock held stemming from an increase in the average balance of FHLB borrowings to support growth in the loan portfolio and replace deposit balances.

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 10 basis points and the weighted average rate paid on borrowings not associated with the leverage strategy increased 33 basis points compared to the prior quarter.

	For the Three Months Ended
	September 30,			June 30,			Change Expressed in:
	2022			2022			Dollars			Percent
	(Dollars in thousands)
INTEREST EXPENSE:
Borrowings	$	24,529		$	11,644		$	12,885		110.7	%
Deposits		9,013			7,787			1,226		15.7
Total interest expense	$	33,542		$	19,431		$	14,111		72.6

The increase in interest expense on borrowings was due primarily to an increase in the rate paid on the short-term borrowings associated with the leverage strategy during the current quarter, due to higher market interest rates, along with an increase in the average balance of borrowings associated with the leverage strategy. Additionally, the average balance and weighted average rate paid on borrowings not associated with the leverage strategy increased compared to the prior quarter due to new borrowings added near the end of the prior quarter and during the current quarter at higher market interest rates. The additional borrowings not associated with the leverage strategy were utilized to fund operational liquidity needs. See additional discussion in the "Financial Condition" section below. The increase in interest expense on deposits was due primarily to an increase in the weighted average rate paid on money market accounts and certificates of deposit, partially offset by a decrease in the average balance of the deposit portfolio, largely the certificate of deposit portfolio.

Provision for Credit Losses

For the quarter ended September 30, 2022, the Bank recorded a provision for credit losses of $1.1 million, compared to a provision for credit losses of $937 thousand for the prior quarter. The provision for credit losses in the current quarter was comprised of a $122 thousand increase in the allowance for credit losses ("ACL") for loans and a $938 thousand increase in reserves for off-balance sheet credit exposures. The provision for credit losses associated with the ACL was primarily related to the one- to four-family loan portfolio due to a slow-down in prepayment speeds and growth in the correspondent loan portfolio, partially offset by a decrease in commercial loan ACL due primarily to the removal of a large dollar loan from special mention classification during the current quarter. The provision for credit losses associated with reserves for off-balance sheet credit exposures was due primarily to growth in commercial construction exposures. The forecasted economic conditions used in the model were less favorable at September 30, 2022 compared to June 30, 2022, which also contributed to the increase in both ACL and reserves for off-balance sheet credit exposures calculated by the model for all loan categories. Similar to June 30, 2022, a weighted economic forecast was selected at September 30, 2022 which incorporates a recessionary outlook into the model.

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
	September 30,			June 30,			Change Expressed in:
	2022			2022			Dollars				Percent
	(Dollars in thousands)
NON-INTEREST INCOME:
Deposit service fees	$	3,467		$	3,601		$	(134	)		(3.7	)%
Insurance commissions		905			788			117			14.8
Other non-interest income		1,421			1,726			(305	)		(17.7	)
Total non-interest income	$	5,793		$	6,115		$	(322	)		(5.3	)

The decrease in other non-interest income was due mainly to a decrease in income on bank-owned life insurance related to the receipt of death benefits during the prior quarter and no such benefits being received 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
	September 30,			June 30,			Change Expressed in:
	2022			2022			Dollars				Percent
	(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits	$	14,268		$	14,581		$	(313	)		(2.1	)%
Information technology and related expense		5,043			4,343			700			16.1
Occupancy, net		3,777			3,721			56			1.5
Regulatory and outside services		1,980			1,572			408			26.0
Advertising and promotional		1,552			1,068			484			45.3
Federal insurance premium		820			784			36			4.6
Deposit and loan transaction costs		747			664			83			12.5
Office supplies and related expense		487			494			(7	)		(1.4	)
Other non-interest expense		1,133			1,163			(30	)		(2.6	)
Total non-interest expense	$	29,807		$	28,390		$	1,417			5.0

The decrease in salaries and employee benefits was due mainly to a decrease in incentive compensation. The increase in information technology and related expense was due primarily to increases in software maintenance/licensing and professional services. The increase in regulatory and outside services was due primarily to higher consulting expenses related to the Bank's upcoming digital transformation project. The increase in advertising and promotional expense was due primarily to the timing of campaigns and sponsorships.

The Company's efficiency ratio was 53.52% for the current quarter compared to 50.61% for the prior quarter. The change in the efficiency ratio was due primarily to higher non-interest expense. 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
	September 30,				June 30,				Change Expressed in:
	2022				2022				Dollars				Percent
	(Dollars in thousands)
Income before income tax expense	$	24,824			$	26,769			$	(1,945	)		(7.3	)%
Income tax expense		5,332				5,617				(285	)		(5.1	)
Net income	$	19,492			$	21,152			$	(1,660	)		(7.8	)
Effective Tax Rate		21.5	%			21.0	%

The decrease in income tax expense was due primarily to lower pretax income in the current quarter.

Comparison of Operating Results for the Years Ended September 30, 2022 and 2021

The Company recognized net income of $84.5 million, or $0.62 per share, for the current year compared to net income of $76.1 million, or $0.56 per share, for the prior year. The increase in net income was due to an increase in net interest income, partially offset by higher income tax expense and a lower negative provision for credit losses. The net interest margin decreased 11 basis points, from 1.90% for the prior year to 1.79% for the current year. Excluding the effects of the leverage strategy, the net interest margin would have increased 14 basis points, from 1.90% for the prior year to 2.04% for the current year. The increase in net interest margin excluding the effects of the leverage strategy was due mainly to a reduction in the weighted average cost of retail certificates of deposit.

