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“This Stock LOVES the Fed Rate Hikes” — what’s Melvin’s “The Perfect Dividend Stock?”

The 20% Letter promises "the best bank to buy in this bear market for just $16" -- what is it?

By Travis Johnson, Stock Gumshoe, January 18, 2023

Here’s the intro to the ongoing teaser pitch from Tim Melvin, who’s been pushing subscriptions to his new 20% Letter since last Fall with variations of this ad (this article is updated throughout, but the first version was published on September 27, 2022) — the headline runs alongside a black & white photo of what looks like a bank building in a depressed town:

“Could a beat up bank like this really have made you millions over the last 22 years?

“Guys, Iā€™m not kiddingā€¦

“These eyesores are cash cows. There are 174 of them throwing off big money as the Federal Reserve raises interest rates.

“Iā€™ll show you the best bank to buy in this bear market for just $16”

And there are a couple clues in that photo, so it’s actually enough on its own for the Thinkolator to ID his stock for you… but that’s no fun, let’s run through a little of his pitch first, we’d like to hear why he likes this particular bank stock.

The ad is for a service he’s launching called The 20% Letter ($79/yr), which is trying to take advantage of higher interest rates to build an opportunistic portfolio of both bank stocks and real estate stocks — most of the tease is about his “perfect dividend stock,” which is a small bank.

He sums it up pretty well on the order form:

“You can continue to try and fight the Federal Reserve bottom-fishing growth stocks that will never come backā€¦ or dividend stocks on the brink of slashing dividends.

“Orā€¦

“Jump on an opportunity thatā€™s consistently beaten the market for the last 23 years. Through wars, recessions, crashes, pandemics, and inflation.

“Banks absolutely thrive during rising interest rate environments. They generate so much extra cash, youā€™ll enjoy compounding dividends.

“In fact, the #1 bank stock I recommend now pays out most of their cashflow to shareholders at a 8.21% yield.”

So that’s what he’s selling as his “perfect dividend stock” — a little bank which follows the strategy he says he has tested for 23 years, and which is the first addition to a portfolio of what will be ten little bank stocks.

Which banks fit his criteria? He gives a bunch of examples, but here’s a little bit of the ad:

“The small banks you may find hiding behind a Burger King or that suspect taco joint.

“Out of 3,711 financial companiesā€¦ only about 174 fit the bill.

“Many are banks youā€™ve never heard of unless you live in the area.

“This beat up building here is owned by a small bank that only operates 39 locations in only Ohio and Florida.

“Yet, theyā€™re set to raise their dividends by 37.5% this year. And I recommend buying it right now. Today….

“Buying these smaller banks is proven to be the #1 best way to build wealth and income. In any market. Anywhere.

“You wouldā€™ve beat the S&P 500 by a whopping 2,325% over the last 22 years”

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What else does he tell us about his perfect stock?

“… my #1 bank dividend stock has averaged 37.5% dividend increases over the last decade.

“At that rate, you could collect over $23,604 dividends over the next 60 months starting with $25,000.

“This stock has been profitable for decades… 81% of their business is strictly mortgages…

“Loan losses and deliquencies are only a fraction of the national average… 70% are originated at less than 80% loan to value….

“…they’ve expanded to adding over a dozen locations in Florida where retirees (and money) hang out.”

And it’s apparently a good value here…

“I look at the price-to-book ratio…. My perfect dividend stock runs at a 0.43….

“On a price-to-earnings ratio, it’s around 11.

“The perfect dividend stock is ultra-cheap”

And apparently the company is also buying back shares, but still trades at a big discount… and yes, he shows that photo again from the headline and says that it started out in that “rundown building” in 1938…

“From this building, a husband and wife team built a small bank to help immigrants of their European heritage.

“The business is almost entirely focused on mortgages….

“Only 39 branches total across just Ohio and Florida.

“Theyā€™re underwriting for mortgages is cream of the crop. Their delinquencies are a fraction of the national average rate of 8.22%.

“The perfect dividend bank stock is trading for less than $16

“And its dividend could keep increasing up to 37.5% each year.”

