Capitol Federal Financial, Inc. (CFFN) is a leading financial institution that has weathered the challenges of the banking industry for decades. As the holding company for Capitol Federal Savings Bank, CFFN has a rich history of serving its communities in Kansas and Missouri, making it a reliable and trusted name in the Midwest.

Business Overview and History Capitol Federal Financial, Inc. was established in 1893 as Capitol Federal Savings and Loan Association, with its headquarters in Topeka, Kansas. The company started with a focus on providing home mortgage loans and accepting deposits from local customers. Over the decades, Capitol Federal Savings Bank grew its branch network throughout Kansas and later expanded into Missouri.

In 2000, Capitol Federal Savings Bank converted from a mutual savings bank to a stock savings bank, becoming a wholly-owned subsidiary of the newly formed holding company, Capitol Federal Financial, Inc. This conversion allowed the bank to raise capital and position itself for future growth. The company's shares began trading on the NASDAQ stock exchange in 2000.

During the 2000s, Capitol Federal Financial continued to expand its branch network and loan portfolio, primarily in the one- to four-family residential mortgage market. The company weathered the financial crisis of 2008-2009 relatively well compared to many of its peers, maintaining strong asset quality and capital levels throughout that challenging period.

Today, the company has grown to become one of the largest residential lenders in the state, with a network of 47 branch locations across Kansas and Missouri. The Bank's primary business activities include originating and servicing residential mortgage loans, as well as accepting deposits from the general public.

In 2010, Capitol Federal Financial, Inc. completed a conversion from a mutual holding company structure to a stock holding company structure, becoming a publicly traded company on the NASDAQ exchange under the ticker symbol CFFN. This transition allowed the company to access public capital markets and pursue strategic growth opportunities.

Over the years, CFFN has maintained a strong focus on residential lending, with one-to-four-family loans comprising the majority of its loan portfolio. As of June 30, 2024, the company's loan portfolio totaled $7.95 billion, with $6.38 billion, or 80.2%, in one-to-four-family loans. The company has also expanded its commercial lending business, which accounted for $1.47 billion, or 18.5%, of the total loan portfolio.

Financial Performance and Ratios Capitol Federal Financial, Inc. has demonstrated resilience in its financial performance, even in the face of challenging economic conditions. For the fiscal year ended September 30, 2023, the company reported total assets of $10.18 billion, total deposits of $6.05 billion, and net income of -$101.66 million. The significant net loss was primarily due to a $192.62 million pre-tax loss on the sale of securities as part of the company's strategic repositioning of its investment portfolio.

Despite the one-time charge, CFFN's financial ratios remain strong. As of June 30, 2024, the company had a debt-to-equity ratio of 2.11, a quick ratio of 3.35, and a current ratio of 3.35, indicating a solid liquidity position. The company's return on assets (ROA) and return on equity (ROE) for the nine months ended June 30, 2024 were 0.36% and 3.35%, respectively.

For the most recent fiscal year, CFFN reported revenue of $167.3 million, net income of $38 million, operating cash flow of $47.53 million, and free cash flow of $41.25 million. In the most recent quarter, the company's performance showed improvement, with revenue of $96.867 million (a 10% increase year-over-year) and net income of $12.057 million (a 45% increase year-over-year). The quarter's operating cash flow was $19.113 million, and free cash flow was $16.437 million.

Regulatory Capital and Liquidity Capitol Federal Savings Bank, the subsidiary of Capitol Federal Financial, Inc., is well-capitalized under regulatory guidelines. As of June 30, 2024, the bank's Community Bank Leverage Ratio (CBLR) was 9.10%, exceeding the well-capitalized threshold of 9.00%. This strong capital position provides the bank with the flexibility to navigate the evolving banking landscape.

In terms of liquidity, the company reported $317.82 million in cash and cash equivalents as of June 30, 2024. Additionally, the bank had access to $2.93 billion in additional liquidity based on its blanket collateral agreement with the Federal Home Loan Bank (FHLB) and unencumbered securities. This robust liquidity position allows CFFN to meet its short-term funding needs and take advantage of strategic opportunities.

