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Analyst Research Report

Capitol Federal Financial, Inc.Company ProfileFigures in U.S. Dollars

Key DataTickerCFFNMajor IndustryFinancialSectorSavings and LoansCountryUnited StatesCurrencyU.S. DollarsFiscal Year EndsDecember 31Employees676ExchangesNYSEShare TypeCommonMarket Capitalization2.09BShares Outstanding137.98MBeta0.55Below 52-Week High-10.21%50-Day Moving Average16.01200-Day Moving Average14.71Short Ratio11.00Forward P/E23.5

Investment ThesisIllusory Dividend Yield, Substantial Dividend Income: Management has expressed the desire to continue to distribute 100% of net income for years to come and continue returning excess capital to shareholders through biannual ‘special dividends’. The resulting 6% dividend yield is often overlooked by financial data software providers. Ceteris paribus, these special dividends are calculated as sustainable for at least 27 years given their current capital levels and the regulatory requirements for well-capitalized institutions.

Pristine Credit and Asset Quality: Non-performing loans as a percentage of total loans averaged .44% over the last 5 years while net charge-offs as a percentage of average loans averaged .03%. Industry averages were 1.20% and .38% during the same period, respectively. The average credit score for originated and refinanced loans has been 767 for the past two years with LTVs averaging 75%.

Improving ROAE and ROAA year-over-year: As CFFN increases earnings marginally and returns excess capital to shareholder’s, ROAE and ROAE will continue to improve steadfast relative to many other mature institutions who have seen flatter ROAE levels. We have determined the institution remains on track to achieve the industry standard 1% ROAA by 2021.

Efficiency Ratio: The homogenous loan structure of SFR RE, sound expense control, and technology-driven efficiencies have contributed to CFFN’s exceptional efficiency ratio compared to peers. CFFN reported an efficiency ratio under 44% for the FYE 2016 and has consistently outperformed its peer group by 10-20%.

Loan Portfolio Poised to do Well in Rising Rate Environment: As a result of well managed interest rate risk, management will continue to roll repaid loan and security principal into higher yielding assets to the tune of $1.5 billion annually. In the historically low interest rate environment CFFN advantageously lengthened the maturities of CDs and FHLB advances to keep the cost of funds lower, for longer, as rates are projected to continue rising.

Chairman, CEO, and PresidentJohn B. Dicus

Executive VP and CFOKent G. Townsend

Executive VP and CLORick C. Jackson

Recommendation:Buy

Current Price:$15.30 (as of 2/17/2017)

Target Price:$18.85 (+23%)

YTD Stock History

Undervalued Residential Lender well-positioned for rising rate environment, regulatory rollback


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Business Description Capitol Federal Financial is a savings and loan holding company. Through its subsidiary, Capitol Federal Savings Bank, the company provides a range of financial services as a regional residential lending bank with over 120 years of continuous service to the mid-west region. The company has just under $10B in total assets and is headquartered in Topeka, KS.

Private to public In March 1999, Capitol Federal was transformed from a privately-held mutual savings association into a partially-public stock savings bank through a capital restructuring plan. In a first-step thrift conversion, a mutual institution that has historically been owned by its depositors becomes a stockholder owned corporation and can raise capital through an IPO. In December 2010, Capitol Federal Financial completed the second step of its conversion. Capitol Federal Financial, which owned 100% of the bank, was succeeded by Capitol Federal Financial, Inc. As part of the corporate reorganization, Capitol Federal Savings Bank MHC’s ownership interest of Capitol Federal Financial was sold in a public stock offering. The net proceeds from the stock offering were $1.13 billion, of which 50%, or $567.4 million, was contributed to the Bank as a capital contribution, while the rest remained at Capitol Federal Financial, Inc. The capital from the proceeds has contributed to the bank being considered well capitalized, and has allowed Capitol Federal to pay out dividends in excess of net income every year since 2012.

Business Capitol Federal accepts retail deposits from the general public and uses the inflows to originate and purchase a variety of loans including one to four family, consumer and construction loans, and commercial real estate loans. The company also invests in a portfolio of mortgage backed securities, investment securities and Federal Home Loan Bank stock. Capitol Federal’s results of operations are primarily dependent on net interest income, which is the difference between the interest earned on loans, MBS, investment securities, and cash, and the interest paid on deposits and borrowings.

Shareholder base Per Nasdaq, Institutional and Mutual Fund ownership account for 79% and 49% respectively, with the Insider ownership making up 8% of the shares outstanding. Institutional ownership was fairly confined with the Top 10 Institutional Holders owning almost 59% of Capitol Federal’s outstanding shares. In the last six months, 94 institutions increased their position, while 55 decreased for a net change of a positive 1.7m shares. Also, no recent significant insider trading was completed by management that might suggest the company is over or undervalued.

Market area Capitol Federal currently has a network of 47 bank branches in two states, Kansas and Missouri, but primarily serves the major metropolitan areas of the state of Kansas. While the bank originates most of its mortgage loans in Kansas (57%) and Missouri (19%), they also purchase loans on a loan by loan basis from a select group of correspondent lenders. This enables the bank to attain geographic diversification in its loan portfolio giving the company relationships in 28 states and the District of Columbia. However, of the 28 states only five states represent over 2% of the company’s overall loan portfolio, thus while the company’s business is spread throughout the country, it is still very concentrated and subject to economic conditions in a relatively small area.

Corporate strategy Capitol Federal’s current corporate strategy is to primarily use low rate retail deposits and to a lesser extent borrowings to build a safe, strong, and low risk loan portfolio consisting mostly of one to four family mortgage loans.

Source of Funds Deposits (67% of interest bearing liabilities, only 35% of interest expense) The bank relies on deposits as the main source of funds for its investments, representing a majority of Capitol Federal’s interest-bearing liabilities. Deposits come into the bank in the form of savings accounts, money market accounts, checking accounts and CDs. The company also uses brokered and public unit deposits, which currently make up 7% of total deposits. The majority of the retail deposits have a stated maturity of less than two years, with the average rate of .8%. Deposits are one of the main ways the bank can offset interest rate risk in the portfolio. Overall deposits into the bank have increased almost 11% since 2014, which provides the company with a cheaper source of funds than borrowings, and thus increases the overall net interest margin.

Borrowings / repurchase agreements (33% of interest bearing liabilities, 65% interest ex) Borrowings, which make up around 31% of the company’s interest-bearing liabilities, are used when the company desires additional capacity to fund loan demand or when they are used to help Capitol Federal meet its asset and liability management objectives. Historically, borrowings have consisted of Federal Home Loan Bank (FHLB) advances, which are obtained at a fixed rate with no embedded options. The current effective rate for the FHLB advances equates to 2.24%, with the weighted average maturity of around three years. The company’s liabilities also consist of repurchase agreements amounting to $200m or around 2% of total assets. These are paid at an average rate of 2.94%. Borrowings are down over 28% in the last three years, which reflects Capitol Federals strategy to decrease higher cost borrowings in favor of lower cost Deposits.


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Source of Revenue Loan portfolio (75% of company’s revenue) One to four family: Capitol Federals primary lending emphasis is the origination and purchase of home mortgage loans on residential properties. This type of loan makes up 96% of the bank’s loan portfolio with an average yield of 3.56%. Of these loans, 36% were purchased, while the rest were originated by the bank. Normally, the company pays a premium of .5% to 1% of the loan balance to purchase these loans along with a fee to service the loan. Purchased loans were the primary reason the banks one to four family loan portfolio grew at a 5% rate in the past year.

Commercial loans: While only making up a little over 2% of Capitol Federal’s overall loan portfolio commercial loans are the fastest growing loan segment at the bank and grew at a year over year rate of 27% in 2016. Commercial loans carry a higher average yield of 4.15%, versus home loans and thus increase the overall interest rate spread. The bank has stated that they look for the current commercial loan growth pace to continue into the future.

Consumer loans: Make up around 2% of the company’s overall loan portfolio, with a majority consisting of home equity loans and lines of credit (97%), but also include home improvement loans and auto loans. All consumer loans are originated in the banks market areas as the company believes offering consumer loans helps to expand and create stronger customer relationships. These loans typically have shorter terms to maturity and currently have an average yield of 5%.

Investments (14% of company’s revenue) Capital Federals investment portfolio primarily consists of three classes of investments held at relatively short term maturities. Investment securities like debentures issued by government sponsored entities and non-taxable municipal bonds make up 20% of the investment portfolio and carry an average yield of 1.2%. Mortgage-backed securities make up a majority with 65% of the investment portfolio and provide an average yield of 2.19%. The rest of the portfolio was held in cash and cash equivalents that consist of an average rate of .49%. The overall portfolio declined significantly, down 32% year over year as the company moved funds to higher yielding loans.

FHLB stock (4% of company’s revenue) As a member of the Federal Home Loan Bank system that allows the company to borrow FHLB advances, Capitol Federal is required to purchase and maintain capital stock in FHLB. As of year-end 2016 the bank had a balance of 110m in FHLB stock, and the stock paid a dividend of around 6%. FHLB stock held decreased 27% in 2016 as Capitol Federal moved the money to fund loans.

Non-Interest Income (7% of the company’s revenue) Non-Interest income consists of Retail fees and charges (64%), income from bank owned life insurance (15%), and other income (22%). This income was up 10%, mainly due to a purchase of new bank-owned life insurance, and receipt of death benefits. Management admits this is not a big source of revenue and is driven by what happens on the liability side of the balance sheet.

Industry Overview Industry information and expected growth Per IBIS, the Savings Banks and Thrifts industry in the United States is made up of 959 institutions and earns $45.9 billion in revenues with 1.4% expected annual growth over the next five years. No major players dominate the market due to the industries regional or local structure. In terms of product and services mix, 43% of revenues originate from residential mortgages and 31.4% originate from “Other” which largely includes deposit account services, unsecured loans, bank service or investment management fees, financing for securities, brokering, and dealing products.

Projected economic growth According to the International Monetary Fund, the new administration in America should boost economic growth as the group believes the U.S. economy will grow at 2.3% in 2017, and 2.5% in 2018, up from 1.6% the previous year. While national economic growth does affect bank revenues, the economic growth in the state of Kansas, plays a much larger role. Per the department of labor, the Kansas unemployment rate in December was down .01% to 4.2% compared to 4.7% nationwide. The overall construction outlook for the Kansas City metro area, which is one of Capitol Federals biggest markets, also looks positive. The FMI construction outlook expects construction to grow at 6.1% over the next 5 years, which is higher than the national average of 3.7%. This growth should benefit Capitol Federal revenues as long as they can continue to capture a significant share of this market. Management also expects the local real estate market to remain strong and property values to continue to increase modestly over the next two to three years.

Expected interest rates While a faster growing economy and higher construction growth lead to an increase in the company’s loan portfolio, interest rates play a major role in Capitol Federals net income. Mortgage rates have held fairly flat since the election in November as it seems the market is waiting to see what the new administration and the Fed will do in 2017. If the administration implements policies that lead to higher inflation through higher earnings and lower employment, you could see the fed increase the fed funds rate to try to keep inflation in check. Currently, while most services are predicting the fed to raise rates twice in 2017, the major mortgage agencies are predicting rates to remain fairly flat. With Fannie Mae predicting 4.3% by the end of the year, and only a slight bump from there in 2018.


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Credit Score LTVOne to Four Family - Originated 765 65%One to Four Family - Purchased 753 64%Consumer - Home Equity 755 20%

764 64%

Competitive Positioning Deep roots in local communities Since opening the company’s first branch in 1950, Capitol Federal has been a trusted community oriented bank with longstanding experience in residential lending within the local Kansas communities in which it operates. Capitol Federal relies on its well-established retail banking network along with its reputation for financial strength and customer service to attract and retain customers that drive both the main source of funds and revenues. The bank currently ranks third in deposits in the state of Kansas, and has consistently been one of the top one to four family lenders in regards to mortgage loan origination volume within the state.

