Capitol Federal Financial, Inc. (NASDAQ: CFFN) is a holding company for Capitol Federal Savings Bank, one of the largest residential lenders in the state of Kansas. With a rich history spanning over 130 years, Capitol Federal has weathered various economic cycles, adapting its strategies to capitalize on emerging opportunities while maintaining its commitment to prudent risk management.
Business Overview: A Solid Foundation Built on Steady Growth
Capitol Federal Financial's roots trace back to 1893 when it was founded as Capitol Building and Loan Association in Topeka, Kansas. The company has since evolved into a holding company structure, formed in 2010 as the parent company of Capitol Federal Savings Bank. In 2002, the bank underwent a significant transformation, converting from a mutual savings and loan association to a stock savings bank and becoming a public company traded on the NASDAQ exchange. This move provided the bank with additional capital to support its continued growth and expansion.
Throughout its history, Capitol Federal has demonstrated resilience in the face of economic challenges. During the financial crisis of the early 2000s, the bank maintained a strong capital position and credit quality, avoiding the subprime mortgage issues that plagued many other financial institutions. This allowed Capitol Federal to continue focusing on its core business of residential mortgage lending and deposit gathering.
In recent years, the company has faced new challenges, including a significant securities strategy implemented in 2023. This strategy involved selling a large portion of the company's securities portfolio, resulting in substantial losses that negatively impacted the financial results for that fiscal year. The management team has since been working to navigate the aftermath of this strategic decision and improve the company's earnings.
Despite these challenges, Capitol Federal has maintained its position as one of the largest residential lenders in Kansas, while also diversifying its business by growing its commercial lending activities. This diversification has helped offset the slowdown in residential mortgage originations and demonstrates the company's ability to adapt to changing market conditions.
Financial Performance: Weathering the Storm
Capitol Federal's financial performance has been relatively resilient in recent years, despite facing headwinds from the pandemic, rising interest rates, and intense competition in the mortgage lending industry. For the fiscal year ended September 30, 2024, the company reported net income of $38.0 million, a significant improvement from the previous year's net loss of $101.7 million.
The turnaround in Capitol Federal's earnings was largely attributed to a decrease in non-interest expenses, a reduction in the provision for credit losses, and a strong rebound in net interest income. The company's net interest margin improved to 1.86% in the first quarter of fiscal 2025, up from 1.71% in the prior-year period, driven by higher yields on loans and securities.
For the quarter ended December 31, 2024, Capitol Federal reported net income of $15.4 million, or $0.12 per share, compared to net income of $2.5 million, or $0.02 per share, in the prior year quarter. This improved financial performance was driven by higher net interest income, which increased 15 basis points to 1.86% due to growth in the commercial loan portfolio and higher yields on loans and securities. The company's efficiency ratio also improved to 57.86% in the current quarter, compared to 92.86% in the prior year quarter, excluding the impact of the securities strategy.
Quarterly revenue for the period ended December 31, 2024, stood at $97.6 million. The company's cash position as of the same date was $170.3 million, providing a solid liquidity buffer.
Liquidity and Capital Position: Maintaining a Solid Foundation
Capitol Federal has maintained a strong balance sheet, with a high level of liquidity and a well-capitalized position. As of December 31, 2024, the company reported total assets of $9.54 billion and a loan portfolio of $7.95 billion, net of allowance for credit losses. The bank's community bank leverage ratio, a key regulatory measure of capital adequacy, stood at 9.4%, well above the 9.0% minimum requirement for well-capitalized institutions.
The company's ample liquidity position is supported by a diversified funding base, including retail and commercial deposits, as well as access to borrowings from the Federal Home Loan Bank of Topeka. As of the end of the first quarter of fiscal 2025, Capitol Federal had an estimated $2.91 billion in additional liquidity available, providing a robust cushion to weather potential market disruptions.
Loan Portfolio: Diversification and Growth
Capitol Federal's loan portfolio is comprised of three main segments: one- to four-family loans, commercial loans, and consumer loans. As of December 31, 2024, the one- to four-family loan portfolio remained the largest segment, accounting for 78% of total loans receivable. This portfolio includes originated loans, as well as correspondent purchased and bulk purchased loans. The originated one- to four-family loan portfolio had a weighted average rate of 3.64% and a weighted average credit score of 771.
The commercial loan portfolio has been a growing focus for the bank, accounting for 21% of total loans receivable as of December 31, 2024. This portfolio includes commercial real estate loans with a weighted average rate of 5.48% and a weighted average loan-to-value ratio of 61.4%, commercial and industrial loans with a weighted average rate of 6.66%, and commercial construction loans with a weighted average rate of 6.14%.
The consumer loan portfolio, which includes home equity loans and other consumer loans, made up the remaining 1% of total loans receivable. Home equity loans had a weighted average rate of 8.31%, while other consumer loans had a weighted average rate of 5.77%.
Deposit Base: A Strong Foundation
Capitol Federal's deposit portfolio is primarily composed of retail deposits, including checking, savings, money market, and certificates of deposit accounts. As of December 31, 2024, retail deposits made up 93.6% of total deposits, with the remaining 5.5% in commercial deposits and 0.9% in public unit certificates of deposit. The bank has focused on growing its deposit base, particularly through its high-yield savings account offering, which had a balance of $171.7 million and a yield of 4.30% as of December 31, 2024.
Risks and Challenges: Navigating a Dynamic Landscape
While Capitol Federal has demonstrated resilience, the company faces a range of risks and challenges that could impact its future performance. One such risk is the highly competitive nature of the banking industry, particularly in the mortgage lending segment, which has seen increased pressure on net interest margins and loan volumes.
Additionally, the company's regional concentration in Kansas and Missouri exposes it to potential economic downturns or natural disasters in its core markets. Capitol Federal is also subject to extensive regulatory oversight, which requires significant investments in compliance and risk management practices.
Guidance and Outlook: Adapting to a Changing Environment
Capitol Federal has provided guidance for the remainder of fiscal 2025, projecting continued growth in its commercial loan portfolio and a focus on maintaining its strong liquidity position. The company is also investing in its digital banking capabilities to enhance the customer experience and drive operational efficiencies.
During fiscal year 2024, the bank suspended its one- to four-family correspondent lending channels for the foreseeable future due to the challenging housing market and limited housing inventory. This decision reflects the company's ability to adapt its strategy in response to market conditions.
Despite the challenges facing the industry, Capitol Federal's management team has demonstrated a track record of prudent decision-making and adaptability. The company's diversified revenue streams, robust capital position, and disciplined risk management practices position it well to navigate the evolving landscape and capitalize on future growth opportunities.
Conclusion: A Resilient Institution Poised for the Future
Capitol Federal Financial has a rich history of serving its local communities, weathering economic cycles, and adapting its strategies to capitalize on emerging trends. With a focus on disciplined lending practices, diversified revenue streams, and a strong balance sheet, the company is well-positioned to navigate the dynamic banking landscape and continue delivering value to its shareholders. As Capitol Federal navigates the evolving challenges facing the industry, investors will closely monitor the company's ability to maintain its competitive edge and drive sustainable growth in its core markets of Kansas and Missouri.