TFSL is on it’s regular roller coaster ride. Low $13 range and below has always seemed to be a good entry point (although I have to say I haven’t always been disciplined or patient enough to wait). Now stock is once again getting in that range. Other then general concerns about banking, housing, and interest rates, anyone see any other issues with this one? Has anything changed from our last board discussions?
I’ve used this primarily as a source of income for the dividend and occasionally selling when it gets above $16-17. In the below $13 range, considering adding.
Hi physician, this looks like automated program to me. I wouldn’t pay too much attention except the earnings estimates are coming down.
But I will mention, since no one has, that all the banks are getting killed because of the SIVB bank run/ stock freeze. They are a bank that deals with startups and seemed to have been caught in a cash burn and run on thier deposits / stock. If you own SIVB, you are probably screwed. But I am not sure why all banks are dropping.
I own a few mutual conversion banks and the are all down. It seems to me that the risk for SIVB has nothing to do with these type of banks that lend mortgages to home owners or commercial property.
Not saying that they don’t have any interest rate risk but the very big drop in the last couple days seems way overdone.
Any way, just thought I would inject this thought into the conversation because it is clearly relevant to the price drops even if not the businesses.
Here is the problem, 90% of SIVB deposits are over 250K, meaning they are not covered by FDIC, If FED, Government doesn’t step in by Monday morning, then you are telling “depositors” if you have over $250K then you are un-insured and on your own. This is going to create a massive bank run. Depositors will withdraw and move it to UST (which by the way pays over 5% and some like me had already done that), or to JPM, BAC, C (systemically important bank, meaning your money is safe). This has already started happening on Friday.
This is going to trigger a massive bank run and moving even more business to big banks. Other second order, third order issues are, crypto and startup firms M&A or going under.
Smaller banks will be impacted, how severely is going to be seen. I know this board and Jim are big on thrifts and small banks. IMO, this is not the time to be brave with your money and buy smaller banks.
Here’s a counter-point take on the SIVB failure and what, if any, impact it will have beyond those folks that banked with SIVB. The author is Los Angeles Times business columnist, Michael Hiltzik:
I remain long TFSL and, in fact, added to my shares on Friday’s weakness and also added a new position in USB.
The only question I have is, if you have more than $250 K in a bank, and it is a small bank, will you still keep the money in that bank? It seems FED is (at least so far) saying, only $250K is insured.
Here is my own personal story. When we got married in 1999 and my wife moved to bay area (silicon valley) I opened her a credit union account and also she setup a direct deposited $1000 of salary into the CU account to encourage savings. Over the last 23 years that has grown into a significant sum, which was never touched. Friday, we took that money out and moved it, because at last she is convinced having more than $250K is a risk.
SO the moral of the story is SVB collapse is so big, it convinced my wife to listen to me after 23 years!
One of the big issues here is that TFSL’s deposit franchise is not that good. So as rates rise as quickly as they have, they have to keep raising rates on their deposits (most of which are time deposits) in order to keep funding for their loans. TFSL’s net interest margin, IIRC, was just about 150 basis points, so not large as these things go. So if rates stay “higher for longer” as the saying goes, it could really ding earnings.
Some segment of the market keeps betting that the Fed will have to quickly lower rates in the (relative) near-term, as the economy hits a recession (which itself seems to keep receding), but the Fed keeps suggesting rates will stay high as long as they think they’re necessary. We now have a massive yield curve inversion, the steepest in 40+ years. It will really hurt banks if it continues for any length of time, particularly banks with a ton of time deposits.
Thanks Jim, David, Randy, Anurag, Kingran, and all,
Coincidentally the TMF Morning Show crew discussed Silicon Valley bank crash on the Friday show and Jim Gilles, who runs several TMF Canada services talked briefly about TFSL.
He has apparently rec’d in some services, studies it, and still believes the company is on strong footing. He tends to more conservative and value focused in his investing approach, perhaps more unusual at TMF.
Of course I believe Silicone Valley was a rec in several TMF services so as always take all investment advice with a grain of salt!
Now that I have posted again, I am precluded from adding more TFSL for a few more days, probably a good thing for a sometimes impulsive buyer! I do remain long TFSL and may add a small bite more as the dust settles.
I am in the age range where I must take RMDs from my 401k and have fortunately over the last 4 to 5 years been building up enough cash in that account to cover about five years of RMDs. It was really hard seeing all that cash earning essentially nothing. But this last several months I’ve been buying six to twelve month treasuries, hoping to get to point can use dividends to cover RMDS
David, Getting to a place where dividends cover RMDs is fantastic. Obviously that can’t last forever, but those tax tables do provide somewhat of a slow ramp in the early years.