Competitive pricing strategy Capitol Federal’s pricing strategy for interest rates on one to four family loan products include reviewing the secondary market prices as well as researching and comparing local competitor pricing for each lending market. This ensures the bank’s interest rates are competitive, and the company also underwrites loans in-house which controls risk, and decreases customer fees. This serves as an advantage over other lenders who don’t underwrite the loans they generate.

Low risk loan portfolio leads to impeccable credit quality and a safe banking partner The Bank's traditional underwriting guidelines, along with its lower risk loan portfolio, have provided Capitol Federal with a safe and strong loan portfolio. The company’s loan portfolio consists mostly of one to four family mortgage applicants that have an average credit score of 764. This is significantly higher than the 723 average credit score of home buyer applicants across the country last year (source: Elli Mae). This allows the company to hold an “allowance for credit losses” that is lower than peers, thus providing more capital for company use. In the 2016 fiscal year the bank’s allowance for credit losses to net charge-offs was 55x, thus the company had 55 years’ worth of reserves based on the losses that actually occurred. Capitol Federals non-performing assets to total assets are at .35%, which is almost three times lower than the average for the top 100 banks in the U.S. The banks delinquency rates are also well below the national average. Capitol Federal’s delinquent mortgage loans as of 2016 year end were at .33% of total loans, compared to a 4.3% delinquency rate in all commercial banks(source: St. Louis Federal Reserve).

Maintaining “Community Bank” status, staying under 10 billion in assets Banks that cross and remain above 10 Billion in assets for four straight quarters are no longer considered community banks, but rather midsized institutions. Going above this threshold that was created with the Dodd-Frank Wall Street reform triggers new regulatory scrutiny and a new powerful regulator, CFPB (Consumer Financial Protection Bureau). This forces banks to assess and enhance their current risk management and compliance infrastructure, which therefore increases expenses. Institutions above $10B must also conduct an annual stress test, are subject to limits on the interchange fees, and also incur higher regulatory assessment fees. Due to these consequences, Capitol Federal is currently content on staying below $10 Billion in assets, with assets currently sitting at $9.14B. The company actively manages its balance sheet and uses different techniques like paying additional dividends, to keep below this mark. However, this also puts a limit on the banks’ ability to grow and has led to the company’s current strategy of selling off lower yielding investment assets and MBS to increase its higher yielding loan portfolio, thus increasing profits while staying below the $10B mark.

Other Impactful Information Banking regulatory environment & outlook Cause for investor concern can stem from continuing uncertainty over the final shape of post-crisis financial regulation. Rising political uncertainty in developed economies has increased the volatility and unpredictability of the macro-policy environment. The points below best summarize the regulatory subject matter that we believe will have the most direct impact on our outlook and valuation for Capitol Federal.

Shakeup in agency leadership: By January 2018, President Trump will have the opportunity to fill the chair/head positions at the Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of Currency (OCC), SEC, and CFTC, as well as vice chair positions at the FRB and FDIC, with the director of the Consumer Financial Protection Bureau’s term expiring later in 2018. These policymakers exert significant influence on the agencies through the priorities they establish and the guidance they propose.

The Durbin Amendment: Part of the 2010 Dodd-Frank law included an amendment that sharply lowered debit card fees that a store processing a debit card transaction would pay a bank when a customer makes a purchase. Before the amendment, retailers paid an average of 44 cents in “interchange fees” to banks for a typical debit card transaction. According to the Federal Reserve the average debit card transaction was $38 at the time of ruling. Because the Durbin Amendment exempts financial institutions with less than $10 billion in assets, such as Capitol Federal, most community banks and credit unions are able to generate additional non-interest income without additional regulation. At nearly $15 million, “Retail fees and charges” accounted for 64% of the bank’s non-interest income in 2016. Under Durbin the maximum interchange fee an issuer can receive from a single debit card transaction is 21 cents plus 5 basis points of the transaction amount. Given a $38 typical transaction amount, the maximum fee is about 24 cents or 45% less than the average cost before the law took effect.

*Source: St. Louis Federal Reserve

“Dodd Frank is a disaster. We're going to be doing a big number on Dodd-Frank."

- President Donald Trump

Capitol Federal’s Regulators


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Agency Position Status

Treasury Department Treasury SecretaryPresidential appointment (Steven Mnuchin)

Federal Reserve Board (FRB)

ChairChair Yellen’s term expires in February 2018

Federal Deposit Insurance Corporation (FDIC)

ChairChairman Gruenberg’s term expires in November 2017

Office of the Comptroller of the Currency (OCC)

Comptroller of the Currency

Comptroller Curry’s term expires in March 2017

Consumer Financial Protection Bureau (CFPB)

DirectorDirector Cordray’s term expires in July 2018

Durbin Amendment Continued: The legislation was built on the premise that cutting retailers’ cost would lower prices for consumers yet it remains unclear whether these savings have actually been passed on to consumers. The Durbin Amendment benefited many larger merchants, selling big-ticket items, by cutting the average swipe fee they pay per transaction almost in half. State bankers associations representing thousands of local banks recently wrote to Congress to support repealing Durbin citing that the rule hampers their ability to serve their communities and small business customers. House Financial Services Committee Chairman Jeb Hensarling has included a proposal to repeal the Durbin amendment in the Financial CHOICE Act. The Financial CHOICE act: Prior to the election in November there was little interest in the broad-based legislation known as the Financial CHOICE Act. Since November the proposal has been gaining a huge amount of traction and is currently at the forefront of the Trump administrations priorities. According to a comprehensive summary by the House Committee on Financial Services, banking organizations that maintain a leverage ratio of at least 10 percent and have a composite CAMELS rating of 1 or 2 may elect to be exempted from a number of regulatory requirements, including the Basel III capital and liquidity standards. The Republican plan thus offers financial institutions of all shapes and sizes a Dodd-Frank “off-ramp”. This freedom from an overly burdensome regulatory environment in exchange for maintaining significantly higher capital than is required by current law and regulation will have a direct impact on Capitol Federal’s ability to grow in size at a healthy rate as well as reduce regulatory operating expenses considerably going forward.

Investment Summary We issue a BUY rating for Capitol Federal with a 12-Month target price of $18.85. The bank’s reliable dividend along with its strong balance sheet, full of excess cash, gives the stock a 23% upside from its current price.

Capitol Federal, due to restrictions to growth, looks more to provide value through capital distributions versus price appreciation. Thus while the company provides good returns with dividends playing an important role, they would be classified as more of a value stock instead of a growth stock.

Investment Drivers Strong and reliable dividends: While many banks are focused on creating shareholder value through earnings and growth, Capitol Federal is operating with a goal of creating a steady earnings stream and reliable shareholder capital distributions. The bank is currently committed to paying out at least 100% of the company’s net income, and has an average payout ratio of 151% in the last five years. In 2016, the company paid out 133% of its net income, and had a 12 month trailing dividend yield of nearly 6%. This yield is almost twice the average of both the peer group median dividend yield at 2.37%, and the industry average for a stable savings and loan, which is typically under 3%. Due to the company’s strong capital positioning the bank should be able to maintain this in the short term. Important to note is that while the company may have the additional capital to maintain or even increase the dividend, the bank is still restricted to what regulators allow and regulators like to keep capital at higher levels.

Potential for the company to repurchase shares: Since the bank went public in 2010, $368m worth of shares have been repurchased, and in 2015 the bank announced a new repurchase plan for up to $70.0 million of common stock. Capitol Federal anticipates making decisions on share repurchases based on available liquidity and market conditions. The Company did not repurchase any shares during fiscal year 2016, but with the company’s strong capital position, they could use the excess capital to fulfill the new repurchase plan or even increase purchases in the future.

Capital adequacy: Capitol Federal is subject to various regulatory and capital requirements, sometimes referred to as Basel III rules, administered by the federal banking agencies. The bank is currently well above the regulatory capital ratios, with its Tier 1 Leverage ratio sitting at 12.3% versus the “well capitalized” limit of 5%. The company’s CET1 ratio is also a shining star at 28.5%, versus the average rate of 11.7% across the country’s biggest banks. Keeping the bank well capitalized and maintaining these requirements gives the bank the ability to absorb losses, while also allowing Cap Fed to continue to pay out the company’s dividend and provide the potential to buy back shares. Both actions are major benefits to shareholders. The company could also choose to distribute this excess capital to shareholders in various ways. With the bank continuing to keep average assets capped due to regulation, this gives the company around $700-800m in excess capital to use until they approach any of the current regulatory capital ratios. This also positions the company to switch to a high capital plan under the Financial Choice Act.

Continued change in assets from lower yield securities to higher yield commercial loans: During the current fiscal year, management continued the strategy of moving cash flows from the relatively lower yield securities portfolio to higher yield commercial loans resulting in a $401.1 million decrease in the securities portfolio and a $333.0 million increase in the loans receivable portfolio. Using this strategy increases the net interest revenue as commercial loans carry over a 2% premium rate compared to the banks investments. Continuing this effort is essential to the company’s revenue growth in the current regulatory environment.


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Daily leverage strategy provides extra income: In addition to traditional spread lending, Capitol Federal augments its revenue through a DLS by which the company borrows on its $2.1 billion FHLB LOC and deposit excess proceeds at the Fed to earn interest greater than the interest paid on the line. The bank is also required to purchase certain levels of FHLB stock which currently yields a 6% dividend, payable quarterly. Management states that they expect to continue this strategy in fiscal year 2017. Net income attributable to the DLS was $2.3 million during the 2016 fiscal year, compared to $2.8 million for the prior fiscal year due to the rate on the FHLB LOC increasing more than the yield earned on cash balances held at the FRB. Because the bank puts the leverage strategy on each first business day of each quarter and pays it off the last business day of each quarter, Capitol Federal was able to have an average balance sheet asset size of $11.3 billion, while still ending the quarter under the regulatory threshold of $10 billion. The DLS strategy does generate additional net income, thereby increasing shareholder dividend payout, but consequently has a negative impact on net interest margin, decreasing the margin by .21% last quarter. This strategy is currently profitable but that may not always be the case, as this revenue is dependent on the spread between LIBOR and the Fed Funds Rate.

Focus on lowering the banks effective borrowing rate for source of funds: In an effort to increase the net interest margin and thus profitability, Capitol Federal has instituted a strategy of increasing Deposits and decreasing borrowings as a source of funds. Currently, due to significantly lower interest rates, deposits make up two thirds of the banks interest bearing liabilities, but only a little over a third of the banks interest expense. Moving away from higher interest expense borrowings, should increase the bank’s net interest margin, making the company more profitable.

Attractive company after mutual to IPO could lead to acquisition: Given the nature of the industry and the number of consolidations that take place we believe we can rationalize situations in which CFFN could acquire another bank or consider being sold outright. In an open interview management expressed interest in the notion that they would be open to sale at a price in the best interest of the shareholder. They further went on to explain that while they are not actively pursuing banks to acquire, it would take $3-4 billion in additional assets minimum to clear regulatory hurdles and breakeven from a profit standpoint if the regulatory environment is not overhauled in their favor. The current excess capital on the balance sheet provides maneuverability in the event an attractive opportunity presents itself. Meanwhile, the continued, gradual payout of that excess capital will increasingly make the bank more attractive as an acquisition target over time.