In part, Melvin is saying this is a “don’t fight the Fed” strategy… he argues that these small bank stocks will do great in any scenario when rates are high or rising:

“… when the Fed is aggressively lowering or keeping rates at 0%ā€¦ normal growth and blue chip stocks will outpace the banks.

“But, the rest of the time, weā€™re winning.

“We even would win, on average, when bank stocks get hammered during the 2008 crisis.”

OK, so rates are going up, small banks can often be very steady and sometimes get acquired by larger banks, and apparently this one also pays an unusually high dividend. What’s the story, and what’s the stock?

This is a little bank called Third Federal Savings & Loan, which is a mutual savings bank out of Cleveland that was originally launched to serve the community of Polish immigrants in that area. The bank has partially privatized, selling a chunk of the company to customers about 15 years ago, and that private chunk is publicly traded under the name TFS Financial (TFSL). It’s still largely a family business, with the son of the founders, Marc Stefanski, serving as Chairman and CEO (he took over 35 years ago, I think he’s only 68 years old now now).

They are primarily a pretty classic savings & loan organization, they take deposits and use that money to make loans, primarily mortgage loans and home equity lines of credit, though they do also carry some leverage (in addition to “borrowing” money from depositors, they also borrow from others). Their profit comes from the difference between what it costs them to borrow money and what they can earn by lending money, once you’ve removed the cost of their operating structure (people, branches, etc.).

About half of their business is in Ohio, another 20% in Florida, and those are the only states where they have a physical presence… the rest of their business is national, built by offering mortgages and other home loans online. 81% of the business is indeed primary mortgages, about 60% of which are fixed-rate and 40% adjustable rate, and the rest is home equity loans and other consumer lending. As of the September quarter (the most recent available, presentation here), their mortgages (81% of the portfolio) had an average yield of 3.11%, and the HELOCs and other home loans (19% of the portfolio) yield about 5.3%. That makes the total portfolio yield about 3.5%.

On the funding side, the $13 billion in loans is covered by $9 billion in deposits (66% of which is in CDs, with about $4 billion of that maturing in the next 18 months), and $4 billion in borrowing, about 75% of which matures within the next year. So that has gotten much worse since the first time we looked at this ad, just one quarter ago (when the average cost of deposits was 0.95%, and the cost of their loans was 1.69%, and back then only 43% of their loans matured within a year), but it still balances out reasonably well, they are currently paying a weighted average cost of about 1.7% and rising on their loans and deposits (up from 1.2% the previous quarter), and they’re earning about 3.5% on the mortgages and other loans they’ve made (up from 3.2% in the previous quarter). That gives them better than a 1.5% net interest margin, still, and 1.5% of $13 billion is almost $200 million, that can cover a lot of employee salaries and branch upkeep.

The challenge is that the margin is gradually getting tighter — the rates on the mortgages they make are not going up as quickly as the rates they have to pay on their borrowing and on their deposits, mostly because the majority of the mortgages are fixed rate (and because adjustable rate mortgages don’t typically adjust very fast — especially if they’re fairly new). 39% of their loans are mortgages which have ten or more years left, and which earn only 3.51% — that may be fine if interest rates start to drop from here, which is clearly the bet of many investors at the moment, but the average 30-year mortgage available today is at about 6.5%, so they can’t really sell the mortgages without taking a substantial capital hit… and if their cost of borrowing keeps rising, as it has been recently, then the profit margin starts to disappear. They have good lending standards, it appears, with very creditworthy borrowers, and their delinquency rates are low, so that’s good… but they can’t magically do anything to change the fact that they own a huge chunk of fixed-rate mortgages, and have to finance those mortgages with debt and deposits that are getting more expensive. Things will probably look worse next quarter, since we’re still talking about September numbers and interest rates shot up during the Fall but it does take some time for customers to change their behavior (like moving their bank deposits to higher yielding banks, or slowing down HELOC applications as costs rise).

