TFSL - Third Federal Savings & Loan

[muscleman]

 

The 74% will be offered to depositors at either $8 or $10.  They will re-adjust the number of shares based on a conversion ratio to reflect ownership. 

 

I am confused about this. Is there a statement by the company that when this happens, it will be either $8 or $10? If that is true, isn't that a big bummer for existing shareholders?

I think the original thesis of TFSL is that the 2nd step will never happen and the entire book value of TFSL belongs to the public shareholders.

But if this is not true, and now we expect this to complete the 2nd step sooner or later, then isn't the original thesis wrong?

 

[oddballstocks]

 

The 74% will be offered to depositors at either $8 or $10.  They will re-adjust the number of shares based on a conversion ratio to reflect ownership. 

 

I am confused about this. Is there a statement by the company that when this happens, it will be either $8 or $10? If that is true, isn't that a big bummer for existing shareholders?

I think the original thesis of TFSL is that the 2nd step will never happen and the entire book value of TFSL belongs to the public shareholders.

But if this is not true, and now we expect this to complete the 2nd step sooner or later, then isn't the original thesis wrong?

 

Mutuals always convert at either $8 or $10.  The shares that are public now are adjusted, your ownership percentage doesn't change even though the price changes.  You don't lose anything, in many cases the public shareholders can come out ahead gaining through the conversion. 

 

I think some of the misunderstanding in our conversation is possibly related to your confusion regarding mutuals and mutual holding companies?

 

Let me simplify this, say the bank has $1,000,000 in equity, 25% owned by public holders and 75% owned by mutual holders.  It's trading for $500k.  They decide to IPO, so they will issue shares at $10 and raise $750k in the offering.  You now own 25% of a company that has equity of $1.75m, the value of your holding increased.  More shares are in public hands, and the bank has more capital.  Does this make sense?

[muscleman]

 

Mutuals always convert at either $8 or $10.  The shares that are public now are adjusted, your ownership percentage doesn't change even though the price changes.  You don't lose anything, in many cases the public shareholders can come out ahead gaining through the conversion. 

 

I think some of the misunderstanding in our conversation is possibly related to your confusion regarding mutuals and mutual holding companies?

 

Let me simplify this, say the bank has $1,000,000 in equity, 25% owned by public holders and 75% owned by mutual holders.  It's trading for $500k.  They decide to IPO, so they will issue shares at $10 and raise $750k in the offering.  You now own 25% of a company that has equity of $1.75m, the value of your holding increased.  More shares are in public hands, and the bank has more capital.  Does this make sense?

 

 

Thank you oddball. I did get confused.

But regarding your example, I am still confused. Sorry about that.

So in your example, before the conversion, the public shareholders have 1m equity. (Not 25% of 1 million, but the entire 1 million. This is the whole thesis of TFSL, right?)

After conversion, the previous public shareholders have only 25% of 1.75m, which is 0.43 m equity, which is a big bummer. Isn't it?

[morningstar]

 

Mutuals always convert at either $8 or $10.  The shares that are public now are adjusted, your ownership percentage doesn't change even though the price changes.  You don't lose anything, in many cases the public shareholders can come out ahead gaining through the conversion. 

 

I think some of the misunderstanding in our conversation is possibly related to your confusion regarding mutuals and mutual holding companies?

 

Let me simplify this, say the bank has $1,000,000 in equity, 25% owned by public holders and 75% owned by mutual holders.  It's trading for $500k.  They decide to IPO, so they will issue shares at $10 and raise $750k in the offering.  You now own 25% of a company that has equity of $1.75m, the value of your holding increased.  More shares are in public hands, and the bank has more capital.  Does this make sense?

 

 

Thank you oddball. I did get confused.

But regarding your example, I am still confused. Sorry about that.

So in your example, before the conversion, the public shareholders have 1m equity. (Not 25% of 1 million, but the entire 1 million. This is the whole thesis of TFSL, right?)