Investment Uncertainties Low diversification within the bank’s loan portfolio and geographic locations While Capitol Federal does offer a range of loans across over half of the country, a large portion of the bank revenues are due to one to four family home mortgages within a few communities in and around the state of Kansas. This lack of diversification increases risks as the company is more reliant on the economic and real estate growth in these areas. Current growth in these communities has remained consistent with the national average, but that may not always be the case. Recently, the company has slowly begun to diversify its loan portfolio with commercial loan growth at nearly 28% last year, compared to 4.6% in real estate. However, the company has a long way to go for its loan portfolio to be considered diversified.

Revenue vulnerability may occur with a quick jump in interest rates The company’s current balance of loans centers on mortgage loans with longer term maturities. This leaves the company more vulnerable to a downturn in profits if there happens to be a quick spike in interest rates. The company has almost $4.8 Billion or 72% of its real estate loans with at least 15 years to maturity, which have an average rate of 3.61%. However, due to turnover and refinances the WAL or average life of these loans currently sits at 6 years. Granted a quick spike may also increase the WAL as individuals may choose to stay in their homes longer to avoid a jump in their mortgage payments. This would still leave the bank in a tough spot with a quickly declining net interest margin, as most of the banks source of funds has maturities of less than 2 years. This leads to the significance of the banks well capitalized balance sheet, which would allow the company to weather the storm until its mortgage loan portfolio was able to turnover.

Flattening yield curve impacts the interest rate spread and affects overall profitability Per management, a flattening yield curve would be the worst environment for the bank to be in as the company borrows at the short end of the yield curve and lends at the long end. When the yield curve flattens the spread between interest-earning assets and interest-bearing liabilities is compressed or diminished and would likely negatively impact the bank's net interest income. A flattening yield curve affects Capitol Federal more than other banks because of a higher percentage of longer term fixed rate home loans. While this type of portfolio has less credit risk compared to other banks, it also tends to have a smaller interest rate spread, due to mortgage loans typically having lower interest rates than commercial or personal loans. Conversely, a steeper yield curve, meaning long-term interest rates are significantly higher than short-term interest rates, would provide the Bank with a better opportunity to increase net interest income. This also points to the significance of the company’s excess capital, allowing the bank to survive in the short term regardless of the interest rate environment.

“If [when] the spread turns negative such that our earnings on the FHLB stock do not generate a profit or the yield on the FHLB stock falls to the point the earnings on the transaction are negative we would simply unwind the strategy. There are no other operational issues with this strategy.”– Kent Townsend, CFO.

Rationale for Acquiring another Institution:

- Achieve economies of scale

- Grow market share

- Gain access to new markets or customers

- Reduce risk

- Remove a competitor

- Exceed unprofitable regulatory thresholds

Rationale for Selling an Institution:

- Maximize shareholder value

- Provide succession for aging management:

- Retirement or estate planning for large shareholder

- Limited opportunities for growth

- Eliminate regulatory issues

- Increasing costs to compete


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Category # Firms Beta Peer Beta Avg. Volume

Investment Banks 45 1.08 WAFD 1.14 461,748

Large Money Center Banks 10 0.86 TFSL 0.4 185,009

Financial Svcs. (Non-bank ) 258 0.65 NWBI 0.62 590,495

Regional Bank 645 0.47 COLB 1.2 400,148

Avg. 0.84 409,350

CFFN 0.55 707,524

Historical Market Risk Profile

Indus try da ta pro vided is as o f J anuary 2017, as pro vided by NYU Ste rn webs ite , c redit A. Damo daran. P eer da ta c redit Mo rnings ta r.

Low High

Risk Free Rate 2.51% 2.51%Beta 0.49 0.82Market Risk Premium 5.30% 5.30%

5.11% 6.86%Round 5.00% 7.00%

Cost Of Equity

Low High AverageComparables Method $19.58 $22.46 $21.50Dividend Discount $14.95 $24.62 $19.64Excess Return $10.89 $20.12 $15.41

Target Price $18.85

Valuation We calculated a target price of $18.85. Our valuation was based on assigning equal weights to three different valuation methods, Dividend Discount model, Excess Return Valuation, and the Comparable Company Analysis model. There are multiple areas that are affecting the current equity price and items that could have an impact in the future.

Items affecting the valuation - results from election Since the election in November, some regional banks have seen increases in their equity price by 20% or even 30%. Capital Federal followed the trend and saw its stock price hit a 52 week high of $16.92 on 12/28, but has since pulled back. A few factors have been noted as causing this increase to bank equity prices including the potential for less regulation, an increase or acceleration of Fed interest rate rises, and a cut to the overall corporate tax rate. For Capitol Federal, the recent pullback may be caused by these factors not playing as large of a role compared to other banks.

Less regulation equals a potential positive affect on overall compliance costs: Per the St. Louis Federal Reserve, compliance costs make up around 3% of the total non-interest expense costs for banks between $1B and $10B in asset size. For Capitol Federal regulatory and outside services expenses make up around 6% of total non-interest expense costs. Thus, while it is not specifically stated by the company, we can conclude that regulatory and compliance costs fall between 3% and 6% of total non-interest expense costs, which accounts for between $2.8m and $5.6m in expenses. If only 25% of these estimated costs were rolled back, the company would save between $700k and $1.4m per year, which would have increased the 2016 net income by .85% to 1.69%.

Acceleration of fed interest rate rises: For banks, a rise in interest rates caused by the Federal Reserve increasing the Fed Funds rate is usually a major benefit and a positive effect on profits due to the widening of the interest rate spread. The effect isn’t quite as positive for Capitol Federal, at least in the short term. This is due to the large percentage of long term fixed mortgage loans within the company’s portfolio. The bank estimates that a 1% rise in rates would increase interest income by 2.24%, but that would be offset by a decrease in the market value of portfolio equity by 5.8%.

Potential decrease in corporate tax rates Corporate tax reform will have sudden, tangible, and pronounced impact to the company’s bottom line. In the past three years Capitol Federal has paid, on average, 32.2% tax on its income. The current administration has recently talked about decreasing the corporate tax rate to as low as 15%, while Congress has suggested a milder cut at 25%. Based on 2016 income, tax cuts within this range would’ve provided an increase to the company’s bottom line of between $7.96m and $20.154m, or between 10% and 24%. Therefore, because of its current stance on paying out dividends, a tax cut would’ve added an additional .06 to .15 cents to the .84 cent dividend

Items affecting the valuations – other Cost of equity: To calculate the cost of equity the 10 year treasury yield was used for the Risk Free Rate, and the Market Risk Premium was derived from research done by Pablo Fernandez. A waterfall of estimates was then created using a mix of Betas, and the valuations will be analyzed using a cost of equity between 5% and 7%

Continued Increase in profitability and efficiency due to rebalance of the balance sheet: Because of the current limitations on asset growth due to current regulations, Capitol Federal has attempted a strategy to become more profitable while maintaining its current size. Within assets, the bank has shifted from lower yielding investment securities to higher yielding commercial loans. For liabilities, the bank has placed focus on growing lower rate deposits to rely less on higher rate borrowings. Both strategies look to widen the net interest margin. With the current strength in the economy, we see both of these treads continuing into the near future.

Potential for future acquisitions: Due to the cap on assets due to regulations, management believes that an acquisition that would increase the bank to 13 to 14 billion in assets would allow the bank to leap over the $10B line that the bank would need to achieve the scale necessary to maintain or exceed current profitability. While management is not currently seeking a merger, they would look for a solid bank in a contiguous market that has a similar culture and credit risk appetite and commercial deposits thus to help diversify the company’s operations. It is this group’s belief that the bank, while always open to the idea as long as it benefits the bank’s shareholders, is comfortable where they are and not actively looking to expand at this time.


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7.00% 6.50% 6.00% 5.50% 5.00%DDM $15.66 $17.32 $19.36 $21.90 $25.17Excess Return $12.48 $13.71 $15.21 $17.09 $19.51

Cost of Equity

P rice / Earnings

P rice / B o o k

P rice / T B V

A verage:

C F F N Implied Share P rices:

$ 22.45 $ 19.58 $ 22.46 $ 21.50


Cost of Equity


Cost of Equity

Dividend Discount and Excess Return Valuation Models The Dividend Discount model was chosen over a traditional Free Cash Flow based DCF due to Capitol Federal’s current dividend policy that involves paying dividends in excess of Free Cash Flow. The DDM allows for a more accurate forecast of actual dividend flows to investors, during this time where Capitol Federal has established a dividend policy that involves returning equity capital in excess of earnings. The Excess Return valuation model was also used because of the ease at which it can be applied to value equity within a bank. Due to the major impact that pending regulatory and tax reform can have on both the economy and the banking industry, a scenario analysis was completed looking at the estimated valuation based on three potential outcomes.

Scenario Analysis Bear Case: Interest rates spike causing the company’s spread to shrink. The economy slows along with loan growth forcing the bank to invest in lower yielding securities. Deposits slow as well as customers reach for higher yields in the market. Corporate tax cuts don’t occur and the current regulatory rules and restrictions stay in place and even increase. Due to all of this the bank is stuck below $10B in total assets and isn’t able to increase effectiveness measures like ROE and ROA.

Base Case: Strong economy leads to loans continuing to grow at their current pace with continued rapid growth in higher yielding commercial loans. Deposits continue recent trend and allows the bank to move out of borrowings and lower its cost of funds. The corporate tax rate is cut to 25% in 2018 and regulations are also eased allowing the bank to slowly decrease compliance costs. Interest rates gradually tick up hitting 5% in the next 5 years, allowing the loan portfolio to gradually turnover to increase the interest rate spread. Due to this the banks effectiveness ratios, ROE and ROA, continue on their current increasing pace.

Bull Case: The corporate tax rates are cut to 15%. Regulations are shredded and the $10B threshold is eliminated, thus allowing the bank to grow without limitations. The company rapidly invests in higher yielding commercial loans. Deposits come into the bank even faster than before lowering the cost of funds and increasing the interest rate spread. Interest rates gradually tick up, allowing the loan portfolio to gradually turnover and slowly increasing the spread.

Comparable Company Analysis Peer group selection Each of the 4 peers identified as best-fit cases for CFFN were chosen based on all having met the criteria listed to the right, and explained in more detail in Appendix D.

Price/earnings: Given a recent spike in financials, we have seen a rising tide effect amongst the peer group’s share price relative to earnings. However, CFFN’s price was recently punished for flat earnings and narrow NIM for the quarter ending 12/31/16. Given the longer duration of CFFN’s loan portfolio and the hasty rate at which short term interest rates spiked Q4 2016, we anticipate it will take 6-9 months, holding constant $100M in repayments a month, to roll repaid cash flow into higher yielding loans in the years to come as the interest rate curve normalizes. As mentioned earlier, CFFN has done well at extending the maturities of interest bearing CDs and FHLB advances while maintaining an asset-sensitive positive gap. The resulting impact to NII will improve the bottom-line over the next 1-3 years. Based on the P/E multiple CFFN is currently trading at a discount to its peers by nearly 47%, providing a buying opportunity for value investors.

Price/book: On the surface CFFN appears to be trading judiciously in line with its identified peers. We believe the 29% discount relative to the peer group’s average P/B multiple is a result of the declining book value per share as CFFN continues to pay out excess capital and reduce book value per share. We believe the nearly 6% dividend yield offered is overlooked by many financial data terminals, given the discretionary nature of said ‘special dividends’, yet management has reiterated the dividend sustainability and its intent to payout 100% of NI in the years to come. Declining levels of excess capital will continue to improve ROAE year-over-year.