So that’s the context of how this company works — their revenue has actually been closer to $300 million most years, I was a little too conservative with those spitballed numbers in the paragraph above, and it’s been in roughly this same range for a long time, and their normalized income has usually come in around $80 million, which is reported as 29 or 30 cents per share. That has actually started to look a little worse of late, net income is down to 27 cents per share on a trailing basis… but it has indeed been a pretty steady business.

Ring a bell? Good memory you’ve got there, not only did this ad get heavily circulated back in September, when I shared the first version of this article, but Brett Owens over at Contrarian Income was teasing this as a high-yielding dividend-growth bank almost two years ago, he called it his “#1 Income Play for 2021,” in part because he thought a big dividend increase was coming. (It wasn’t, but more on that in a minute.)

The good news? TFSL does pay a high current dividend — the current dividend is $1.13 per share, per year, payable quarterly. With the stock now at about $14.80, that’s about a 7.5% yield. Pretty good, and higher than inflation at the moment.

The bad news? The dividend is not growing. It did grow for several years coming into the COVID crisis, but it’s now at the maximum level the mutual owners have approved, and the dividend has been mostly unchanged since March of 2020 (OK, they technically increased it in 2021, but the increase was less than 1% — and it was not increased last year).

The strange news? This company that earned 27 cents per share over the past year, down a bit from the 28-30 cents they usually earn, is paying out a dividend of $1.13 per share. How on earth does that work?

The short answer is, the customers don’t want dividends… they get their rewards in the form of better rates on their deposits, and they have decided to refuse the dividend over the past 15 years, so the profits of the company that can be paid out as dividends are instead paid out to just the publicly held shares. There are 280 million shares outstanding, but only 53.5 million of them are owned by the public and traded, so dividing up that $66 million in profit among 53.5 million shares makes it look a lot better than would dividing up the profit among 280 million shares.

This is one little player in a corner of the investing world that we call “mutual conversions” — that’s when a mutual company, usually a savings bank or insurance company that is owned by the depositors and customers, decides to sell some of itself to investors to raise more capital (there are lots of these mutual companies, they’re not all banks, and sometimes they stay “mutual” forever — the biggest ones you’ve probably heard of are State Farm and Vanguard).

In the case of small banks, they generally follow a two-step process — offer up a chunk of the bank to depositors, who usually get the chance to buy at something near book value (or some other discounted price), and list them on the stock market, and then, later, take the rest of the company public in the second step of the conversion. If they’re an attractive business, they often get bought out after the waiting period has expired following their second-step conversion (usually three years), just because consolidation has been the name of the game in the US banking business for generations, and buying up small banks is the easiest way for larger banks to grow.

You don’t have to go all the way public, though, you can stop halfway through, and that’s what TFS Financial did — they sold a small chunk of the company 15 years ago, and that chunk is still publicly traded, but 81% of the mutual savings bank is still owned by its depositors.

And the company, in it shareholder communications, always makes a point of focusing on the minority public shares (which own about 19% of the company) — this is how they put it in their most recent investor presentation:

“GAAP Book Value Per Share of $6.57 but Book Value Per Minority Share of $34.50.

“For last 4 quarters, GAAP Earnings Per Share of $0.27 but Earnings Per Minority Share of $1.39.”

And they reiterate that this is a typical valuation metric with this footnote:

“In a mutual holding company structure where only the minority shares are publically held, many investors focus on the level of shareholdersā€™ equity and net income per minority shares outstanding, which is a nonā€GAAP measure.”

I wouldn’t push back too hard against that assertion, though I will note that in the mutual conversion investments I’ve looked at in the past, the minority shareholders have owned something closer to 50% of the company, not this very small 19% stake. And that shrinking minority stake comes largely from share buybacks which effectively increase the leverage for shareholders — the company has bought back about half of the originally floated minority shares since 2007, which, using their rationale, makes perfect sense. They bought 52 million shares to cut their minority shareholding from 105 million to 53 million, and in so doing were able to claim dramatic growth in earnings and book value per minority share.