And BTW, TFSL’s high exposure to ARMs also helps mitigate some of the rising rate scenario.
As of Dec 31 there is $67 M AOCI losses that are not yet realized; But here is the real problem. Look at their weighted average yield on their investments, if interest rates stays higher for longer, these losses not only increase, but at some point they have to start booking those losses.
Separately, TFSL earns material fee income from originating mortgages. With higher interest rates, refinance and new mortgage origination is going to be low, thus the banks fee income is going to be impacted.
Their cost of deposits are increasing
The losses on their investment portfolio is increasing
There fee income is going down
The bank has to increase reserves substantially at a time when their income is going down.
Sorry to be a broken record, now is not the time to be investing in small banks.
Regarding TFSL’s unrealized losses on investment securities, you wrote “…if interest rates stays higher for longer, these losses not only increase, but at some point they have to start booking those losses…” I wanted to ask you about that.
I may be wrong about this, but I’m thinking, from an accounting perspective, they would only need to recognize these losses through earnings if (1) they have concerns about the credit quality of the issuer of the securities, or (2) if they determine they will not, or will not be able to, hold the securities until the fair value recovers (which may not be until the securities approach their maturity date).
If neither of those is the case, I believe they can continue to report the unrealized losses as a component of equity.
Maybe there’s more to it, or another scenario that would require recognizing these losses through the earnings statement?
At some point, these investments will be MTM from the capital ratio’s and has to flow throw the balance sheet, mainly as a reserve. As far as income statement I don’t know how the new GAAP rules impact. Companies like Berkshire GAAP income fluctuates wildly because of AOCI flows through income statement. It seems for banks, so far only AFS is flowing through the income statement. For now, the losses are covered (mostly) by the hedges. See below.
This is not just for TFSL, as an industry, banking sector is sitting with close to $700 B “unrealized” losses, even though they are earning healthy like close to $300 B, there is a gap, that means it is not a one or two quarter issue, but multiple years it is going to take to adjust, assuming we are “higher for longer”.
Now, for TFSL, I think their earnings will also simultaneously take hit, as they let these “losses” flow through the income statement and that means they will be forced to suspend the buyback and their dividend could be potentially in jeopardy. This is somewhat reflected in their price and a high dividend yield.
I hate to keep beating a dead horse, but in the TMF Morning Show for 3/24, Jim Gilles once again responds to a question about TFSL at about the 32:30 mark. He goes into some detail on their financial numbers and is still quite bullish. And, I have to say following a number of ideas from the two TMF Jims (i guess Jim Royal is actually an ex-TMF) has been relatively successful, so I pay attention to both!
Gilles noted among other data “Everything I’ve looked, oh, and by the way, they are quite literally trading at the lowest valuation ratio they’ve ever traded out in terms of price to book ever as a public company, including the global financial crisis and including where they were prohibited from 2011-2014 from paying dividends and buying back stock because they were under memorandum of understanding with their regulator, which I would consider both of those bigger crises than today.”
Check out the Motley Fool live video if you have access. I can cut and paste parts of the transcript although not the greatest transcription, if folks don’t have access and want to see his arguments.
I know Jim (canuck) does a fantastic job with data, this is not GFC, but ask what Irwin Financials reminds him? The last time I asked him this questions was related to AFSI. The million dollar portfolio defended vehemently, and many doubled, tripled down, only to see they were taken private. I know, I know this is no where closer any of those situations.
There is no exposure to commercial real estate (they closed that),
Of the $11.6 Billion mortgage loan portfolio, only $4.67 is adjustable-rate
Roughly $7 B is fixed rate,
LTV is pretty good, i.e, over 80% of the loans have at least 20% equity
Bulk of them are (close to 80%) are excellent credit
Of the 11 B, over 10 B has at least 5 years outstanding, and close to 9 B has 15 year tenure…
All good/ great numbers!!! TFSL has excellent loan book, what are you concerned? Except that we are not in the credit cycle, but deposit costs are going up!
From the below their loans yield 3% and their CD/ borrowed funds will either get to 3% or above.
The small banks have no other streams of income to mitigate this. That’s the risk. I am sure Jim G has looked into it and see a pathway for TFSL to stay profitable but I am not able to see how TFSL can be profitable, unless FED brings down the interest rates.
