Capitol Federal Widens Margin as Commercial Lending Accelerates
Net interest margin expanded 7 bps to 2.31% as borrowing costs fell and commercial lending accelerated.
Capitol Federal Financial (CFFN), the Kansas-based thrift shifting toward commercial banking, increased net interest income by $1.2 million QoQ to $53.5 million, its eighth consecutive quarterly gain. Net interest margin expanded 7 bps to 2.31%, following increases of 5 bps in March and 10 bps in December, as lower average borrowings and higher-yielding commercial loans supported the spread.
The portfolio shift gathered pace. Commercial loans rose $155.2 million during the quarter, a 27% annualized rate, after increasing $39.1 million in March. One- to four-family loans declined $105.6 million, leaving total net loans up $52.6 million at $8.17 billion.
Commercial loans reached $2.47 billion, or 30% of the portfolio, compared with $2.32 billion and 29% three months earlier. Growth centered mainly on commercial real estate as Capitol Federal redirected cash from its shrinking single-family mortgage book into higher-yielding assets.
Funding trends were less supportive. Total deposits declined $73.8 million QoQ to $6.85 billion, led by certificates of deposit, while commercial-deposit growth slowed sharply. Deposit interest expense was nearly unchanged at $36.3 million as lower retail CD balances and renewal rates were offset by growth in high-yield savings accounts.
Borrowing costs provided a larger benefit, falling 4.0% QoQ to $15.4 million. The bank allowed $50 million of advances to mature, received the full-quarter benefit from an earlier $100 million runoff and refinanced $375 million of Federal Home Loan Bank debt at a 3.81% weighted rate, down from 4.36%. For the first nine months of the fiscal year, margin expanded 33 bps YoY to 2.25%.
Credit costs swung to a $433,000 provision release from a $2.4 million expense in March, primarily because updated loss-model regressions reduced reserves for commercial construction. The nine-month provision still rose to $3.0 million from $226,000 a year earlier, reflecting a $4.0 million specific allowance tied to a nonaccrual commercial relationship and continued commercial growth.
Capital returns continued at a slower pace. Capitol Federal repurchased 1.84 million shares at an average $7.73 during the quarter, down from 2.16 million shares in March, while the dividend returned to its regular $0.085 a share after the prior quarter included a $0.040 special payment. Management intends to maintain the regular dividend and pursue opportunistic repurchases.
Fee revenue helped absorb higher operating costs: noninterest income rose 22.1% QoQ to $6.7 million, supported by debit-card fees, bank-owned life-insurance income and insurance commissions, while noninterest expense increased 3.5% to $31.3 million. Efficiency improved modestly to 52.10%. Further margin progress now rests on sustaining the commercial-loan rotation while managing slower deposit growth and the rising share of high-yield savings.