This is a more extreme example than most I’ve looked at, but it’s true that other banks who have done mutual conversions have made similar arguments, and investors generally accept that — and it’s also true that mutual conversions have been an appealing place to look for relatively quiet investments that end up performing well, with relatively low risk of a real blow-up (and sometimes a nice takeover at a premium price).

This has not been a great era for bank earnings, however, with interest rates squeezed over the past decade, and TFSL has been a below-average performer since everything bottomed out in March of 2009, though, to be fair, it was a brand-new stock at the time (listed in 2007). Banks in general have disappointed during that time, but the larger ones, on average, have at least come closer to keeping up with the S&P 500 (up 535% since the March 2009 low). Here’s that chart, in case you’re curious — that’s TFSL down at the bottom in purple, the S&P in orange, and a couple bank ETFs in the middle… and this is the total return, including dividends:

TFSL Total Return Level Chart

The dividend to common shareholders can stay pretty high as long as they make a decent net interest margin (the difference between their cost of borrowing and the rate they earn by lending), and as long as the majority shares owned by the mutual company, Third Federal MHC, elect to reject dividends (that has to be voted on by those owners each year and approved by the regulators, and could change). That vote has been overwhelmingly in favor of withholding dividends from the mutual company in the past (the vote this past summer was 97% in favor of rejecting the dividend), but if that changed it would obviously be a very different investment — TFS reported net income of roughly $75 million over the past year and paid out $58 million in dividends, so their dividend is covered, (albeit not as easily as it was a couple years ago)… but distributing $58 million to the 53 million outstanding minority public shares is a lot more exciting, for shareholders, than would be distributing that money to the full shareholder base, including the majority mutual shareholding company, of 280 million shares (if the mutual company voted to accept the dividend, as currently seems very unlikely, partly because they’d have to pay taxes on it, the annual payout could effectively drop from $1.13 per share to about 20 cents/share).

So that’s why the financials sound a little funny and don’t screen well, GAAP accounting requires them to include the 81% of the shares owned by the mutual company… and the company itself would prefer that investors think about the whole company being owned by the 19% minority shareholders. That means the minority shareholders essentially get free leverage, having a call on the profits of the whole company while only actually owning a fifth of it.

As long as that’s the consensus of shareholders, and as long as depositors continue to approve the waiver every year to withhold dividends from the majority shareholders, that might work out well. And the odds are reasonably good that’s how it will turn out, though the dividend seems unlikely to grow anytime soon (it was approved at the current level for this next year, and there will be another vote of the mutual company’s owners next summer, as is required every year, but the company’s earnings are also likely to be much weaker in the near future than they have been in recent years).

What are the risks? Well, the big risk for a bank is a shifting yield curve… in general, to oversimplify, savings banks borrow short and lend long, meaning they take depositors’ money in a savings account or one-year CD and lend it out on a 30-year mortgage… but every bank is a little different. Because TFSL actually holds most of its own loans and earns the margin between their cost of funds and the returns from those loans, their situation is a lot cleaner than at most big banks. The big risk is that their cost of borrowing can easily rise much faster than their income from lending, since the majority of their lending is in 30-year fixed-rate mortgages at what are now well-below-market rates, and the majority of their borrowing has to be recycled every year or two at then-current rates.

There are things they can do to manage that, that’s the life of a banker, but the math is pretty simple — the outstanding long-term mortgages on their books are bringing in only about 3.5% a year, and the money they have “borrowed” from depositors and lenders is costing them 1.5-2% a year. At least half of those mortgages could sit still for a decade or more, still bringing in 3.5%, but as TFSL refinances their debt or tries to attract more savers they’ll be paying much more than the current 1.5-2% a year.

The challenge comes mostly from the duration of their portfolio, and the fact that rates for short term borrowing often reset much faster than rates for long-term lending. 48% of their lending is at fixed rates for primary mortgages, and almost 80% of that amount is not going to mature for more than ten years. What might save their net interest margin are those adjustable rate mortgages, 33% of their total, and their home equity lines of credit (18%), which are probably also at adjustable rates, and are at least at higher rates to begin with… but you have to have some faith that they have structured their balance sheet to manage this abrupt increase in interest rates over the next year or two, because probably 80% of their funding base is likely to see costs ramp up dramatically this year.

