TFS Financial ($TFSL) — 3Q20 Update (11/22/20)

TFS Financial (TFSL)

This is a small bank in Cleveland that has a few attractive elements to it:

  1. Trades at a ridiculous valuation of book value and earnings
  2. Is a second-step mutual bank — potential to complete the thrift conversion and become even more overcapitalized
  3. Pays a 7% dividend — my punt-on-third down guilty pleasure
  4. Heavily overcapitalized

Earnings were down in the September quarter from $21.5m to $13.5m (-37%). But what really concerns me are the increased costs of borrowed funds in a lower rate environment and the huge one-time gains on loan sales — $11.5m in the quarter and $28.4m for the year. The latter propped up earnings considerably. Without these gains, net income could have been $60m which barely covers the current $0.28 per share dividend.

image

I take a little bit of comfort in how overcapitalized this bank is with $1.67bn in equity on $14.5bn in total assets. And with most loans being plain vanilla mortgages — there are unlikely to be many risky loans — as evidenced by the $3m in total provisions for the year ended 9/30/20.

Overcapitalization is obvious here — most banks are shooting for a CET1 ratio in the 10-12% range while TFSL is at ~21-22%! It also helps that the majority of their loans are lower on the risk scale of risk-weighted assets. TFSL probably has $200-300m in excess capital today ($4-6 per share).

image

The latest 10-K isn’t yet out so I had to estimate the final quarter in dividends and buybacks but this lays out the basic financial picture…

image

The bank has been stable at ~$80m in earnings for years despite lower net interest margins. They spent the 2014-2017 period deploying excess capital into buybacks which has almost completely stopped. Capital allocation has shifted toward dividends lately which suits me just fine — at $17, it’s a 6.5% yield.

With a stable earnings base, I’m not so worried about the dividend as insiders control the company and they have plenty of balance sheet capacity to reduce borrowing costs.