Price/tangible book value: Perhaps the most remarkable multiple is the 48% discount at which CFFN trades relative to its peers. To adjust BV for TBV we must look at a company’s Tier 1 Capital calculation as identified in its SEC filings and use the disclosures to modify stated Common Shareholders’ Equity (aka Book Value). Because TBV must be manually calculated it is often overlooked by analysts just as is the case with CFFN’s dividend yield. P/TBV subtracts out intangibles such as goodwill, usually a balance sheet item resulting from a premium paid for an acquisition, to identify how much a bank is worth when excluding the intangible, non-income producing assets. CFFN has little to no intangible asset base on its balance sheet and as a result has very similar P/BV and P/TBV multiples. In the case of the identified peer group, these same two multiples varied by approximately .52x due to the large amount of intangible assets found on balance sheets. In one instance, intangibles accounted for 31% of the underlying bank’s stated shareholder equity (COLB). The calculated multiple resulted in a peer average P/TBV multiple of 2.49x compared to CFFN’s 1.69x current multiple. Because we held excess capital levels equal amongst peers, this indicates CFFN is extensively undervalued.

Discount rationale: We believe the primary drivers for the discount in CFFN’s share price are a result of the lagging nature of its ROAE, ROAA and NIM relative to its peer group. Mitigates identified are discussed in detail under the “Financial Analysis” section.

Criteria for Peer Group Saving & Loans, not Commercial Banks

Total Assets near $10 Billion

Federal Home Loan Bank membership

Active Dividend

Similar levels of Excess Capital

Peer Companies


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Financial Analysis Tangible equity: CFFN has remained exceptionally well capitalized since the completion of its corporate reorganization in 2010. We believe the recurring $.25 special dividend (aka “True Blue capitol dividend”) each June is an attempt to reduce capital levels to that of its peer group. Holding current risk-weighted-asset levels constant, it is noteworthy that even if CFFN were to continue to pay out approximately $33 million in capital dividends each year, on top of 100% of earnings, the company would be able to do so for nearly 27 years and still remain a “well capitalized” bank per regulatory definition.

Loan-to-deposit ratio & average borrowings/deposits: Many thrifts operate with LDRs north of 100% by funding the excess with FHLB borrowing, as is the case with CFFN. Relative to banks, thrifts tend to have longer-term assets that cannot be matched with demand deposits. FHLB advances matching long-term assets help CFFN reduce interest rate risk. Higher LDRs are further warranted by the less risky nature of single family residential mortgages compared to riskier C&I lenders, which typically operate with LDRs in the 70-85% range. Higher leverage can add additional risk but also adds to the ROE for shareholders.

Loan loss ratio (NCOs/Avg. Loans): Averaging .03% over the past 5 years, CFFN continues to exemplify pristine credit quality and sound underwriting standards. The average credit score for originated loans and loans refinanced by bank customers, including correspondent purchased loans, has been 767 for the past two years.

Control on non-interest expenses leads to top of class efficiency: Capitol Federal’s ability to manage non-interest expenses while growing revenues speaks to the company’s continued emphasis on expense control. The bank attributes this to fewer branches with a larger deposit base per branch, a higher asset quality allowing the company to spend less time on non-performing loans, and centralization of the banks back-office operations. The company’s non-interest expenses declined in 2016, while revenue grew around 2%. This decline led to a 2% year over year decrease in an already low efficiency ratio of 44%, which is around 20% lower than the company’s peers. The banks operating expense ratio also continues to fall and has declined 16% in the last three years. The company will look to continue to maintain this advantage by managing the expenses they can control and searching for technology driven efficiencies.

Efficiency ratio: The homogenous loan structure of SFR RE, sound expense control, and technology-driven efficiencies have contributed to CFFN’s exceptional efficiency compared to peers. CFFN’ efficiency ratio, measured as operating expenses as a percentage of N.I.I. + non-interest income, has averaged under 45% for the past 5 FYEs. CFFN’s efficiency ratio has consistently outperformed its peer group by 10-20%.

Net interest margin: Given the bank’s limited mix of interest earning assets and the narrow spread available in the market, NIM is going to be at a disadvantage relative to C&I banks from a yield perspective. Residential mortgages are much more commoditized than commercial loans and sacrifice yield in exchange for security. Management forecasts include steady, marginal increases in NIM as interest rates rise but at a disproportionate rate than a commercial bank. See ‘Interest Rate Risk’ for additional evidence.

Return on average assets (ROAA): We consider this metric to be the best measure of overall profitability for the bank because it removes the effect of capital structure, unlike ROAE. For comparability purposes, we believe it is important the financial ratios are performed without inclusion of the unsustainable daily leverage strategy. For the 4 years leading up to 2016, CFFN has increased its ROAA by 13 basis points from .75% to .88%. The lower margin nature of residential lending had dragged on ROAA historically but we anticipate marginal net income growth as the bank shifts its loan portfolio into higher yielding assets, such as CRE loans, and away from lower yielding assets, such as MBS. Coupling these profitability drivers with the rising rate and relaxing regulatory environments, we project the bank to achieve 1.00% ROAA by our TY 2021.

Return on average equity (ROAE): As a result of cash received from the completion of the second-step conversion, CFFN has operated with above-average equity levels that have had a negative impact on ROAE. The current capital dividend strategy is driven in part to reduce capital levels closer to that of its peers. By continuing to pay a $.25 capital dividend annually, repurchase shares at attractive prices, and distribute 100% of N.I., we estimate equity levels to continue to decline by approximately $33 million a year. Based on Appendix 1 ‘Return on Average Equity (ROAE)’, we estimate an 8%+ ROAE through disaggregation of the ROAE calculation by TY 2021.


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Named Executive Title Age Tenure Position Tenures Base Salary

Required Ownership

2016 Total Compensation

John B. Dicus CB, CEO, P 55 31 7, 13, 20 $664,676 5x Salary $1,163,912Kent G. TownseCFO, T, EVP 55 32 11, 11, 11 $345,577 3x Salary $517,195Rick C. Jackson CLO, EVP 51 23 6, 23 $246,116 3x Salary $375,806

33,584 $11.91 05/14/2022100,116 $11.91 05/14/2027

Total 133,700 13,804 $14.96 08/23/202033,584 $11.91 05/14/202256,416 $11.91 05/14/2027

Total 103,804 34,630 $14.43 01/26/202055,910 $14.43 01/26/2025

Total 90,540

John B. Dicus

Option Awards

Name

Number ofSecurities Underlying

Unexercised Options (#) Exercisable

Option Exercise Price ($)

Option Expiration Date

Kent G. Townsend

Rick C. Jackson

Name # $10,495 $43,18711,737 $30,92711,427 $23,025

Total 33,659 $97,1393,731 $15,3534,436 $11,6894,137 $8,336

Total 12,304 $35,3782,752 $11,3243,230 $8,5102,979 $6,003

Total 8,961 $25,837

Rick C. Jackson

Stock AwardsEquity Incentive Plan Awards: Unearned Shares,

Units or Other Rights That Have Not Vested

John B. Dicus

Kent G. Townsend

Probability

HighDiscontinued

Daily Leverage

Interest Rate Risk

Mgmt.

Interest Rate Curve Flattens

Interest Rates

Normalize

Compeition from E-lenders

Financial CHOICE Act

Moderate Management Retires

Increasing Credit Risk

Corporate Tax Rates

Cut

Chg. In Agency

Leadership

Technological obsolescence

Slowing US Economy

Acquisition of Another

Bank

Low Interest Rates Historic Lows

Cyber Security Breach

Home Sales Decline

Additional Regulation

Insignificant Moderate Major

Identifiable Operating & Investment Risk Profile

Impact to Profitability

Operating & Investment Risks Interest rate risk: IRR is discernibly the most significant market risk the bank is exposed to. The majority of interest-earning assets that reprice year over year are a result of payments and prepayments received on mortgage loans and MBS, both of which include the option to prepay without penalty. The cash flows received totaled $1.5 billion for the FYE ended 9/30/2016 and $465 million for the quarter ended 12/31/16. In our current rising rate environment, the cash flows received are then reinvested into new interest-earning assets at higher interest rates than they were previously. The amount of interest-bearing liabilities expected to reprice in a given period is usually not significantly impacted by changes in interest rates, because the bank's borrowings and CD portfolios have contractual maturities that generally cannot be terminated early without a prepayment penalty. As a result, these borrowings lock in the cost of funds until maturity. The bank has priced long-term CDs more aggressively than short-term CDs with the goal of incentivizing customers to move funds into longer-term CDs when interest rates were still lower. The long-term fixed-rate borrowings and long-term CDs both reduce the amount of liabilities repricing as interest rates rise. Because of the on-balance sheet strategies implemented over the past several years, management believes the bank is well-positioned to move into a market rate environment where interest rates are higher.

Increasing credit risk The bank identifies that strategic growth into commercial real estate (CRE) loans presents a greater risk of delinquencies, non-performing assets, loan losses, and future loan loss provisions than one to four family residential real estate loans that can at times be outside of the borrower’s control. These loans tend to be reliant on the property’s ability to successfully cash flow its own debt obligations. The bank mitigates these risks by striving to maintain high underwriting standards as demonstrated by the absence of any delinquent CRE loans in the past two financial audits. The bank holds zero OREO – CRE as of FYE 2016.

Financial technology The bank identifies that a failure to effectively implement technology initiatives or anticipate future technology needs or demands could adversely affect business performance. The rapidly growing fintech market presents both a competitive threat and an opportunity for traditional lenders. Capitol Federal has taken initiatives to offer online banking products all with the highest levels of online security. We further believe additional growth efficiency opportunities exist for Capitol Federal in the event they are able to responsibly automate certain aspects of the home loan underwriting process while maintaining sound credit decision making. We believe the underwriter’s human capital could then be better allocated to higher yielding, less homogenous CRE loans.

Cyber security The bank identifies that a security breach or interruption of services provided can result in a magnitude of adverse outcomes. Regulators are getting more involved and focusing on cyber risk as part of operational risk. Capitol Federal emphasizes a need for the continued devotion of significant resources and management focus to remain unexposed. However, compliance with current or future privacy data protection and information security laws will most likely result in higher compliance and technology costs.

Corporate Governance Board independence & effectiveness: As per Rule 5605 of the Marketplace Rules of NASDAQ, the Board identifies 7 of 8 total members as “independent directors.” The exception to the list is CEO John B. Dicus who was elected to the board in 1989 and promoted to Chairman in 2009. The company currently combines the position of CEO and Chairman into one position, with no lead outside director, on the grounds that the CEO’s daily company interaction leads to improved communications between the Board while ensuring the Board’s interest is represented in the daily operations of the company. The Board’s constituents include diverse professional backgrounds pertinent to the banking business and have an average tenure of 9 years.

Established committees: The Board of Directors has standing Executive, Compensation, Stock Benefit (a sub-committee of the Compensation Committee), Audit and Nominating Committees.

Bonus incentive plans: All officers of the company are eligible to receive cash bonuses on an annual basis based on the financial performance of CFFN and the NEO. Performance metrics used are the Efficiency Ratio, Basic EPS, and ROAE. We find these targets more attractive than share price based incentives in which management may be tempted to act in a manner against their fiduciary duty.