After conversion, the previous public shareholders have only 25% of 1.75m, which is 0.43 m equity, which is a big bummer. Isn't it?

 

But it was only trading for 500k. So you wind owning it at about 1.2x book, pro forma for a finished demutualization, which is pretty good compared to the 2.0x book where standard GAAP calculations would have said you were trading to begin with.

 

Also, this example was pretty punitive in that the new shares were sold at 50% of where the existing public shares were trading - in reality the discount would likely be a bit smaller, and therefore more accretive to original public shareholders.

[muscleman]

But it was only trading for 500k. So you wind owning it at about 1.2x book, pro forma for a finished demutualization, which is pretty good compared to the 2.0x book where standard GAAP calculations would have said you were trading to begin with.

 

Also, this example was pretty punitive in that the new shares were sold at 50% of where the existing public shares were trading - in reality the discount would likely be a bit smaller, and therefore more accretive to original public shareholders.

 

My whole point is that this TFSL original thesis is almost entirely based on the assumption that as long as the 2nd step didn't happen, the public shareholders actually owns the entire book value. He ran some calculations and concluded that the book value per share is currently $24.4, and will soon reach $30, and that the current price is really cheap.

 

So how can we be so certain that the 2nd step of demutualization will never happen?

If it does happen, historically, what's the rights offering price?

 

I think these are the key questions.

[muscleman]

I found an example here:

https://www.google.com/finance?q=CFFN&ei=A4MaVPGiBOGJiAKFrYDIDw

 

This bank did the first step in 2000, and the stock price went from $10 to $40 in just 8 years. Then it decided to do the second-step conversion in 2010, and share price was decimated.

I checked the non-performing asset ratio, and it seems to be quite good at that time, so clearly there was no forced equity raise.

 

Thoughts?

[muscleman]

Talked to NoCallStrikes and it turned out that CFFN's conversion ration was over 2.2 instead of 0.8. I must have misread some other companies' conversions at mid night and confused with this one.

Thank you and I put 10% of my portfolio into this.

[cameronfen]

I wish there was a section on Investment and Accounting questions.  I guess the investment strategies post is most relavent, however this is a question about Third Federal Savings and Loans.  I came across the table attached on page 17 of the latest 10q.  There was also a similar table in the latest 10k.  In the table it says impaired loans with no related allowance are recorded at significantly below par, however, loans with a related allowance are recorded on the balance sheet for roughly par.  I would of thought it would be the other way around.  If you record an allowance for loan losses the loans would be significantly impared.  Does anyone else know why loans with an allowance are recorded at closer to par that loans without allowances.  Thanks,

 

Cameron

[oddballstocks]

http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/alll.pdf

 

http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/lpm.pdf

[muscleman]

http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/alll.pdf

 

http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/lpm.pdf

 

You've put in so much research! Is this your best idea right now? :)

[oddballstocks]

http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/alll.pdf

 

http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/lpm.pdf

 

You've put in so much research! Is this your best idea right now? :)

 

I've read those books and believe they're helpful to answering the question.  The Comptroller's Handbook is the 101 of banking.  This is how regulators view banks, this is what's given to new regulators when they're hired.  There is a lot of value in understanding banks like regulators understand them.

 

 

[muscleman]

http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/alll.pdf

 

http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/lpm.pdf

 

You've put in so much research! Is this your best idea right now? :)

 

I've read those books and believe they're helpful to answering the question.  The Comptroller's Handbook is the 101 of banking.  This is how regulators view banks, this is what's given to new regulators when they're hired.  There is a lot of value in understanding banks like regulators understand them.

 

Thanks a lot! I will read over this.

[cameronfen]

@muscleman  That's Nate from Oddball Stocks.  He is probably to modest to say so but he does a ton a research on a lot of stocks.  His blog is here: http://www.oddballstocks.com/

 

 

[no_thanks]

Earings out.  Don't see anything interesting at first look.