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 Year Ended
	September 30,						Change Expressed in:
	2022			2021			Dollars				Percent
	(Dollars in thousands)
INTEREST AND DIVIDEND INCOME:
Loans receivable	$	228,531		$	229,897		$	(1,366	)		(0.6	)%
MBS		19,406			21,399			(1,993	)		(9.3	)
Cash and cash equivalents		18,304			144			18,160			12,611.1
FHLB stock		10,031			3,916			6,115			156.2
Investment securities		3,268			2,825			443			15.7
Total interest and dividend income	$	279,540		$	258,181		$	21,359			8.3

The decrease in interest income on loans receivable was due to a lower weighted average rate on the originated and correspondent one- to four-family loan portfolio during the current year, mostly offset by an increase in the average balance of the loan portfolio. The lower weighted average rate was due to endorsements, refinances, originations and purchases at lower market rates at the time of the transactions in the prior fiscal year, which are being fully reflected in the current year. Premium amortization related to the one- to four-family correspondent loan portfolio decreased significantly compared to the prior year due to the slow-down in prepayments and endorsements resulting from the increase in market interest rates during the last half of the fiscal year, partially offsetting the reduction in interest income related to a lower weighted average rate on the one- to four-family portfolio mentioned above.

The decrease in interest income on the MBS portfolio was due primarily to a decrease in the average balance of the portfolio as repayments were primarily used to fund loan growth.

The increase in interest income on cash and cash equivalents and the increase in dividend income on FHLB stock were due mainly to the leverage strategy being utilized during the current year and not being utilized during the prior year. Additionally, market interest rates increased during the year resulting in an increase in the yield on cash, and FHLB increased the dividend rate paid during the year.

The increase in interest income on investment securities was due primarily to an increase in the average balance of the portfolio, along with an increase in the yield due to purchases at higher market yields during the current year.

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 Year Ended
	September 30,						Change Expressed in:
	2022			2021			Dollars				Percent
	(Dollars in thousands)
INTEREST EXPENSE:
Borrowings	$	52,490		$	34,774		$	17,716			50.9	%
Deposits		34,456			48,406			(13,950	)		(28.8	)
Total interest expense	$	86,946		$	83,180		$	3,766			4.5

The increase in interest expense on borrowings was due to the leverage strategy being utilized during a portion of the current year and not being utilized during the prior year. Interest expense on borrowings associated with the leverage strategy totaled $18.5 million during the current year. Interest expense on FHLB borrowings not associated with the leverage strategy was lower in the current year due to terminating or not renewing certain interest rate swap agreements, not replacing some maturing FHLB advances and prepaying certain advances during fiscal year 2021, partially offset by an increase in the average balance due to a recent increase in FHLB borrowings to fund operational needs.

The decrease in interest expense on deposits was due mainly to a decrease in the weighted average rate paid and the average balance of the retail certificate of deposit portfolio. Retail certificates of deposit repriced downward during the prior year and first half of the current year as they were renewed or were replaced at lower offered rates at the time of the renewal, along with some certificates of deposit not renewing. During the third quarter of fiscal year 2022, management began to increase rates offered on retail certificates of deposit and money market accounts to help reduce the outflow from these portfolios.

Provision for Credit Losses

The Bank recorded a negative provision for credit losses during the current year of $4.6 million, compared to a negative provision for credit losses of $8.5 million during the prior year. The negative provision in the current year was comprised of a $3.6 million decrease in the ACL for loans and a $992 thousand decrease in reserves for off-balance sheet credit exposures. The negative provision for credit losses associated with the ACL in the current year was due primarily to a reduction in commercial loan qualitative factors, partially offset by an increase in ACL related to loan growth during the current year and a less favorable economic forecast compared to the prior year. The negative provision for credit losses associated with the reserve for off-balance sheet credit exposures in the current year was due primarily to a reduction in commercial loan qualitative factors, partially offset by growth in commercial construction exposures.

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 Year Ended
	September 30,						Change Expressed in:
	2022			2021			Dollars				Percent
	(Dollars in thousands)
NON-INTEREST INCOME:
Deposit service fees	$	13,798		$	12,282		$	1,516			12.3	%
Insurance commissions		2,947			3,030			(83	)		(2.7	)
Gain on sale of Visa Class B shares		—			7,386			(7,386	)		(100.0	)
Other non-interest income		6,085			5,388			697			12.9
Total non-interest income	$	22,830		$	28,086		$	(5,256	)		(18.7	)

The increase in deposit service fees was due primarily to an increase in debit card income and service charges as a result of higher transaction and settlement volume, in addition to an increase in the average transaction amount. During the prior year, the Bank sold its Visa Class B shares, resulting in a $7.4 million gain, with no similar transaction during the current year. The increase in other non-interest income was due primarily to a gain on a loan-related financial derivative agreement.

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 Year Ended
	September 30,						Change Expressed in:
	2022			2021			Dollars				Percent
	(Dollars in thousands)
NON-INTEREST EXPENSE:
Salaries and employee benefits	$	56,600		$	56,002		$	598			1.1	%
Information technology and related expense		18,311			17,922			389			2.2
Occupancy, net		14,370			14,045			325			2.3
Regulatory and outside services		6,192			5,764			428			7.4
Advertising and promotional		5,178			5,133			45			0.9
Federal insurance premium		3,020			2,545			475			18.7
Deposit and loan transaction costs		2,797			2,761			36			1.3
Office supplies and related expense		1,951			1,715			236			13.8
Loss on interest rate swap termination