How so? They’re going to have to pay 4% on those CDs to attract people pretty soon, 1% won’t cut it any more, and about half of those CDs mature before September… and they’ll probably soon have to pay 2%+ on savings accounts, maybe more if rates keep rising (big banks have criminally low savings rates still, but small and online banks who are trying to attract depositors are paying more than 3%). And on the non-deposit side, the borrowing that they’ve done from other folks will come due over time and roll over to much higher costs now, too — as of September they said they had about $3.6 billion in borrowing that matures within a year, and when they refinance that borrowing it will likely cost a LOT more than the 3% they’re currently paying.

Borrowing at 4% and lending at 3% is not profitable, of course. That means investors have to hope either that their interest rate hedging is helping to make up the difference (at some cost), or that the reset terms of their adjustable rate mortgages will keep up… because the half of their portfolio that’s earning only 3% or so, those fixed-rate mortgages, is very unlikely to go away soon and might become a bit of an albatross around their necks. At least for a while.

There are plenty of stories now about folks being “stuck” in their house, if you’ve got a 3% mortgage and the cost of a new mortgage is coming in at more than twice that amount now, that means you’ll both be getting lower bids for your home if you want to sell, and will have a harder time buying something else if you have to take out a new mortgage… which means more people will stay put. Even a lot of Ohio “empty nest” retirees who would otherwise think about selling and moving to Florida might be holding off for a few more years.

I don’t want to make you think this is a disaster — it probably isn’t. Just that things can get challenging for a business like this if interest rates change quickly, since their borrowing rates will very likely reset faster than their lending rates and compress their margins for a while. Over time they should be able to adjust, banks have survived this short-term compression many times in the past, and things are usually much more gradual in the real world than they appear on a spreadsheet, but that “over time” part is important. Things could become catastrophic for TFSL if the situation persists for a few years, but they have very low default rates and have been fairly conservative in their underwriting, so hopefully they can adjust as their cost of borrowing rises.

Just keep in mind that the 80% ownership of the mutual company, the bank’s customers, is a sleeping beast to some degree, and there’s probably the potential that the mutual company could quickly change the story if they decide on a different strategy. Most likely that would mean a full conversion to a publicly traded corporation, which would be somewhat dilutive but might still go fairly well (since the mutual owners, the account holders, wouldn’t just be given the shares that they theoretically already own, they would be offered the chance to buy them at something like book value — which would instantly overcapitalize the bank and, three years later, maybe make them an attractive takeover target).

It’s a little tricky to get your head around these partial ownership structures when dealing with mutual conversions, or with other companies where there’s still a large part of the company which owns a different class of shares that doesn’t trade — does that half of the company which isn’t public and may not get a dividend still count as “ownership?” Should it go into an assessment of the valuation? It’s not so different, really, than the debate over whether we should look at “adjusted earnings” or “GAAP earnings” for a tech stock that issues millions of new shares each year to pay employees — fashions change when it comes to that kind of valuation thinking, there is no single “rule” and investors have to think for themselves in making those judgements.

I’ve blathered on about this for too long, so here’s what we know now: TFS Financial (TFSL) is essentially a levered bet on the performance of Third Federal Savings, a bank that’s mostly in Ohio and Florida and that mostly makes mortgages that are funded by issuing CDs and paying savers (and borrowing some money). The levered part of that doesn’t cost investors anything directly, it comes from the fact that the publicly traded shares get most of the profits from the entire operation, in the form of a high dividend… but only actually own 19% of the bank.

Those dividends grew for many years, but have currently stopped growing, and the dividend has to be re-authorized each July by the mutual company’s owners (the bank’s customers, essentially). At the current rate of dividends, which is approved for at least a couple more quarters, the shares have a dividend yield of about 7.5%. Tim Melvin implies that the dividend could jump another 37.5% quickly, but that looks very unlikely to me (and is impossible until at least next July, when the next vote takes place).

