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Capitol Federal Financial, Inc.’s (CFFN - Snapshot Report) fiscal fourth-quarter 2013 earnings (ended Sep 30) came in at 11 cents per share, missing the Zacks Consensus Estimate by a penny. However, this was in line with the year-ago number.

Results were adversely affected by escalating operating expenses and a substantial fall in net interest income as well as non interest income. Also, profitability ratios deteriorated during the quarter. However a better asset quality and strong capital ratios were the tailwinds for the quarter.

Capitol Federal Financial’s net income declined 10.7% sequentially to $16.1 million.

Further, for fiscal 2013, net income was $69.3 million or 48 cents per share, decreasing from $74.5 million or 47 cents per share in fiscal 2012. Earnings missed the Zacks Consensus Estimate of 49 cents per share.

Performance in Detail

Capitol Federal Financial’s total revenue for the reported quarter came in at $78 million, down 1.9% sequentially. However, total revenue outpaced the Zacks Consensus Estimate of $50.0 million.

For fiscal 2013, total revenue was $321.8 million, decreasing 8.6% from the prior-year figure. Nevertheless, it significantly surpassed the Zacks Consensus Estimate of $204.0 million.

Net interest income declined 1.3% sequentially to $43.8 million. The dip was mainly driven by lower interest and dividend income, partially offset by falling interest expense. However, net interest margin was 1.96%, in line with the prior-quarter.

Non-interest income decreased 1.1% sequentially to $5.8 million. The dip was primarily due to a fall in insurance commissions and loan fees.

Non-interest expense rose to 7.6% sequentially to $25.4 million. The rise was mainly due to an increase in personnel expenses, occupancy costs and deposit and loan transaction costs. The company expects personnel expenses to decrease in fiscal 2014 by approximately $7.7 million along with a decrease in advertising and promotion expense, partially offset by an increase in payroll expense and expenses related to the technology platform.

The efficiency ratio rose to 51.22% from 46.99% recorded in the prior quarter. The rise indicates deterioration in profitability.

Asset Quality

Asset quality exhibited a marked improvement during the quarter with total nonperforming assets decreasing to $30.3 million as of Sep 30, 2013, compared with $31.9 million as of Jun 30, 2013.

Likewise, provision for credit losses declined 37.5% from the prior quarter to $0.5 million. Moreover, allowance for credit losses as a percentage of total loans came in at 0.15% as of Sep 30, 2013, compared with 0.16% as of Jun 30, 2013.

Loans and Deposits

As of Sep 30, 2013, Capitol Federal Financial’s total loans were $5.9 billion, up 2.0% from the previous quarter.

As of Sep 30, 2013, total deposits stood at $4.6 billion, in line with the prior quarter.

Capital Ratios

The company’s capital ratios remained strong in the quarter. As of Sep 30, 2013, Tier 1 leverage ratio was 14.8% and Tier 1 risk based capital ratio was 35.6%. Both the ratios are well above the regulatory minimum standards.

Profitability Ratios

Capitol Federal Financial’s profitability ratios deteriorated during the quarter. The return on average assets was 0.70%, compared with 0.78% as of Jun 30, 2012.

As of Sep 30, 2013, ratio of return on average equity came in at 3.94, down from 4.39 as of Jun 30, 2012.

Capital Deployment Activities

Capitol Federal Financial continues with its share repurchase plan of $175.0 million, approved in Nov 2012. As of Sep 30, 2013, the company repurchased 3,826,644 shares for $45.4 million at an average price of $11.85 per share.

Concurrent with the earnings release, Capitol Federal Financial announced a special year-end cash dividend of 18 cents per share to be paid on Dec 6 to shareholders of record as of Nov 22.

For fiscal 2014, the company intends to continue with the 100% payout ratio. The payout is expected to be in the form of regular quarterly cash dividends of 7.5 cents per share, totaling 30 cents for the year and a special year-end cash dividend, which will be equal to the surplus earnings in fiscal 2014, after the payment of regular quarterly cash dividends during fiscal 2014.

Performance of Other Savings and Loan Institutions

Washington Federal Inc.’s (WAFD - Analyst Report) fiscal fourth-quarter 2013 earnings (ended Sep 30) came in at 41 cents per share, beating the Zacks Consensus Estimate by a nickel. Also, this compared favorably with 33 cents earned in the year-ago quarter.

People's United Financial Inc. (PBCT - Analyst Report) reported third-quarter 2013 operating earnings per share of 20 cents, missing the Zacks Consensus Estimate by a penny. However, earnings compared favorably with 19 cents per share reported in the prior-year quarter.

New York Community Bancorp, Inc. (NYCB - Snapshot Report) reported third-quarter 2013 cash earnings of 28 cents per share, outpacing the Zacks Consensus by two cents. However, results were below the prior-year quarter figure of 32 cents.

Our Viewpoint

Capitol Federal Financial’s conservative credit culture and solid capital position are expected to act as tailwinds. However, a still weak interest rate scenario is expected to deter any significant bottom-line improvement in the near term.

Currently, the company carries a Zacks Rank #3 (Hold).

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