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Appendix A: Balance Sheet

2014 2015 2016 2017 (est) 2018 (est) 2019 (est) 2020 (est) 2021 (est)ASSETS:Cash and cash equivalents 810,840 772,632 281,764 165,344 80,584 98,732 87,514 160,210 Securities:

Available-for-sale ("AFS"), 840,790 758,171 527,301 452,220 387,830 332,608 285,248 244,633 Held-to-maturity ("HTM"), 1,552,699 1,271,122 1,100,874 1,022,215 949,176 881,356 818,382 759,908

Loans receivable 6,242,397 6,634,470 6,966,564 7,340,103 7,658,811 7,921,108 8,156,447 8,361,277 Allowance for credit losses "ACL" (9,227) (9,443) (8,540) (9,060) (9,434) (9,804) (10,181) (10,578) Federal Home Loan Bank Topeka ("FHLB") stock, at cost 213,054 150,543 109,970 104,415 104,079 103,874 103,638 103,186 Premises and equipment, net 70,530 75,810 83,221 83,838 83,352 84,200 85,604 86,624 Income taxes receivable, net - 1,071 - - - - - - Other assets 143,945 189,785 206,093 206,331 206,331 206,331 206,331 206,331

Total Assets $9,865,028 $9,844,161 $9,267,247 $9,365,407 $9,460,728 $9,618,405 $9,732,982 $9,911,590

Liabilities:Deposits 4,655,272 4,832,520 5,164,018 5,318,939 5,478,507 5,642,862 5,812,148 5,986,512 FHLB borrowings 3,369,677 3,270,521 2,372,389 2,320,341 2,312,861 2,308,304 2,303,058 2,293,029 Repurchase agreements 220,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 Advance payments by borrowers for taxes and insurance 58,105 61,818 62,643 62,643 62,643 62,643 62,643 62,643 Income taxes payable, net 368 - 310 - 300 - 300 - Deferred income tax liabilities, net 22,367 26,391 25,374 24,594 25,811 22,995 24,297 25,311 Accounts payable and accrued expenses 46,357 36,685 49,549 46,541 44,197 44,197 44,197 44,197

Total Liabilities $8,372,146 $8,427,935 $7,874,283 $7,973,058 $8,124,319 $8,281,001 $8,446,643 $8,611,693

Stockholders' Equity:Preferred stock - - - Common stock 1,410 1,371 1,375 1,379 1,375 1,375 1,375 1,375 Additional paid-in capital 1,180,732 1,151,041 1,156,855 1,188,758 1,169,538 1,200,381 1,176,332 1,214,913 Unearned compensation, Employee Stock Ownership Plan ("ESOP") (42,951) (41,299) (39,647) (39,235) (49,632) (52,442) (54,631) (57,294) Retained earnings 346,705 296,739 268,466 236,846 207,724 180,266 155,114 132,355 Accumulated other comprehensive income ("AOCI"), net of tax 6,986 8,374 5,915 4,601 7,405 7,824 8,151 8,548

Total stockholders' Equity $1,492,882 $1,416,226 $1,392,964 $1,392,349 $1,336,410 $1,337,404 $1,286,340 $1,299,897Total Liabilities & Stockholders' Equity $9,865,028 $9,844,161 $9,267,247 $9,365,407 $9,460,729 $9,618,405 $9,732,982 $9,911,589

2014 2015 2016 2017(est) 2018(est) 2019(est) 2020(est) 2021(est)Loans receivable 6,242,397 6,634,470 6,966,564 7,340,103 7,658,811 7,921,108 8,156,447 8,361,277

6.28% 5.01% 5.80% 5.32% 4.97% 3.96% 3.25%Deposits $4,655,272 $4,832,520 $5,164,018 $5,318,939 $5,478,507 $5,642,862 $5,812,148 $5,986,512

3.81% 6.86% 5.46% 5.03% 3.05% 3.05% 3.05%


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Appendix B: Income Statement

2014 2015 2016 2017 (est) 2018 (est) 2019 (est) 2020 (est) 2021 (est)Interest and Dividend Income:Loans receivable $229,944 $235,500 $243,311 $257,839 $277,138 $295,317 $312,558 $329,014Mortgage-backed securities ("MBS") $45,300 $36,647 $29,794 $30,998 $31,146 $29,574 $28,002 $26,431FHLB stock $6,555 $12,556 $12,252 $11,633 $11,596 $11,573 $11,546 $11,496Cash and cash equivalents $1,062 $5,477 $9,831 $9,831 $9,831 $9,831 $9,831 $9,831Investment securities $7,385 $7,182 $5,925 $5,925 $5,925 $5,925 $5,925 $5,925

Total interest and dividend income $290,246 $297,362 $301,113 $316,227 $335,636 $352,220 $367,863 $382,697Interest Expense:FHLB borrowings $63,217 $67,797 $65,091 $67,376 $68,218 $70,311 $72,481 $72,316Deposits $32,604 $33,119 $37,859 $47,870 $49,307 $56,429 $63,934 $71,838Repurchase agreements $10,282 $6,678 $5,981 $6,012 $6,012 $6,012 $6,012 $6,012

Total interest expense $106,103 $107,594 $108,931 $121,258 $123,537 $132,752 $142,426 $150,166Net Interest Income $184,143 $189,768 $192,182 $194,968 $212,099 $219,469 $225,437 $232,531Provision for Credit Losses $1,409 $771 -$750 $0 $890 $921 $948 $972

N.I.I. after provision for Credit Loss $182,734 $188,997 $192,932 $194,968 $211,209 $218,548 $224,489 $231,559Non-Interest Income:Retail fees and charges $14,937 $14,897 $14,835 $14,836 $14,937 $14,937 $14,937 $14,937Income from bank-owned life insurance ("BOLI") $1,993 $1,150 $3,420 $2,092 $2,188 $2,188 $2,188 $2,188Other non-interest income $6,025 $5,093 $5,057 $4,144 $5,057 $5,057 $5,057 $5,057

Total non-interest income $22,955 $21,140 $23,312 $21,072 $22,182 $22,182 $22,182 $22,182Non-Interest Expense:Salaries and employee benefits $43,757 $43,309 $42,378 $41,467 $40,576 $39,703 $38,850 $38,015Occupancy, net $10,268 $9,944 $10,576 $11,336 $11,456 $11,573 $11,766 $11,906Information technology and communications $9,429 $10,360 $10,540 $10,651 $10,764 $10,873 $11,054 $11,186Regulatory and outside services $5,572 $5,347 $5,645 $5,704 $5,533 $5,367 $5,206 $5,050Deposit and loan transaction costs $5,329 $5,417 $5,585 $5,644 $5,704 $5,762 $5,858 $5,927Federal insurance premium $4,536 $5,495 $5,076 $5,129 $5,184 $5,236 $5,324 $5,387Advertising and promotional $4,195 $4,547 $4,609 $4,657 $4,707 $4,755 $4,834 $4,892Low income housing partnerships $2,416 $4,572 $3,872 $3,913 $3,954 $3,994 $4,061 $4,109Office supplies and related expense $2,096 $2,088 $2,640 $2,668 $2,696 $2,724 $2,769 $2,802Other non-interest expense $2,939 $3,290 $3,384 $3,420 $3,456 $3,491 $3,549 $3,592

Total non-interest expense $90,537 $94,369 $94,305 $94,589 $94,029 $93,478 $93,271 $92,866Income Before Income Tax-Expense $115,152 $115,768 $121,939 $121,451 $139,362 $147,252 $153,400 $160,876Income Tax Expense $37,458 $37,675 $38,445 $39,108 $34,840.55 $36,812.92 $38,350.08 $40,218.95

Net Income $77,694 $78,093 $83,494 $82,344 $104,522 $110,439 $115,050 $120,657

Changes in unrealized holding gains on AFS securities -$110 $545 -$965 $0 $0 $0 $0 $0Taxes $171 -$843 $1,494 $0 $0 $0 $0 $0

Other comprehensive income (loss), net of tax -$281 $1,388 -$2,459 $0 $0 $0 $0 $0Comprehensive income $77,413 $79,481 $81,035 $82,344 $104,522 $110,439 $115,050 $120,657


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Appendix C: Statement of Cash Flows

2014 2015 2016 2017 (est) 2018 (est) 2019 (est) 2020 (est) 2021 (est)Cash Flow from Operating Activities:

Net income 77,694 78,093 83,494 82,344 104,522 110,439 115,050 120,657 Adj. to reconcile N.I. to net cash provided by Operating Activities:

FHLB stock dividends (6,555) (12,556) (12,252) (11,633) (11,596) (11,573) (11,546) (11,496) Provision for credit losses 1,409 771 (750) - 890 921 948 972

Originations of loans receivable held-for-sale ("LHFS") (1,325) - - - - - - - Proceeds from sales of LHFS 1,998 - - - - - - -

Amortization and accretion of premiums and discounts on securities 6,053 5,649 5,342 5,342 5,342 5,342 5,342 5,342 Depreciation and amortization of premises and equipment 6,316 6,844 7,141 7,381 7,338 7,413 7,537 7,626

Amortization of deferred amounts related to FHLB advances, net 6,139 4,196 1,868 1,868 1,868 1,868 1,868 1,868 Common stock committed to be released for allocation - ESOP 2,014 2,036 2,174 1,995 1,952 1,910 1,869 1,829

Stock-based compensation 2,134 2,086 1,121 1,103 1,401 1,480 1,542 1,617 Provision for deferred income taxes 2,106 3,201 470 478 426 450 469 492

Changes in:Other assets, net 1,606 3,878 1,807 1,807 1,826 1,845 1,875 1,898

Income taxes payable/receivable 382 (1,374) 1,381 - - - - - Accounts payable and accrued expenses (8,184) (6,215) (6,840) (3,008) (2,344) - - -

Net cash provided by operating activities $91,787 $86,609 $84,956 $87,677 $111,625 $120,094 $124,953 $130,804

Cash Flow from Investing Activities:Purchase of AFS securities (120,817) (149,937) (99,927) (100,000) (100,000) (100,000) (100,000) (100,000)

Purchase of HTM securities (168,830) (54,133) (144,392) (145,000) (145,000) (145,000) (145,000) (145,000) Proceeds from calls, maturities and principal reductions of AFS securities 349,210 234,794 326,814 175,081 164,390 155,222 147,359 147,359

Proceeds from calls, maturities and principal reductions of HTM securities 328,433 330,054 309,328 223,659 218,039 212,820 207,974 207,974 Proceeds from the redemption of FHLB stock 22,387 265,929 382,450 364,915 362,306 362,240 362,256 362,256

Purchase of FHLB stock (100,356) (190,862) (329,625) (347,160) (349,769) (349,835) (349,819) (349,819) Net increase in loans receivable (280,105) (398,307) (336,056) (373,539) (318,708) (262,298) (235,338) (204,830)

Purchase of premises and equipment (7,227) (12,022) (14,854) (5,895) (4,792) (6,127) (6,682) (6,298) Proceeds from sale of other real estate owned ("OREO") 4,875 5,987 4,973 5,278 5,278 5,278 5,278 5,278

Purchase of BOLI - (50,000) - - (50,000) - (50,000) - Proceeds from BOLI death benefit 405 - 783 - - - - -

Net cash provided by (used in) investing activities $27,975 -$18,497 $99,494 -$202,661 -$218,256 -$127,699 -$163,972 -$83,081

Cash Flow from Financing Activities:Dividends paid (138,172) (114,162) (111,767) (107,757) (133,644) (137,896) (140,203) (143,416)

Net change in deposits 43,826 177,248 331,498 154,921 159,568 164,355 169,286 174,364 Proceeds from borrowings 2,944,577 7,575,100 8,000,100 8,000,100 8,000,100 8,000,100 8,000,100 8,000,100

Repayments on borrowings (2,194,577) (7,695,100) (8,900,100) (8,052,048) (8,007,480) (8,004,557) (8,005,246) (8,010,029) Change in advance payments by borrowers for taxes and insurance 713 3,713 825 1,750 1,750 1,750 1,750 1,750

Payment of FHLB prepayment penalties - (3,352) - - - - - - Repurchase of common stock (79,633) (50,034) - - - - - -

Stock options exercised 458 267 4,070 1,598 1,576 2,001 2,114 2,202 Excess tax benefits from stock options - - 56 - - - - -

Net cash (used in) provided by financing activities $577,192 -$106,320 -$675,318 -$1,436 $21,871 $25,753 $27,801 $24,972

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $696,954 -$38,208 -$490,868 -$116,420 -$84,760 $18,148 -$11,218 $72,695 Beginning of year $113,886 $810,840 $772,632 $281,764 $165,344 $80,584 $98,732 $87,514

End of year $810,840 $772,632 $281,764 $165,344 $80,584 $98,732 $87,514 $160,210


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Appendix D: Peer group Section Each of the 4 peers identified as best-fit cases for CFFN were chosen based on all having met the following criteria;

• Saving & Loans, not Commercial Banks – Thrifts like CFFN hold loan portfolios that are typically dominated by residential RE. To qualify as a thrift charter in the eyes of regulators and the Federal Home Loan Bank, these depository institutions must have 65% of its assets in “qualified thrift investments”. These assets can include mixes of SFR RE mortgages, multifamily RE mortgages, and MBS which gives some leeway to the type of loans extended by each S&L.