 

http://www.nasdaq.com/press-release/photo-release--tfs-financial-corporation-earnings-remain-steady-20150129-01260

[ArminvanBuyout]

I'm still sort of confused. Why is it that we can't count the shares held by the MHC? The company is still controlling the shares, and as a result the company.

[oddballstocks]

I'm still sort of confused. Why is it that we can't count the shares held by the MHC? The company is still controlling the shares, and as a result the company.

 

The best way to think of this is a mutual bank that is owned by depositors is owned by a public holding company.  You own shares in the public holding company.  The holding company owns shares in the mutual bank, which is in turn also owned by depositors.

 

You can't count mutual shares because they're not "real" yet.  If this thing fully converts then they will essentially IPO the mutual inside of the holdco.  Mutual holding companies are confusing, investors don't seem to get them, regulators don't like them, and I'm not sure bankers do either.  It wouldn't surprise me if mutual holding companies end up being phased out over the next decade or so.

[oddballstocks]

Earings out.  Don't see anything interesting at first look.

 

http://www.nasdaq.com/press-release/photo-release--tfs-financial-corporation-earnings-remain-steady-20150129-01260

 

I'd say the most interesting thing about the annual report is the packaging itself.  The cover is the sun with the words "Feel the Warmth" and below "Sunshine & Blue Skies".  The President's letter states that everything is going well and they feel "There's plenty more Sunshine and Blue Skies on the horizon!"  Here is a letter on their site referencing where this came from: https://www.thirdfederal.com/special_message_from_marc/special-message-march-2014

 

In my view the implicit signaling factor from the annual report is enormous.  The numbers don't jump out, but Stefanski is saying a LOT.  They are looking to grow and expand and their core banking operations are back on track.

[ArminvanBuyout]

I'm still sort of confused. Why is it that we can't count the shares held by the MHC? The company is still controlling the shares, and as a result the company.

 

The best way to think of this is a mutual bank that is owned by depositors is owned by a public holding company.  You own shares in the public holding company.  The holding company owns shares in the mutual bank, which is in turn also owned by depositors.

 

You can't count mutual shares because they're not "real" yet.  If this thing fully converts then they will essentially IPO the mutual inside of the holdco.  Mutual holding companies are confusing, investors don't seem to get them, regulators don't like them, and I'm not sure bankers do either.  It wouldn't surprise me if mutual holding companies end up being phased out over the next decade or so.

 

Thank you for responding.

 

Why are the shares not "real" though? Like you said, the depositors also owns part of the mutual bank, alongside you.

[valuedontlie]

I'm still sort of confused. Why is it that we can't count the shares held by the MHC? The company is still controlling the shares, and as a result the company.

 

The best way to think of this is a mutual bank that is owned by depositors is owned by a public holding company.  You own shares in the public holding company.  The holding company owns shares in the mutual bank, which is in turn also owned by depositors.

 

You can't count mutual shares because they're not "real" yet.  If this thing fully converts then they will essentially IPO the mutual inside of the holdco.  Mutual holding companies are confusing, investors don't seem to get them, regulators don't like them, and I'm not sure bankers do either.  It wouldn't surprise me if mutual holding companies end up being phased out over the next decade or so.

 

I believe regulation has already eliminated the messy "second step" conversion process whereby a mutual IPOs with the MHC and subsequently IPOs the MHC shares down the road. The remaining partially converted mutuals (maybe 10-15?) are slowly shrinking as second step conversions have picked up of late.

[hillfronter83]

I'm still sort of confused. Why is it that we can't count the shares held by the MHC? The company is still controlling the shares, and as a result the company.

 

The best way to think of this is a mutual bank that is owned by depositors is owned by a public holding company.  You own shares in the public holding company.  The holding company owns shares in the mutual bank, which is in turn also owned by depositors.