And there you have it. In a world of scared investors and risk-averse sentiment, a 7.5% yield from a pretty conservative little bank sounds decent… just note that while rising rates are generally good for banks over time, they aren’t necessarily good for every bank during every period, especially if their cost of borrowing is going up faster than the income they can collect from their lending portfolio.

I do have a soft spot for small banks, they can be a nice and fairly steady foundation for a portfolio… but they’re generally not market-beaters unless you’re talking about just the smaller banks that have been acquired at premium prices over the years. And the more “vanilla” a savings bank is right now, the more challenging its business is probably going to be in the near term as they face rising costs for deposits and falling value for the mortgages they hold on their books (and, perhaps, slower demand for new mortgages for a longer period of time if rates keep climbing). So I’ll continue to pass on this one right now, even though I do like a nice dividend.

That’s just my call, though, and what I’m doing with my money — with your money, it’s your opinion that matters. Think this levered play on what has been a pretty conservative savings bank will keep paying its nice dividend, or maybe raise it in the future? Have a crystal ball that tells you where rates will settle in the future, and what that will mean for the bank’s net interest margin? Please do tell in a comment below, we could all stand to get a little wiser (some folks had very helpful comments on the first version of this letter, so I’ve included those below as well). Thanks for reading!

P.S. Melvin also included some “special report” teases in this ad about some real estate investments that also pay out high dividends, and about some other small banks that he sees as takeover targets… I also wrote about those when the ad first started running, but have not updated that article — the teased stocks are still the same, FFBW (FFBW), Territorial Bancorp (TBNK) and Global Medical REIT (GMRE), here’s how those three plus TFSH have done since this ad started running back in September — with the exception of FFBW, they’ve generally held up better than the S&P 500 (orange) and the larger regional banks (the KBWR ETF, brown):

TFSL Total Return Level Chart

Disclosure: I am not directly invested in any of the companies mentioned above, and will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.

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Eric Gowins
Eric Gowins
September 27, 2022 3:56 pm

What were the clues in the picture?

twycked
December 19, 2022 1:58 pm
Reply to  Eric Gowins

BB&T bought SUNTRUST a couple of years ago not a couple of days 12/14/2022 ago. Eric, did you join?

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Simon Sapsford
September 27, 2022 4:06 pm

Buying banks is always about buying the dips and holding till someone buys them as they grow for me. They are cyclical but pay dividends. I like little banks that I buy on dips so they pay me decent yields on original funds, give me decent bounce back returns and eventually some bigger bank buys them for even more return. I am presently down to owning $HOPE, with a 91+% gain and an effective dividend on purchase prices of 7.8%. All the rest have been purchased. Ideas for me to buy anyone?

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Avidbank Investor
Guest
Avidbank Investor
January 19, 2023 12:08 am
Reply to  Simon Sapsford

Idea for anyone to buy:
Avidbank Holdings, Inc. (OTCPK – AVBH), avidbank.com.
Consolidation is ongoing in the banking industry, mainly for cost efficiency, economies of scale, diversification, and geographic expansion. Small banks merge with other small banks, and large banks acquire small banks. No antitrust issues arise that would prevent large bank + large bank mergers.
Small banks track mainly the local economy where they are situated. Their customers are mostly local.

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Avidbank Holdings (AVBH)
contractorr
contractorr
September 27, 2022 6:22 pm

Travis, GREAT dissection of TFSL. BUT Series I Savings Bonds is offering 9.6% for next six months with no negative impact like TFSL.
WHAT YOU SAY?

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quincy adams
quincy adams
September 27, 2022 7:58 pm

In my view, the elephant in the lobby is the 40% adjustable rate mortgages, which is similar to the average level among banks just before the Great Recession. When these reset, they could be looking at a hurricane size wave of defaults. Should that develop, aside from the likely dividend cut, they might consider slicing a bigger chunk of themselves off to the public in order to save themselves. I also love dividend stocks, but that takes a back seat to preservation of capital.

blackjack69
Irregular
blackjack69
September 27, 2022 8:54 pm

Thanks for a terrific analysis. I’m curious about Melvo’s additional real estate and bank takeovers and would appreciate additional information when you get around to it. Keep up the good work. Your analyses have helped me to avoid making some potentially bad investment decisions.