Diversification and Growth Initiatives While CFFN's primary focus has been on residential lending, the company has also made strides in diversifying its revenue streams. In recent years, the bank has grown its commercial lending business, which accounted for 18.5% of the total loan portfolio as of June 30, 2024. This diversification helps to mitigate risks and provides the company with additional avenues for growth.

Furthermore, CFFN has invested in enhancing its digital capabilities, rolling out a new core banking system and digital banking platform in August 2023. This digital transformation is expected to improve the customer experience, deepen relationships with existing clients, and attract new customers. The company has also realigned its staffing to better support its commercial banking and small business banking initiatives, positioning it for further growth in these areas.

Product Segments and Financial Metrics CFFN's primary business activities are centered around its banking operations through Capitol Federal Savings Bank. The bank's main sources of revenue and profitability come from its lending and deposit-gathering activities.

One- to Four-Family Loans: As of June 30, 2024, these loans comprised 80.2% of the total loan portfolio, with $6.38 billion outstanding. The weighted average yield on this portfolio was 3.50%.

Commercial Loans: This segment includes commercial real estate, commercial and industrial, and commercial construction loans. As of June 30, 2024, commercial loans totaled $1.47 billion, or 18.5% of the total loan portfolio, with a weighted average yield of 5.59%. The bank has seen growth in this area, with originations and participations totaling $290.10 million during the first nine months of fiscal year 2024.

Consumer Loans: Primarily consisting of home equity loans and lines of credit, this segment totaled $108.37 million, or 1.4% of the total loan portfolio, as of June 30, 2024. The weighted average yield on the consumer loan portfolio was 8.61%.

Deposits: The bank's deposit portfolio totaled $6.13 billion as of June 30, 2024, with retail certificates of deposit accounting for 45.2% of total deposits and non-maturity deposits such as checking, savings, and money market accounts making up 53.2%. The weighted average rate paid on total deposits was 2.44%.

Borrowings: CFFN utilizes FHLB advances as a source of wholesale funding, with $2.29 billion in borrowings as of June 30, 2024. The weighted average effective rate on these borrowings was 3.24%.

The bank's net interest margin improved to 1.77% for the third quarter of fiscal year 2024, up from 1.50% in the prior year period, driven by higher yields on the loan and securities portfolios, partially offset by an increase in deposit costs.

Geographic Markets and Asset Quality CFFN operates primarily in the states of Kansas and Missouri, with 47 branch locations across these two states. As a small cap company, CFFN does not have significant operations outside of its core markets.

The bank's asset quality remained strong, with low delinquency and charge-off ratios. As of June 30, 2024, loans 30-89 days delinquent were 0.21% of total loans receivable, net, and loans 90+ days delinquent or in foreclosure were 0.11% of total loans receivable, net. During the current year period, net charge-offs were $58,000.

Risks and Challenges Like any financial institution, Capitol Federal Financial, Inc. faces a range of risks and challenges, including interest rate risk, credit risk, and regulatory changes. The company's significant exposure to the residential mortgage market means that it is susceptible to fluctuations in the housing market and changes in interest rates.

Additionally, CFFN's pre-1988 bad debt reserves may impact the timing and amount of capital distributions from the bank to the holding company, as any distributions deemed to be drawn from these reserves would result in the recognition of additional income tax expense. This issue adds complexity to the company's capital management strategy and could affect its ability to pay dividends or repurchase shares.

Furthermore, the highly competitive nature of the banking industry, particularly in the Midwest region, poses challenges for CFFN as it seeks to maintain market share and profitability. The company must continue to innovate and adapt its product offerings to meet the evolving needs of its customers.

Conclusion Capitol Federal Financial, Inc. has a long and storied history as a trusted financial institution in the Midwest. Despite the challenges faced by the banking industry, CFFN has demonstrated resilience, maintaining a strong capital position and diversifying its revenue streams. The company's digital transformation and focus on commercial and small business banking present opportunities for future growth, while the company must also navigate risks such as interest rate fluctuations and regulatory changes. As CFFN continues to evolve, its ability to serve its communities and create value for shareholders will be crucial to its long-term success.