The end of the refinancing boom wreaked havoc on Capitol Federal Financial's earnings last quarter, but neither its top executives nor its investors are panicking.
The $8.6 billion-asset Topeka, Kan., thrift company is planning no changes in its business strategy, preferring to ride out the period of low interest rates and hope that rates rise before it runs out of the capital that has enabled it to pay high dividends.
Meanwhile, investors are not bailing on its stock, even though earnings declined by 88% last quarter and 42% for its fiscal year, which ended Sept. 30.
John B. Dicus, Capitol's president and chief executive officer, said that it is still covering its expenses and meeting its obligations to shareholders, so it sees no reason to alter its strategy of primarily making home loans.
"We didn't lose money; we just didn't make as much." he said. "We've continued to provide a return to the shareholders."
Capitol essentially made a bad bet on interest rates. When it went public four and a half years ago, it had a high capital-to-assets ratio, and it put some of its capital into mortgage-backed securities. It also borrowed from the Federal Home Loan Bank to have a good base of funding.
The loans and securities repriced as interest rates fell, but the Home Loan Bank advances held steady, so its net interest margin dropped by 82 basis points during the last fiscal year, to 1.34%.
Still, it is staying its course, and analysts say that is a wise decision. Capitol is better off using its capital to pay dividends and wait for rates to rise, because prepaying the Home Loan Bank advances would cost more, according to analysts.
One reason its stock has held up is its relatively high dividend.
On Wednesday, the same day Capitol reported its earnings, it announced it would pay $2 a share in dividends for the fiscal year that ended Sept. 30, the same rate it paid for the previous year.
"As long as they keep paying the dividend, they're still an attractive investment," said Albert H. Savastano, a New York analyst for First Tennessee National Corp.'s FTN Midwest Research.
The market has supported his assertion. Capitol's stock closed at $31.82 a share on Oct. 28. A day later it announced it would pay a 50-cent dividend for the fiscal fourth quarter, and by Oct. 31 the stock had risen by nearly 17%, closing at $37.01. It was trading at $34.71 late Monday.
Ronald J. Peterson, a Chicago analyst with Moors & Cabot Inc. of Boston, said Capitol has enough money to keep paying the same dividend for two years.
Capitol is not alone among thrifts suffering from lower earnings and compressed margins. Judith A. Gonsch, chief financial officer at $258 million-asset Prospect Federal Saving Bank in Worth, Ill., said its earnings would drop by half from last year, when it made $2.7 million.
And earnings at $7.5 billion-asset Washington Federal Inc. in Seattle remained flat, at around $146 million, in its fiscal year that ended Sept. 30.
Both companies have sold off large chunks of their mortgage portfolios and reinvested in short-term investments, such as federal funds.
"We have opted not to hold on to 30-year or 15-year loans because we don't want to hold them at low rates," Ms. Gonsch said.
