TCF shores up its balance sheet

Bank takes a first-quarter hit, but it expects the refinancing and other moves to add about $74 million in pretax profits for the year.

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A TCF branch in St. Louis Park. The bank is working to restructure in the face of new banking regulations.

Photo: Lewis Leung, Star Tribune

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TCF Financial Corp. has refinanced $3.6 billion in higher-interest long-term debt and sold $1.9 billion of mortgage-backed securities as part of a restructuring aimed at making the bank more nimble and diverse.

The Wayzata-based regional bank announced the moves before markets opened Tuesday. The steps were necessary, it said, as TCF shifts its business model away from real estate assets such as residential mortgages with longer terms, toward various specialty finance assets such as auto loans and a new inventory financing business, with shorter durations and variable interest rates.

It's not entirely unlike a homeowner shoring up the household finances by getting a lower-cost mortgage and selling off an old car that's threatening to become a liability.

TCF has been struggling to regain momentum at a time when bank rivals are posting record profits. The lender lost significant revenue after new regulations in recent years restricted fees it can collect on debit card transactions -- it boldly sued the Federal Reserve over that and lost -- and checking account overdrafts. It's been battling to recoup those losses.

Chairman and CEO Bill Cooper said in an interview with the Star Tribune that the moves TCF announced Tuesday will significantly improve its profitability.

"It's a big step forward in connection with this reinvention of the bank," Cooper said.

TCF's banged-up stock got a lift from the news, with shares up 70 cents to $11.53.

The deal, which Cooper said was completed over the last week, doesn't affect jobs. "TCF is hiring, not firing," he said.

The debt part of the balance sheet restructuring involved paying off $3.6 billion in long-term, fixed-rate borrowings that had an average interest rate of 4.4 percent. The bank replaced $2.1 billion of that with a new mix of floating and fixed-rate loans averaging about 0.5 percent. It simply paid off the remaining $1.5 billion.

Restructuring the loans freed up the bank to sell $1.9 billion in mortgage-backed securities it held. Although the bundles of mortgages were earning the bank money, Cooper said that they were risky because of the interest rate environment and could turn into losses.

On the downside, the bank will take a first-quarter hit from the changes -- a one-time net after-tax charge of $293 million, or a loss of about $1.85 per common share. The restructuring also reduces overall capital.

The bank's total Tier 1 risk-based capital ratio, a key measure of bank health, will drop from 12.67 percent to 10.8 percent, but that's still well above what regulators require for a bank to be considered well-capitalized.

On the upside, the bank expects the restructuring to add about $74 million in pretax profits over the course of the year.

Jon Arfstrom, a bank analyst with RBC Capital Markets in Minneapolis, said the deal makes sense.

"This strategy has a high cost in the near term but positions the company to move forward and get on with their strategy," Arfstrom said. "The loan balances that they talk about are stronger than anticipated [inventory finance] and the fee pressure continues to be a drag. All in all, they are making a tough decision, but it seems to be the right one given the interest rate environment."

Cooper said the bank will pay off still more debt with $805 million in FDIC-insured deposits that it's acquiring from Prudential Bank & Trust. Terms of the purchase, expected to close in the second quarter, weren't disclosed.

The third-largest bank in Minnesota by deposits, TCF has $19 billion in assets and more than 430 branches.

In recent months the feisty regional bank has been talking about reinventing itself over the next three years. It wants to reshape itself into a more diverse, loan-driven and more national bank less focused on customer checking accounts and better able to compete with rivals such as Wells Fargo.

A key part of the plan is to focus on specialty finance. To that end, TCF in October bought Gateway One Lending Finance, a used car financing company. It's also getting deeper into inventory financing for dealers buying gear from manufacturers such as Toro and Arctic Cat. It has been in the equipment finance business for about 10 years.

Cooper, who came back out of retirement to head the bank again in 2008, will be well compensated for his efforts. In January, the company increased his base salary from $950,000 to $1.5 million, and piled on about 1 million new shares of various flavors of restricted stock.

"Most of this stuff doesn't happen unless we hit certain goals," Cooper said of the stock awards.

Is he worth it? Said Cooper: "That remains to be seen."

Jennifer Bjorhus • 612-673-4683

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  • TCF's refinancing plan

    Tuesday March 13, 2012

    • TCF paid off $3.6 billion in longer-term, fixed-rate borrowings that had an average interest rate of 4.4 percent.

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