TFSL - Third Federal Savings & Loan

[fishwithwings]

After modeling out a few past conversions, I understand it better. However, it seems that in most cases, a full second step conversion is usually dilutive to existing public shareholders. Has anyone else noticed this?

Yes.  From my understanding it is b/c the shares are being offered below book value.  See screenshot for examples or better yet: http://www.manualofideas.com/members/moi201010_michael_godby_interview.pdf MHC discussion starts on pp.56 and discussion on TFSL starts on pp 61.

[Philbert77]

i think this stock deserves a bump up on the forum. This looks like a great opportunity today. The dividend now sits at $1 annually, which is 6.7% on a stock price of $14.78. The company has continued to buyback stock and has increased the dividend multiple times.

In fact in the last 11 years the number of minority shares has been slashed in half from 105 million to 53 million at the end of June 2018.

 

As of June 30th 2018 it had a BVPS of $33 on the minority shares. So currently it is trading at 45% of book value. In a stock screen you will not see this though because of the nature of the mutual holding company.

[Sunrider]

i think this stock deserves a bump up on the forum. This looks like a great opportunity today. The dividend now sits at $1 annually, which is 6.7% on a stock price of $14.78. The company has continued to buyback stock and has increased the dividend multiple times.

In fact in the last 11 years the number of minority shares has been slashed in half from 105 million to 53 million at the end of June 2018.

 

As of June 30th 2018 it had a BVPS of $33 on the minority shares. So currently it is trading at 45% of book value. In a stock screen you will not see this though because of the nature of the mutual holding company.

 

Yeah ... but the lalaland CEO, Mr Sunshines and Blueskies is also on record saying that he doesn't see the second step demutualisation until another generation of his family takes over. These guys are just milking the management salaries and dividends on their own stock. Probably want to shrink share count to nothing, then take over what little is left publicly at a low low price.

 

It's been dead money for I think about 4 years.

 

[Spekulatius]

I like what I see and have started building a position. I agree on management, but as long as they continue and just keep doing, what they are doing, it should work out fine. Because if management, you are buying this for less than 50c on thr $ ($33 book value). They keep buying back shares and now thr MHC owns 81%, so there is more than 4 “phantom” shares for every share one owns. Yielding 6.7% now. It looks like they could bump up the yield to 10% at current share prices and earnings levels.

 

It’s true they the stock has done nothing during the last 4 years, but IV has increased, as has the dividend. So, this is now cheaper than ever. I can live with that if I get paid to wait.

[TBW]

Seems like a decent value here, div probably increasing, and you have an overcapitalized bank earning an roe of 7% (not awesome).  Maybe safest dividend yield you can find though.  Having spoken to management briefly I don't think they will be that aggressive buying back shares, more inclined to raise dividends.

 

This is one that I have thought a lot about and still not too sure, can they even do the second step?  I agree that they will likely wait till the next generation CEO is ready then hand them a very overcapitalized bank.  But at some point the second step may require too much capital.  By my calculations, and I could be wrong, they would need to raise between $6 and $8bil to do the second step, is that realistic?  I think part of the reason they may have stopped aggressively repurchasing is that it would increase that problem, as book value per share would increase.  Anyone have any thoughts on this? 

[fishwithwings]

Seems like a decent value here, div probably increasing, and you have an overcapitalized bank earning an roe of 7% (not awesome).  Maybe safest dividend yield you can find though.  Having spoken to management briefly I don't think they will be that aggressive buying back shares, more inclined to raise dividends.

 

This is one that I have thought a lot about and still not too sure, can they even do the second step?  I agree that they will likely wait till the next generation CEO is ready then hand them a very overcapitalized bank.  But at some point the second step may require too much capital.  By my calculations, and I could be wrong, they would need to raise between $6 and $8bil to do the second step, is that realistic?  I think part of the reason they may have stopped aggressively repurchasing is that it would increase that problem, as book value per share would increase.  Anyone have any thoughts on this?

 

Why would the second step be an issue?  Raising capital is going to be a piece of cake given second steps are usually done at $10 and at a discount to book. 

[Spekulatius]

Seems like a decent value here, div probably increasing, and you have an overcapitalized bank earning an roe of 7% (not awesome).  Maybe safest dividend yield you can find though.  Having spoken to management briefly I don't think they will be that aggressive buying back shares, more inclined to raise dividends.

 

This is one that I have thought a lot about and still not too sure, can they even do the second step?  I agree that they will likely wait till the next generation CEO is ready then hand them a very overcapitalized bank.  But at some point the second step may require too much capital.  By my calculations, and I could be wrong, they would need to raise between $6 and $8bil to do the second step, is that realistic?  I think part of the reason they may have stopped aggressively repurchasing is that it would increase that problem, as book value per share would increase.  Anyone have any thoughts on this?

 

Why would the second step be an issue?  Raising capital is going to be a piece of cake given second steps are usually done at $10 and at a discount to book.

 

They could do it, but then the bank would be ridiculously overcapitalized and almost resemble a cash box, with a small bank attached. They kind of boxed themselves in buying back so many shares and still end up overcapitalized.

[fishwithwings]

Seems like a decent value here, div probably increasing, and you have an overcapitalized bank earning an roe of 7% (not awesome).  Maybe safest dividend yield you can find though.  Having spoken to management briefly I don't think they will be that aggressive buying back shares, more inclined to raise dividends.

 

This is one that I have thought a lot about and still not too sure, can they even do the second step?  I agree that they will likely wait till the next generation CEO is ready then hand them a very overcapitalized bank.  But at some point the second step may require too much capital.  By my calculations, and I could be wrong, they would need to raise between $6 and $8bil to do the second step, is that realistic?  I think part of the reason they may have stopped aggressively repurchasing is that it would increase that problem, as book value per share would increase.  Anyone have any thoughts on this?