• Total Assets near $10 Billion – Our sample peer group includes two S&L institutions just under $10 billion in assets, as is this case with CFFN, and two additional S&Ls who have crossed over the $10 Billion in assets mark.

• Federal Home Loan Bank membership – Each of the 4 peers analyzed are qualifying members of the FHLB. In exchange for receiving FHLB advances at or near comparable treasury rates, these members must own a portion of FHLB stock and remain recognized as a qualified thrift charter.

• Active Dividend – Each of the 4 peers are dividend paying stocks with an average dividend yield of 2.37% compared to CFFN’s fallacious 2.22% dividend advertised on Bloomberg. It is noteworthy that no identifiable S&L firms with similar capital structure to CFFN pay biannual special dividends on a regular basis that result in a regular payout ratio of 100%+.

• Similar levels of Excess Capital – It is critically important to look at relative capital levels when comparing Price/Book Value multiples to ensure that an apples-to-apples comparison is being made because most investors are unwilling to pay a premium for a bank’s ‘excess equity’. The peer group identified holds excess capital twice the required minimum set forth by regulatory authorities with an average Tier 1 Leverage ratio of 12.0%.


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Appendix E: Peer group comparison Updated 2/15/2017 5-yr Average

Operating Name Ticker Share Price Market Cap (B) Price/Earnings Price/Book Price/TBV Dividend Yield Buyback Yield Payout Ratio

1 Washington Federal Inc. WAFD $34.10 3,045 18.33x 1.53x 1.79x 1.95% 3.32% 26.10%

2 Third Federal Savings & Loan TFSL $17.46 4,949 60.21x 2.95x 3.32x 1.70% 2.66% 102.54%

3 Northwest Savings Bank NWBI $17.59 1,789 42.90x 1.55x 2.15x 3.93% 1.91% 91.74%

4 Columbia Banking System COLB $40.84 2,371 23.25x 1.86x 2.71x 1.89% 0.05% 33.63%

Average $27.50 3,038 36.17x 1.97x 2.49x 2.37% 1.98% 63.50%

Capitol Federal Financial, Inc. CFFN $15.19 2,097 24.48x 1.53x 1.69x 5.79% 4.71% 151.04%

CFFN Implied Share Prices: $22.45 $19.58 $22.46 Average: $21.50

% difference: +47.8% +28.9% +47.9% Average: +41.5%

Peer Group Description:

Operating Name: Ticker: Branches: Total Assets: Loan Portfolio: % SFR-RE: % in CRE:Washington Federal Inc. WAFD 238 14,888,063 10,950,608 57% 8.7% -Washington Federal, Inc. is the parent company of Washington Federal, a national bank that operates 237 branches in Washington, Oregon, Idaho, Utah, Nevada, Arizona, Texas and New Mexico. Established in 1917, the bank provides consumer and commercial deposit accounts, financing for small to middle market businesses, commercial real estate and residential real estate, including consumer mortgages, home equity lines of credit and insurance products through a subsidiary. As of December 31, 2016, the Company reported $14.9 billion in assets, $10.6 billion in deposits and $2.0 billion in stockholders’ equity. Operating Name: Ticker: Branches: Total Assets: Loan Portfolio: % SFR-RE: % in CRE:

Third Federal Savings & Loan TFSL 38 12,906,062 11,708,804 100% 0% -TFS Financial Corporation, a federally chartered stock holding company, conducts its principal activities through its wholly owned subsidiaries. The principal line of business of the Company is retail consumer banking, including mortgage lending, deposit gathering, and other insignificant financial services. Third Federal Savings and Loan Association of Cleveland, MHC, its federally chartered mutual holding company parent, owned 79.91% of the outstanding shares of common stock of the Company at September 30, 2016. The Company’s primary operating subsidiaries include the Association and Third Capital, Inc. The Association is a federal savings association, which provides retail loan and savings products to its customers in Ohio and Florida, through its 38 full-service branches, eight loan production offices, customer service call center and internet site. The Association also provides savings products, purchase mortgages, first mortgage refinance loans, home equity lines of credit, and home equity loans in states outside of its branch footprint. Third Capital, Inc. was formed to hold non-thrift investments and subsidiaries, which include a limited liability company that acquires and manages commercial real estate.

Operating Name: Ticker: Branches: Total Assets: Loan Portfolio: % SFR-RE: % in CRE:

Northwest Savings Bank NWBI 167 9,623,640 7,496,408 54% 31.2% -Headquartered in Warren, Pennsylvania, Northwest Bancshares, Inc. is the holding company of Northwest Bank. Founded in 1896, Northwest Bank is a full-service financial institution offering a complete line of business and personal banking products, employee benefits and wealth management services, as well as the fulfillment of business and personal insurance needs. Northwest operates 167 full-service community banking offices and nine free standing drive-through facilities in Pennsylvania, New York, Ohio and Maryland and 49 consumer finance offices in Pennsylvania through its subsidiary, Northwest Consumer Discount Company.

Operating Name: Ticker: Branches: Total Assets: Loan Portfolio: % SFR-RE: % in CRE:

Columbia Banking System Inc COLB 149 9,509,607 6,213,423 4.7% 43.7% - Columbia Banking System, Inc. operates as the bank holding company for Columbia State Bank that provides various banking products and services to small and medium-sized businesses, professionals, and individuals in Washington, Oregon, and Idaho. It offers various personal banking products and services, including noninterest and interest-bearing checking, saving, money market, and certificate of deposit accounts; fixed and variable rate home equity loans and lines of credit, home mortgages for purchases and refinances, personal loans, and other consumer loans; debit and credit cards; and electronic bill pay, and online and mobile banking services. The company also provides business banking products and services, such as agricultural, commercial and industrial, municipal, real estate and real estate construction, and SBA lending products; and cash management, mobile banking, treasury management, international banking, merchant card, remote deposit capture, and small business services. In addition, it offers wealth management services to high net-worth individuals, families, and professional businesses in the areas of private banking, professional banking, financial services, and trust and estate services. Further, it provides individual and business retirement, insurance, and wealth management solutions; financial planning services; and fiduciary, agency, trust, and related services. As of December 31, 2015, the company had 149 branches, including 74 branches in Washington, 59 branches in Oregon, and 16 branches in Idaho. The company was founded in 1993 and is headquartered in Tacoma, Washington.


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Appendix F: Peer Ratios Comparison

Peer Profitability Ratios (by FYE)

Peer Balance Sheet Ratios (by FYE)

Return on Average Assets (ROAA) 2012 2013 2014 2015 2016 Equity-to-Asset Ratio 2012 2013 2014 2015 2016

WAFD 1.07% 1.19% 1.13% 1.09% 1.11% WAFD 15.2% 14.8% 13.4% 13.4% 13.3%

TFSL 0.10% 0.50% 0.57% 0.57% 0.65% TFSL 16.0% 16.4% 16.3% 14.1% 13.6%

NWBI 0.79% 0.84% 0.79% 0.73% 0.55% NWBI 14.2% 14.7% 13.7% 13.0% 12.2%

COLB 0.96% 0.92% 1.09% 1.14% 1.13% COLB 15.8% 14.9% 14.9% 14.4% 13.6%

Average 0.73% 0.86% 0.90% 0.88% 0.86% Average 15.3% 15.2% 14.5% 13.7% 13.2%

CFFN 0.79% 0.75% 0.85% 0.83% 0.88% CFFN 19.3% 17.8% 15.1% 14.4% 15.0%

Return on Average Equity (ROAE) 2012 2013 2014 2015 2016 Bank - Tier 1 Leverage Ratio 2012 2013 2014 2015 2016

WAFD 7.26% 7.90% 8.05% 8.16% 8.35% WAFD 12.5% 12.0% 11.3% 11.7% 11.5%

TFSL 0.64% 3.05% 3.52% 4.04% 4.73% TFSL 13.3% 14.2% 13.5% 12.8% 11.7%

NWBI 5.48% 5.87% 5.69% 5.49% 4.28% NWBI 12.2% 12.7% 11.6% 10.3% 9.0%

COLB 6.06% 6.14% 7.36% 7.93% 8.27% COLB 11.1% 9.3% 9.8% 9.9% 8.9%

Average 4.86% 5.74% 6.16% 6.41% 6.41% Average 12.3% 12.0% 11.6% 11.2% 10.3%

CFFN 3.93% 4.14% 4.97% 5.13% 5.78% CFFN 14.6% 14.8% 13.2% 12.6% 12.3%

Net Interest Margin (NIM) 2012 2013 2014 2015 2016 Loan-to-Deposit Ratio 2012 2013 2014 2015 2016

WAFD 3.18% 3.17% 3.05% 3.08% 3.11% WAFD 94% 86% 77% 81% 90%

TFSL 2.39% 2.46% 2.42% 2.17% 2.23% TFSL 114% 119% 123% 135% 141%

NWBI 3.63% 3.51% 3.47% 3.49% 3.73% NWBI 98% 101% 105% 108% 95%

COLB 5.77% 5.16% 4.76% 4.35% 4.12% COLB 72% 76% 77% 78% 78%

Average 3.74% 3.58% 3.43% 3.27% 3.30% Average 94% 96% 96% 101% 101%

CFFN 2.01% 1.97% 2.07% 2.07% 2.10% CFFN 123% 129% 134% 137% 135%

Loan Loss Ratio (NCOs/Avg. Loans) 2012 2013 2014 2015 2016 Average Borrowings/Deposits 2012 2013 2014 2015 2016

WAFD 0.87% 0.23% -0.18% -0.06% -0.14% WAFD 31.2% 21.4% 19.4% 17.8% 19.3%

TFSL 1.54% 0.44% 0.29% 0.06% 0.02% TFSL 5.4% 8.8% 11.3% 27.9% 27.4%

NWBI 0.43% 0.36% 0.41% 0.23% 0.21% NWBI 14.7% 15.3% 15.6% 14.00% 7.52%

COLB 0.52% 0.24% 0.20% 0.18% 0.15% COLB 1.6% 1.6% 1.4% 2.2% 2.0%

Average 0.84% 0.32% 0.18% 0.10% 0.06% Average 13.24% 11.78% 11.92% 15.50% 14.06%

CFFN 0.12% 0.02% 0.02% 0.01% 0.00% CFFN 63.6% 61.4% 77.1% 71.8% 49.8%

Efficiency Ratio 2012 2013 2014 2015 2016

WAFD 34.54% 40.85% 46.76% 49.54% 50.39%

TFSL 59.67% 59.81% 59.82% 63.86% 61.28%

NWBI 63.86% 64.99% 67.44% 66.98% 64.78%

COLB 69.17% 70.87% 63.33% 62.12% 60.04%

Average ER 56.81% 59.13% 59.34% 60.62% 59.12%

CFFN 43.55% 48.13% 43.72% 44.74% 43.76%


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Appendix G: Dividend Discount Model