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Sherman
Member
Sherman
September 27, 2022 9:40 pm

Hi Travis, what’s your view on BDC stocks (Business Development Company) to ride on the rising interest rates? Most of these BDCs loan to their customers are in floating rate.

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carlb60
Irregular
September 27, 2022 10:30 pm

This is a strange one where the managing family owns a substantial portion of the public stock. I owned some for a while and it paid a good dividend, but I think that sooner or later the “mutual” owners (depositors) or regulators will want more into reserves or capital. As an old banker, I think this is just too strange to last forever, and I did not want to be around when something goes wrong.

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kashg123
kashg123
September 28, 2022 2:46 am

8.4 percent might look attractive, but it is the dividend dollars that is important to me. The price has dropped from a high of about $22 in 2021 to about $13 now. The dividend yield with the same dividend $ would have correspondingly gone up. So looking at dividend yield % numbers to me is misleading.

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wally1
wally1
September 28, 2022 7:28 am

Some years ago one of the newsletters was touting TFSL as a takeover target. Any thoughts on that?

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friarjohn
friarjohn
September 28, 2022 11:30 am

IMO B Riley Financial offers 8% and less risk.

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Steve Hall
Steve Hall
September 28, 2022 12:55 pm

RE: Banks. For a bank “borrowing at 4% and lending at 3% is not profitable” . . Maybe. But that does not account for Fractional Reserves. In our system, the bank can lend as much as 20 times the amount that it has borrowed. If they borrow 1,000 at 4% and lend 20,000 at 3% , is that profitable?

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gailrock
gailrock
October 1, 2022 11:04 am

Fabulous discussion and education on small banks in general! Thanks

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carlb60
Irregular
October 2, 2022 12:40 am

Travis is right. Banks or S&Ls cannot lend more than their deposits. In fact, they have to maintain a minimum percentage of cash and government bond reserves. when I was a banker, the required reserves were around 23% of deposits. it’s pretty easy to figure that loan rates have to be higher than average deposit rates if loans cannot be more than 77% of deposits, and of course, there’s always that nuisance of having to pay the help and the light bill and the rent

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Ishkabibel
Member
Ishkabibel
October 3, 2022 10:13 am

Just curious, has anyone heard of the small pharma ($4 stock), that Ray Blanco is pushing, that is currently working on major clinical trial announcements for Rheumatoid arthritis?

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Frank
Guest
Frank
January 18, 2023 3:54 pm

This Bank has zero non-accruals and a very high average FICO borrowers score. Very conservative, and I’ve worked at small local family run Banks. Eventually they all get bought out. The CEO is 68 and was asked about a sale. His answer: Not while I still run it, so this is just waiting for his retirement party. Treading water until then

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Daniel
Guest
Daniel
January 18, 2023 5:16 pm

I grew up in Ohio and the bank in Cincy was Fifth Third Bank. Did they rename?

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John C
Member
John C
January 19, 2023 8:36 am

Invisible phenomena Ignite Massive stock wins. Tom Gentile pitch.

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Azureblue
Member
Azureblue
March 11, 2023 1:19 am

I do not own TFSL, but doubt they have much exposure to Silicon Valley or crypto. What do you think Mr Gumshoe??

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Carl Brady
Irregular
March 11, 2023 3:44 pm

My understanding is that when tech startups were flush with investors capital , they deposited it faster than SVB could get it invested. So, management parked the excess in bonds that were very low yield at the time. When rates started up and depositors demanded more interest or move, the bank had to liquidate bonds at big losses. Remember when the interest rate doubles, the principal is worth half. We might be surprised how many banks face this same problem. If the banks were prudent and laddered their bond portfolio with plenty of short maturities matching their CD maturities, they will be OK. Not very profitable, but OK

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