 

You can't count mutual shares because they're not "real" yet.  If this thing fully converts then they will essentially IPO the mutual inside of the holdco.  Mutual holding companies are confusing, investors don't seem to get them, regulators don't like them, and I'm not sure bankers do either.  It wouldn't surprise me if mutual holding companies end up being phased out over the next decade or so.

 

I'm also new to bank demutualization so I went through an example as suggested by Nate. The stock is CFFN, which Muscleman mentioned it in his early post. The company went through second step of conversion in 12/2010. Here is what I found out:

Before conversion:

Stock price $24.5/share

Public shareholder owned 29%, about 21.2 million shares

MHC owned the other 71%

Book value about $962 million

P/B including MHC interest was 1.9, excluding MHC ownership was about 0.54 (similarly attractive as TFSL?)

ROA about 0.80%, ROE about 7%, which arguably is better than TFSL.

 

For conversion, 118 million shares were issued at $10/share, including 38.5 million to MHC members. The public shares were converted at a ratio of 2.2637 to new shares, making total S/O after conversion 167.5 million. So public shareholders retained about 29% ownership.

 

Given today's CFFN price at $12.55/share (at about 1.2 P/B), CFFN shareholders' return was about 16% in a bull market.

 

So either CFFN is currently very cheap or I missed something? It's also interesting that CFFN conversion was under subscribed by MHC members.

 

[JAllen]

The important thing to point out is that the MHC shares only exist on a sheet of paper - they haven't actually been sold yet.

 

 

So when the second step occurs, those MHC shares are actually sold, and more capital is injected into the bank than what was there prior to the sale.

 

 

So the MHC shares are sort of reserved; they haven't been sold.

 

 

Now, if there is some ratio that isn't 1:1 for the sale, then that is something that would need to be carefully looked at and could be dilutive.  I had looked at single or complete demutualizations in the past where this wasn't a concern.

 

 

To illustrate, those are typically:

• Mutual bank with $10M depositors' equity
  
• Sells 1M shares for $10 per share
  
• So 1M shares outstanding with $20M shareholder equity = $20/share book value
  

 

 

 

 

 

 

[hillfronter83]

The important thing to point out is that the MHC shares only exist on a sheet of paper - they haven't actually been sold yet.

 

 

So when the second step occurs, those MHC shares are actually sold, and more capital is injected into the bank than what was there prior to the sale.

 

 

So the MHC shares are sort of reserved; they haven't been sold.

 

 

Now, if there is some ratio that isn't 1:1 for the sale, then that is something that would need to be carefully looked at and could be dilutive.  I had looked at single or complete demutualizations in the past where this wasn't a concern.

 

 

To illustrate, those are typically:

• Mutual bank with $10M depositors' equity
  
• Sells 1M shares for $10 per share
  
• So 1M shares outstanding with $20M shareholder equity = $20/share book value
  

 

Allen,

 

I think you hit the nail on the head. In CFFN's case, the new issue contributed only 55% of the post-conversion book value, yet owned 70% of the company, diluting public shareholders.

[JAllen]

Found a paper about thrift demutualizations:  http://digitalcommons.unl.edu/cgi/viewcontent.cgi?article=1005&context=businessdiss

 

 

Have a feeling some here will enjoy it.

[ArminvanBuyout]

So I'm going to try to better understand this through an example.

 

In a normal company with 10% of the shares public, the structure will be like this:

 

10 Share outstanding

1 Shares outstanding is controlled by public entities

9 Shares outstanding is controlled by the founder

 

The reason why the founder controls 9mm of BV is because he actually contributed capital to the company through an initial investment of some sort. In this case, the shares outstanding is correct.

 

In the case of TFSL (example numbers),

 

10 Shares outstanding

2 Public Shares outstanding

8 Shares outstanding controlled by the MHC

 

The 8 shares outstanding controlled by the MHC shouldn't be counted because the entity did not contribute capital to the company. Once the shares are sold for capital, they should be counted.

 

Is my thought process on the right track here?

2mm

[ArminvanBuyout]

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?