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7.00% 6.50% 6.00% 5.50% 5.00%6.00% 8.68 9.48 10.47 11.70 13.29 7.00% 10.47 11.46 12.66 14.17 16.10 8.00% 12.26 13.42 14.84 16.62 18.91 9.00% 14.04 15.39 17.03 19.08 21.71

10.00% 15.83 17.34 19.20 21.53 24.51

8% 12.62 13.87 15.4 17.31 19.7610% 13.91 15.31 17.01 19.14 21.8812% 15.3 16.85 18.74 21.11 24.1614% 16.78 18.5 20.59 23.22 26.6

Cost of equity

Return on Equity

ROE Growth

Appendix H: Excess Return Valuation

Return on Equity = 5.90%Retention Ratio = -33.33%

Expected growth rate = -1.97%Cost of equity = 6.00%

1 2 3 4 5 Terminal YearNet Income $82,379.90 $106,956.35 $110,466.40 $117,191.00 $119,241.99 $131,234.79 - Equity Cost (see below) $83,577.84 $82,052.38 $80,264.35 $78,616.48 $77,079.24 $84,831.51Excess Equity Return -$1,197.94 $24,903.97 $30,202.05 $38,574.52 $42,162.75 $46,403.28Terminal Value of Excess Equity Return $1,031,184.01Cumulated Cost of Equity 1.06000 1.12360 1.19102 1.26248 1.33823Present Value -$1,130.14 $22,164.44 $25,358.22 $30,554.63 $802,067.14

Beginning BV of Equity $1,392,964.00 $1,367,539.66 $1,337,739.15 $1,310,274.64 $1,284,653.98 $1,413,858.46Cost of Equity 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%Equity Cost $83,577.84 $82,052.38 $80,264.35 $78,616.48 $77,079.24 $84,831.51

Return on Equity 5.91% 7.82% 8.26% 8.94% 9.28% 9.28%Net Income $82,379.90 $106,956.35 $110,466.40 $117,191.00 $119,241.99 $131,234.79Dividend Payout Ratio 130.86% 127.86% 124.86% 121.86% 118.86% 100.00%Dividends paid $107,804.24 $136,756.86 $137,930.90 $142,811.66 $141,733.78Retained Earnings -$25,424.34 -$29,800.51 -$27,464.50 -$25,620.66 -$22,491.80

Equity Invested = $1,392,964.00PV of Equity Excess Return = $879,014.30Value of Equity = $2,271,978.30Number of shares = 133045.215Value Per Share = $17.08

Excess Return Valuation


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Appendix I: Excess Return Valuation 2


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Appendix J: SWOT Analysis

Strengths Weaknesses

-Longstanding Community Based Trust -High Quality Loan Portfolio -Strong and Consistent Dividend

-Lack of diversification in Loan portfolio leads to lower interest rate spread -Lack of Geographical diversification makes the company more susceptible to downturns in local economy

Opportunities Threats -Expansion within Business Segments -Increase profitability and efficiency through controlling the balance sheet.

-Flattening Yield Curve -Political Volatility -Changing Regulations

Strengths

Capitol Federal’s strength is rooted in their longstanding community-based trust. They manage their assets intelligently, typically offering higher retail return rates than the Federal Reserve Bank. Oppositely, they offer lower rates for customers on a loan than a typical commercial customer would pay, incentivizing additional customers to Capitol Federal. Another strength is the company’s low risk, high quality loan portfolio. This allows the bank to set aside a smaller amount of capital for charge offs and provides a strong and reliable income stream. Additionally, and separately, is Capitol Federal’s dividend policy, which is consistent and dependable. Capitol Federal pays bi-monthly dividends, with minimums set at $0.085, and the semi-annual dividends typically being much larger.

Weakness

Capitol Federal has a significantly higher portion of their assets in Single Family Mortgages, and within the states of Kansas and Missouri. This leads to greater risk as a downturn in the local economy can have a more pronounced effect on the company’s bottom line. Also a higher percentage of home loans make the bank more susceptible to the real estate market and home market values. This type of loan portfolio also leads to a lower interest rate spread because of the lower rates compared to commercial loans. This decreased spread increases Capitol Federal’s interest rate risk.

Opportunities

There are many opportunities for Capitol Federal, expanding within their own business segment, as well as other segments within the financial industry. They currently have high expertise in the retail consumer segment, and considering the many other consumer segments, they have ample opportunity to create for themselves a new target market. If they do not wish to exceed the community bank threshold set by the Dodd-Frank Act, creating an off-shoot within the new market is an effective way of expanding. Within their own business segment, they do also have the ability to expand into the midsized institution level because of their highly effective operations. Expanding into the next industry level, despite additional regulations and supervision, could still be an effective long-term strategy. The company also has a chance to increase their efficiency and profitability within their current balance sheet. They have recently been working towards these both on their assets and liabilities sides. To do this they have increased their position in higher yielding commercial loans while decreasing their lower yielding investment securities. They have also attempted to increase lower cost deposits, while decreasing higher cost borrowings.

Threats

A flattening yield curve is the biggest threat to Capitol Federal., because the company lends at the long end of the curve while borrowing at the short end. There’s a lot of political volatility in the near future that necessitates financial institutions to remain on their toes and stay alert. Changing governmental policies in the near future may have the potential to benefit larger institutions and increase their potential to outcompete smaller community banks, such as Capitol Federal.


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Appendix K: Industry Overview : Porters 5 Forces

Porter’s Five Forces the industry faces the following: Power of Buyers – Individual consumers consist of 69.3% of the industry’s revenues and serve as the dominant buyer. Business loans generate the second highest portion of revenues at 13.3%. Together, the buyers have Moderate power because despite the choice between substitutes, most buyers need the loan servicing provided. Power of Suppliers – Two primary suppliers exist for the industry: finance/insurance providers and commercial leasing. Finance and insurance provide a large share of the intermediate inputs and commercial leasing allow the thrifts to rent properties to establish their retail networks. The power for suppliers is Low as regulations largely define the power available. Threat of New Entrants – Heavy regulation and policy restrictions drive the barriers to entry up creating more difficulty for new entrants in the industry. Given the regional focus, location also becomes a high barrier to entry as few areas remain unserved and it is difficult to attract customers from their existing institutions. These factors leave the threat of new entrants Low. Threat of Substitutes – Consumers have many choices within the financial industry for residential and commercial loans. Comparable services from commercial banks, credit unions, and other non-bank financial service providers create a High threat of substitutes for the industry. To quantify this threat, between 2010 and 2015, the share of total deposits for savings institutes fell from 4.1% to 2.7%, while commercial banks increased their share from 95.9% to 97.4%. Competition in the Industry – Competition is High and increasing. Operating in a local or regional scale creates a smaller consumer pool and more competition to attract and retain the available consumers. While the 2008/2009 financial crisis reduced the number of competing banks as savings banks and thrifts began to consolidate, it also reduced the number of relevant depositor’s therefore increasing competition for available consumers.


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Appendix L: ‘Banking Regulatory Environment & Outlook 1’

Agency Position Status

Treasury Department Treasury Secretary Presidential appointment (Steven Mnuchin)

Federal Reserve Board (FRB)

Chair Chair Yellen’s term expires in February 2018

Vice Chair Vice Chairman Fischer’s term expires in June 2018

Governor Governor Tarullo’s term expires in January 2022

Governor Governor Powell’s term expires in January 2028

Governor Governor Brainard’s term expires in January 2026

Governor (Vice Chair of Supervision) Vacant

Governor Vacant

Federal Deposit Insurance Corporation (FDIC)

Chair Chairman Gruenberg’s term expires in November 2017

Vice Chair Vice Chairman Hoenig’s term expires in April 2017

Director (Independent) Vacant

Director (Comptroller of the Currency) Comptroller Curry’s term expires in March 2017

Director (CFPB Director) Director Cordray’s term expires in July 2018

Office of the Comptroller of the Currency (OCC) Comptroller of the Currency Comptroller Curry’s term expires in March 2017

Consumer Financial Protection Bureau (CFPB) Director Director Cordray’s term expires in July 2018

Securities and Exchange Commission (SEC)

Chair Chair White will resign in January 2017

Commissioner Commissioner Stein’s term expires in June 2017

Commissioner Commissioner Piwowar’s term expires in June 2018

Commissioner Vacant

Commissioner Vacant

Commodity Futures Trading Commission (CFTC)

Chair Chairman Massad’s term expires in April 2017

Commissioner Commissioner Bowen’s term will expire in April 2018

Commissioner Commissioner Giancarlo’s term will expire in April 2019

Commissioner Vacant

Commissioner Vacant

Department of Labor (DOL) Labor Secretary Presidential appointment (Andy Puzder)


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Appendix M: ‘Banking Regulatory Environment & Outlook 2’

The Financial CHOICE Act - Comprehensive Summary The following Appendix summarizes the The Financial CHOICE Act, or "The Act", as per the explanation provided on the House.gov's website. We understand the Republican proposal to reform the financial system is ideological in nature but our analysis team has attempted to identify the legislation most impactful to Capital Federal Financial, Inc. as presented in the context provided with asterisk annotation (*). 1. Dodd-Frank Off-Ramp for

Strongly Capitalized, Well-Managed Banking Organizations*

-The Financial CHOICE Act enhances U.S. financial market resiliency and promotes economic growth by offering well-managed, well-capitalized financial institutions – those with a simple leverage ratio of 10 percent – an “off ramp” from Dodd- Frank’s suffocating regulatory complexity.

2. Bankruptcy Not Bailouts -The Act ends bailouts and establishes a new chapter in bankruptcy code that preserves the rule of law while enabling large, complex financial institutions to fail safely without making taxpayers foot the bill.

3. Repeal of the Financial Stability Oversight Council’s SIFI Designation Authority

-The FSOC’s process for designating non-bank financial institutions and so-called “financial market utilities” as “systemically important,” based upon vague and illdefined standards, gives regulators broad license to concentrate more power in Washington. By repealing the FSOC’s designation authority, the Financial CHOICE Act addresses one of Dodd-Frank’s greatest sources of regulatory overreach, and eliminates the government’s authority to anoint large financial institutions as “too big to fail.”

4. Reform the Consumer Financial Protection Bureau*

-The Bureau’s policies often harm consumers or exceed its legal authority because the Bureau is not subject to checks and balances that apply to other regulatory agencies. The Act will increase accountability by changing the Bureau’s governance and funding mechanism, and promote real consumer protection by putting power in the hands of consumers, not Washington bureaucrats.

5. Relief from Regulatory Burden for Community Financial Institutions*

-Increasing regulatory costs are inevitably passed on to customers in the form of higher prices and diminished credit availability. The act will increase consumer and small business access to credit by allowing community financial institutions to cease hiring compliance officers and resume hiring loan officers.

6. Federal Reserve Reform -The Act scales back the Fed’s regulatory and supervisory powers and subjects them to greater congressional oversight and accountability. It further promotes a more predictable, rules-based monetary policy, and provides a stronger foundation for economic growth.

7. Upholding Article I: Reining in the Administrative State

-Failure to conduct cost-benefit analysis reduces the quality of regulation and creates unnecessary regulatory costs; it does a disservice to the American people. By imposing a statutory cost-benefit analysis requirement on financial regulators, the Act will yield benefits to consumers, investors, and the broader economy.

