TFS Financial ($TFSL) — FY21 Update (11/26/21)

I was reviewing the newly released $TFSL 10-K and figured I’d send an update since it’s a stock that doesn’t get a lot of mention on here. I scooped up a very small number of shares in the midst of the pandemic (July 2020) and it remains a small position around 1% or so.

TFSL is a Cleveland, OH based savings & loan with a mutual ownership structure (i.e. most shares are owned by a MHC or mutual holding company) which is akin to being owned by depositors as opposed to shareholders. The true free float is only 53.7m shares despite the headline 280.7m number. Read more about mutuals / thrifts in Seth Klarman’s value investor classic “Margin of Safety.”

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  • 53.7m shares x $20 stock = $1.07bn market cap

Looking at fiscal year 2021 results… This isn’t massive earnings growth but the business has been incredibly stable despite a rocky environment for financial institutions lately. With a stable $80m in annual net income, that’s ~$1.50/share on a $20 stock is 13x earnings.

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TFSL is a plain vanilla lender offering fixed and adjustable rate residential mortgages and HELOCs mostly in Ohio, Florida, and California. It’s also well positioned for interest rates with less than 45% of loans at fixed rates and a big portion of that with terms less than 10 years.

Book value at 9/30/21 was $1.7bn or $32/share for a 0.6x P/B multiple — probably appropriate for the 4.7% ROEs this bank is earning. What I like about the balance sheet is the ridiculous level of overcapitalization. They carry 12% equity-to-assets and a 20% CET1 ratio (industry standard measure for capital levels) — for comparison, $JPM had a CET1 ratio of 12.9% at 3Q21 and they consider their balance sheet to be best in class…

So they’ve taken all that extra capital and pay it out as dividends and have bought back plenty of stock over the past few years. The dividend is $1.13/share for a 5.8% yield (excellent in this environment for such a low risk business).

Capital returns have slowed as they’ve gone from wildly overcapitalized to just very overcapitalized. The dividend has grown considerably and my guess is they’ll continue to grow this modestly.

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If net income hangs around $80m annually at current interest rates; then the dividend is well covered with a small amount of capital retained each year to grow book value.

It consumes a small little corner of my portfolio but that doesn’t bother me. It’s almost like a bond alternative with a 5.8% coupon and a few upside call options (low valuation, interest rates rise, distribute excess capital, sale of company, or pursue a second step conversion) and low downside risk (overcapitalization, plain vanilla lending, adjustable rate exposure).

This may give an impression of a “punt on third down” mentality and admittedly it is. But I’m not obsessed with portfolio concentration and have no problem owning this reasonable-returning stock on a quasi-permanent basis.

My take is that this little thing outperforms the market over the next decade with 7-9% annual returns — more if they take less likely paths such as a sale of the company, returning excess cash, or pursue a second step conversion.