Capitol Federal Falls Despite Earnings Beat - Analyst Blog

Shares of Capitol Federal Financial, Inc. CFFN fell 1.2% despite the company's better-than-expected fiscal second-quarter 2014 results. On Apr 28, the company reported earnings per share of 14 cents, which beat the Zacks Consensus Estimate by a penny. The reported figure also compared favorably with 12 cents earned in the previous quarter.

Results benefited from a rise in net interest income and decline in both operating expenses and provision for credit losses. These were partly offset by a fall in total interest and dividend income. Further, while credit quality was a mixed bag, active capital deployment activities reflected the company's robust liquidity level.

Capitol Federal Financial's net income increased 10.5% sequentially to $19.7 million.

Quarterly Performance

Total revenue for the reported quarter came in at $77.6 million, almost flat compared with the previous quarter. However, it outpaced the Zacks Consensus Estimate of $51.0 million.

Net interest income increased 3.3% from the previous quarter to $45.7 million. The rise was mainly due to fall in interest expense, partially offset by rise in both interest and dividend income. Also, net interest margin increased 9 basis points to 2.07%.

Non-interest income increased 4.1% from the previous quarter to $5.7 million. The rise was mainly due to increase in insurance commissions, partially offset by lower retail fees and charges.

Non-interest expense decreased 4.2% from the last quarter to $21.8 million. The fall was mainly due to decline in regulatory and outside services, deposit and loan transaction costs, advertising and promotional costs as well as other non-interest expenses.

Asset Quality

Asset quality was a mixed bag during the quarter. Total nonperforming assets increased 3.2% sequentially to $32.4 million as of Mar 31, 2014.

However, provision for credit losses declined significantly from $0.5 million in the previous quarter to $0.2 million.

Capital and Profitability Ratios

Capitol Federal Financial's capital ratios were well above the required regulatory requirements. As of Mar 31, 2014, Tier 1 risk-based capital ratio was 34.6%. Total risk-based capital ratio was 34.8% and Tier 1 leverage capital ratio was 14.6%.

The company's profitability ratios were strong during the quarter. Return on average assets rose to 0.87% from 0.78% in the prior quarter. As of Mar 31, 2014, return on average common equity ratio was 5.10%, up from 4.37% in the previous quarter.

Capital Deployment Activities

Capitol Federal Financial continued with its share repurchase plan of $175.0 million, which was approved in Nov 2012. As of Mar 31, 2014, the company bought back 8.6 million shares for $102.6 million at an average price of $11.93 per share.

Since Mar 31, 2014, the company has not repurchased any shares.

Our Viewpoint

Capitol Federal Financial's solid capital position and strong profitability will expectedly act as catalysts going forward. However, a still weak interest rate scenario is likely to restrict any significant bottom-line improvement in the near term.

Currently, Capitol Federal Financial carries a Zacks Rank #3 (Hold).

Performance of Other Banks

Washington Federal Inc.'s WAFD fiscal second-quarter 2014 earnings of 38 cents per share came in line with the Zacks Consensus Estimate.

People's United Financial Inc. PBCT reported first-quarter 2014 operating earnings per share of 19 cents, which missed the Zacks Consensus Estimate by a penny.

First Niagara Financial Group Inc. FNFG reported first-quarter 2014 operating earnings of 17 cents per share, in line with the Zacks Consensus Estimate.