8. Amend Dodd-Frank Title IV* -The Act amends Title IV of the Dodd-Frank Act to enhance funding opportunities for start-up companies and other job creators and to focus government resources on protecting mom-and-pop investors instead of the wealthiest Americans.

9. Repeal the Volcker Rule* -Because of the Volcker Rule’s complexity, even community banks that do not conduct any proprietary trading have had to incur large costs to prove what the regulators already know (that they are not engaged in proprietary trading activity covered by the rule). Community banks must also perform due diligence to determine whether each security in their portfolios qualifies for an exemption from the Volcker Rule. Repealing the rule will therefore have the salutary consequence of removing one more unnecessary regulatory burden inflicted on community financial institutions.

10. Repeal the Durbin Amendment*

-Mandated interchange fee limits have reduced fee income from retailers paid to banks that has resulted in prices ultimately being passed on to consumers. The Durbin Amendment has resulted in the elimination of free checking accounts at many banks while providing no discernible benefit to retail consumers.

11. Eliminate the Office of Financial Research

-There are countless other federal agencies – most notably the Federal Reserve, which maintains a “Division of Financial Stability” and employs over 300 PhD economists – that perform market surveillance and collect and analyze data for purposes of identifying threats to financial stability. Eliminating the OFR will result in one less redundant federal bureaucracy.

12. SEC Enforcement Issues -By requiring the SEC to incorporate economic analysis in its deliberations on enforcement matters, the Act will help ensure that shareholder interests are recognized and protected to a greater extent than is currently the case.

13. Reforms to Title IX of Dodd-Frank

-The Financial CHOICE Act includes organizational changes and other reforms of the SEC that will make for a more nimble, less sclerotic agency better-suited to fulfilling its statutory mission. Imposing a fiduciary duty on broker-dealers will raise costs and reduce access to investment advice for retail investors, costing Americans billions of dollars in lost retirement savings by compounding bureaucratic complexity and inefficiencies at the SEC.

14. Capital Formation -The Act will seek to foster competitive markets that encourage innovation, expand the investment opportunities available to all investors, and promote a regulatory regime that acknowledges the differences between small, private and start-up companies and well-established public companies. The Act contains a host of provisions designed to advance these objectives. Although small companies are at the forefront of technological innovation and job creation, they frequently face obstacles in obtaining funding in the capital markets. The SEC has also failed to follow up the JOBS Act with a post-JOBS Act agenda to expand access to capital for entrepreneurs and start-up ventures.

15. Improving Insurance Regulation by Reforming Dodd-Frank Title V

-Consolidating federal insurance positions into one advocate will give a unified voice and seat at the table for the U.S. insurance industry at the domestic and international levels, while preserving our traditional state-based system of insurance regulation.


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Appendix N: Dividends

Calendar Year 2012 2013 2014 2015 2016Amount Per Share Amount Per Share Amount Per Share Amount Per Share Amount Per Share

Regular quarterly dividends paidQuarter ended March 31 12,145 0.075 11,023 0.075 10,513 0.075 11,592 0.085 11,305 0.085

Quarter ended June 30 11,883 0.075 10,796 0.075 10,399 0.075 11,585 0.085 11,314 0.085Quarter ended September 30 11,402 0.075 70,703 0.075 10,318 0.075 11,385 0.085 11,323 0.085Quarter ended December 31 11,223 0.075 10,754 0.075 10,226 0.075 11,303 0.085 11,363 0.085

True-up dividends paid (to match 100% of N.I.) 26,585 0.18 25,815 0.18 35,450 0.26 33,248 0.25 38,835 0.29Earnings Dividend total 73,238 0.48 129,091 0.48 76,906 0.56 79,113 0.59 84,140 0.63

True Blue dividends paid (Capital Distribution) 76,494 0.52 35,710 0.25 34,663 0.25 33,924 0.25 33,274 0.25Calendar year-to-date dividends paid 149,732 1.00 164,801 0.73 111,569 0.81 113,037 0.84 117,414 0.88

Earnings Dividend, % of total dividend 48.00% 65.75% 69.14% 70.24% 71.59%


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Appendix O: Loan Positions

Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount RateReal Estate LoansOriginated 4,010,424 3.84% 4,005,615 3.74% 4,095,119 3.80% 4,177,021 3.90% 4,260,562 4.00% 4,345,773 4.10% 4,432,689 4.20%Correspondent Purchased 1,846,210 3.52% 2,206,072 3.50% 2,539,378 3.48% 2,800,049 3.58% 3,003,304 3.68% 3,156,966 3.78% 3,267,852 3.88%Bulk Purchased 485,682 2.25% 416,653 2.23% 352,065 2.24% 302,027 2.34% 259,100 2.44% 222,275 2.54% 190,683 2.64%Construction 29,552 3.64% 39,430 3.45% 37,459 3.44% 41,204 3.54% 45,325 3.64% 49,857 3.74% 54,843 3.84%Total Real Estate 6,371,868 3.56% 6,667,770 3.56% 7,024,020 3.60% 7,320,302 3.71% 7,568,291 3.82% 7,774,871 3.92% 7,946,067 4.03%CommercialPermanent 109,314 4.15% 110,768 4.16% 104,323 4.15% 106,409 4.25% 108,538 4.35% 110,708 4.45% 112,923 4.55%Construction 11,523 3.82% 43,375 4.13% 76,254 4.10% 91,505 4.20% 109,806 4.30% 131,767 4.40% 158,120 4.50%Total Commercial 120,837 4.12% 154,143 4.15% 180,577 4.13% 197,914 4.23% 218,343 4.32% 242,475 4.42% 271,043 4.52%Consumer LoansHome Equity 125,844 5.01% 123,345 5.01% 122,378 4.99% 124,826 5.09% 126,698 5.19% 128,598 5.29% 130,527 5.39%Other 4,179 4.21% 4,264 4.21% 4,213 4.19% 4,234 4.29% 4,255 4.39% 4,277 4.49% 4,298 4.59%Total 130,023 4.99% 127,609 4.99% 126,591 4.96% 129,060 5.06% 130,953 5.16% 132,875 5.26% 134,825 5.36%Total Loans Receivable 6,622,728 3.66% 6,949,522 3.60% 7,331,188 3.58% 7,647,275 3.66% 7,917,587 3.66% 8,150,221 3.66% 8,351,935 3.66%

7,331,043 7,648,629 7,921,108 8,156,447 8,361,277 Less:ACL 9443 8,540.00 9,059.54 9,434.14 9,804.09 10,181.34 10,577.58 Discounts/unearned loan fees 24213 24933 26,238.12 26,238.12 26,238.12 26,238.12 26,238.12 Premiumns/deferred costs -35955 -41975 (44,172.18) (44,172.18) (44,172.18) (44,172.18) (44,172.18) Total loans receivable 6,625,027 6,958,024 7,322,168 7,640,129 7,912,979 8,148,694 8,353,920

Interest:Originated 154,000.28 3.84% 149,810.00 3.74% 155,614.52 3.80% 162,903.83 3.90% 170,422.47 4.00% 178,176.69 4.10% 186,172.92 4.20%Correspondent Purchased 64,986.59 3.52% 77,212.52 3.50% 88,370.34 3.48% 100,241.76 3.58% 110,521.57 3.68% 119,333.32 3.78% 126,792.66 3.88%Bulk Purchased 10,927.85 2.25% 9,291.36 2.23% 7,886.26 2.24% 7,067.43 2.34% 6,322.05 2.44% 5,645.78 2.54% 5,034.04 2.64%Construction 1,075.69 3.64% 1,360.34 3.45% 1,288.57 3.44% 1,458.63 3.54% 1,649.82 3.64% 1,864.66 3.74% 2,105.97 3.84%Total 230,990 3.56% 237,674 3.56% 253,160 3.60% 271,672 3.71% 288,916 3.82% 305,020 3.92% 320,106 4.03%CommercialPermanent 4,536.53 4.15% 4,607.95 4.16% 4,329.40 4.15% 4,522.40 4.25% 4,721.39 4.35% 4,926.52 4.45% 5,137.98 4.55%Construction 440.18 3.82% 1,791.39 4.13% 3,126.41 4.10% 3,843.20 4.20% 4,721.65 4.30% 5,797.74 4.40% 7,115.41 4.50%Total 4,977 4.12% 6,399 4.15% 7,456 4.13% 8,366 4.23% 9,443 4.32% 10,724 4.42% 12,253 4.52%Consumer LoansHome Equity 6,304.78 5.01% 6,179.58 5.01% 6,106.66 4.99% 6,353.62 5.09% 6,575.62 5.19% 6,802.86 5.29% 7,035.43 5.39%Other 175.94 4.21% 179.51 4.21% 176.52 4.19% 181.64 4.29% 186.80 4.39% 192.02 4.49% 197.27 4.59%Total 6,481 4.99% 6,359 4.99% 6,283 4.96% 6,535 5.06% 6,762 5.16% 6,995 5.26% 7,233 5.36%Total Interest Receivable 233,005 3.66% 241,893 3.60% 257,839 3.66% 277,138 3.66% 295,317 3.66% 312,558 3.66% 329,014 3.66%

2015 2016 2017 (est) 2018 (est) 2019 (est)Portfolio Portfolio Portfolio Portfolio Portfolio

2020 (est) 2021 (est)Portfolio Portfolio


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Amount Rate Amount Rate Amount RateBeginning balance 6,011,799 3.82% 6,237,518 3.76% 6,622,728 3.66%Originations and refinancesFixed-rate:

One-to-four-family 376,660 594,406 465,013 Commercial real estate 7,050 7,498 136,277

Home Equity 2,863 6.16% 3,670 6.10% 4,247 5.71%Other 1,141 7.44% 769 8.07% 828 8.73%

OriginatedRefinanced by Bank customers

Fixed 387,714 4.00% 606,343 3.60% 606,365 3.52%Adjustable-rate:

One- to four-family 107,659 102,662 92,874 Commercial real estate - 0% - 0% - 0%

Home equity 70,066 4.64% 69,975 4.58% 71,013 4.65%Other 1,469 3.17% 1,537 3.11% 2,652 3.36%

Adjustable 179,194 3.74% 174,174 3.62% 166,539 3.65%

Fixed 387,714 4.00% 606,343 3.60% 606,365 3.52%Adjustable 179,194 3.74% 174,174 3.62% 166,539 3.65%

Purchases and participationsFixed-rate:

Correspondent - one- to four-family 366,599 3.95% 525,946 3.59% 567,014 3.56%Participations - commercial real estate 43,950 3.81% 25,082 3.79% 153,239 3.94%

Total fixed-rate purchased/participations 410,549 3.93% 551,028 3.60% 720,253 3.64%Adjustable-rate:

Correspondent - one- to four-family 148,876 3.09% 125,095 2.96% 95,803 2.90%Participations - commercial real estate 14,358 4.34% 35,236 4.25% 47,876 4.29%

Total adjustable-rate purchased/participations 163,234 3.20% 160,331 3.25% 143,679 3.36%Total purchased/participation loans 573,783 3.72% 711,359 3.52% 863,932 3.60%

2014 2015 2016New Loans New Loans New Loans

Appendix O: New Loan Positions and Rates


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Appendix O: Recent Quarter Balance Sheet with Rates / WAL

Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report [holds/does not hold] a financial interest in the securities of this company. The author(s), or a member of their household, of this report [knows/does not know] of the existence of any conflicts of interest that might bias the content or publication of this report. [The conflict of interest is ] Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society Kansas City. CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.


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