 

Why would the second step be an issue?  Raising capital is going to be a piece of cake given second steps are usually done at $10 and at a discount to book.

 

They could do it, but then the bank would be ridiculously overcapitalized and almost resemble a cash box, with a small bank attached. They kind of boxed themselves in buying back so many shares and still end up overcapitalized.

 

Sure.  That happens all the time with Mutual conversions.

[TBW]

Yeah that was my point, seemed to big relative to overall size of the bank.  Also, how much of a discount would they need to book to do so?

 

Are there other examples of a second step being this large?  i would be interested to take a look at one.

[Philbert77]

 

They could do it, but then the bank would be ridiculously overcapitalized and almost resemble a cash box, with a small bank attached. They kind of boxed themselves in buying back so many shares and still end up overcapitalized.

 

So i don't really know that much about these mutual conversions.... but couldn't they use the cash for an acquisition or buyback the shares once the conversion is complete? And if they never get to the second step does it really matter?

 

I mean if they are waiting for a next generation CEO wouldn't we be waiting a while on that?

[Spekulatius]

 

They could do it, but then the bank would be ridiculously overcapitalized and almost resemble a cash box, with a small bank attached. They kind of boxed themselves in buying back so many shares and still end up overcapitalized.

 

So i don't really know that much about these mutual conversions.... but couldn't they use the cash for an acquisition or buyback the shares once the conversion is complete? And if they never get to the second step does it really matter?

 

I mean if they are waiting for a next generation CEO wouldn't we be waiting a while on that?

 

Yes that is definitely possible. many thrifts are buying back stocks, but they would need to buy back like 80% of their shares after a 2nd step, just to get the bank being as overcapitlized than it is right now. I think there have been larger thrift conversion, CFFN is one example. Most are just a few hundred million in market cap and many even sub $50M

[TBW]

From my notes CFFN was $1.2bil.

 

You are right that in theory they could do second step and buy someone, but that still would require raising 7bil of equity vs current mkt cap of $750mil.  You also have to consider if this is a management team that would do that.  They pride themselves on never firing an employee,  That does not sound like an acquirer to me.

 

The other issue is their funding base isn't great.  Mostly CD's and FHLB.  Those are repricing quicker than their loans.  NIM has been squeezed by 9bps yoy, and that likely continues as the fed continues to raise rates.

 

So you have a bank that is significantly overcapitalized, partly because they know they have some interest rate risk, by about $300mil.  They are trading at ~fv at 0.45x, with an ROE of ~5% but the ROE will shrink next year too.  I would argue that is a bit cheap, but not wildly so.  However, as a shareholder you are yielding 8.7%, 2% in share repurchases, and 6.7% in div yield.  This dividend yield probably goes to 8.5% next year.  You also have an option where you have a big win if they do the second step, although I think it is very unlikely they do that anytime soon.  That said the CEO is 64 (pays himself $4mil per year!).

 

I can't decide, I see both sides here. 

[TBW]

Worth reading this interview of the CEO:

 

https://www.cleveland.com/business/index.ssf/2017/07/after_30_years_as_ceo_of_third.html

 

couple of key notes:

 

- "It would almost be a slap in the face to the people who helped build this company to put ourselves up for sale."

 

- would they sell "Well, you know what? We never say never. We've looked at companies in the past but it's hard to find companies that run anywhere close to the way we run. Their businesses may be more diversified, which means we would have to liquidate parts of the business. Or the way that people were treated, culturally, would be a huge mismatch. So we like to grow and we like to actually acquire customers one at a time. We're pretty good at that."

 

- "We're not necessarily a profit-driven company. Sure, we need profits. I always talk about a company's purpose. As a human being, we breathe air to live. But our sole purpose isn't breathing air. Same thing with a company. A company needs to make money but that's not the sole purpose of a company. There are other things that go along with that -- the community involvement, doing things that are going to help enhance people's lives. Our focus isn't on the numbers per se, but it's how we're doing to love and support the community. And make a little bit of money along the way too."

[oddballstocks]

The unfortunate reality is that a lot of mutuals like their mutual status because execs can earn a posh living while they are "working for the community."

 

The MHC insulates Third Federal from having to complete a second step.  The giant mutual Dollar Bank, which is also in Cleveland (and Pittsburgh) is forming a MHC.  Their stated intent is to never convert because "mutual banking is the purest form of banking."  Rumors have it that the CEO of Dollar is making $1m-$1.5m a year with execs raking it in as well.

 

I have accounts at Dollar, I've tried to attend their annual meeting.  As a depositor (shareholder) you are supposed to be able to attend.  They don't announce it, they won't tell you over the phone or in person.  The only way to know when it is: they post a small note on a small bulletin board with the date at their corporate headquarters in the lobby.  So you need to visit the lobby daily until you see this little note popup.  Not very transparent...wonder why?

 

Anecdotally I've heard stories of depositors who attend mutual annual meetings, ask for compensation details and get thrown out.

 

The dividend here is nice.  You're getting a dividend that approximates the bank's ROE, that's about as good as it gets.  If they grow the dividend that's gravy.

 

I've owned shares off and on in the past.

[Philbert77]

Anyone have thoughts on the odds of them increasing the dividend again?

[TBW]

My thoughts are that it is likely they do increase the div.

 

I am guessing that they realize that buying more shares only increases book value which is great but it makes the second step really huge in terms of capital needed to raise.  Therefore with earnings they are much more likely to pay divs than buyback stock. 

[no_free_lunch]

Anecdotally I've heard stories of depositors who attend mutual annual meetings, ask for compensation details and get thrown out.

 

I wasn't really sure, are you referring to Dollar or TFSL?