My Special Situations portfolio invests in companies that are undergoing some type of huge change that creates value or makes it evident where it was obscured before. That's the case with TFS Financial (NASDAQ:TFSL), a bank that has been under the cloud of a regulatory memorandum of understanding.

The portfolio already owns shares of TFS, but I'm coming back for more, in a big way, adding $5,000 to the $2,000 I've already invested. Following this, the portfolio will have more than 14% of its capital in the bank. Big investment? Sure. But this bank trades for about 55% of tangible book value, and it's profitable. So I'm making it the largest position in my portfolio by about two times.

The business
In my original buy article in March, I noted why you should love this stock:

  • Plain vanilla retail banking operation
  • Cheap stock, now marked at 55% of tangible book value
  • Consistently profitable on an annual basis throughout the financial crisis
  • Declining delinquencies and non-performing assets
  • Strong credit metrics for new loans (FICO score of 780+ with loan to value around 60%)
  • Strong potential for buybacks to drive the share price
  • Potential for a dividend initiation

Now, all of these elements remain in place today. And like then, the bank still labors under a memorandum of understanding with regulators. According to management in the April conference call, regulators want to see sustained and consistent profitability.

In the most recent earnings report last week, TFS showed its highest quarterly profit since going public in 2007. Another quarter or two of that, and it could be hard for regulators to keep this highly overcapitalized bank in limbo. And that could mean a return to the huge buybacks the company began in 2008 -- and the potential for a dividend as well. Both would really drive the share price higher.

And buybacks could be a huge event, since the company has excess capital greater than its entire market cap. That leaves a lot of room to juice the stock.

Foolish bottom line
So that's why I'm making TFS Financial the largest position in my Special Situations portfolio. On the next market day, I'll be adding $5,000 to the stock.

Interested in TFS Financial or have another stock to share? Join me on my discussion board and follow me on Twitter (@TMFRoyal).

Jim Royal owns shares of TFS Financial. The Motley Fool owns shares of TFS Financial. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.