TCF swings to rare loss, but shares hold steady

  • Article by: JENNIFER BJORHUS , Star Tribune
  • Updated: April 19, 2012 - 10:33 PM

The state's No. 3 bank by deposits takes a hit from a costly balance sheet overhaul.

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A TCF branch in St. Louis Park.

Photo: Lewis Leung, Star Tribune

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TCF Financial Corp. posted its first quarterly loss in 17 years Thursday, as the bank works through a major balance sheet restructuring it announced in March.

The Wayzata-based lender posted a net loss of $282.9 million, or $1.78 per share, for the first quarter, which was in line with what Wall Street expected. Revenue grew 20 percent from a year earlier and 27 percent from the previous quarter, but that was largely due to a $76.6 million gain the company got from selling its mortgage-backed securities in its restructuring.

TCF projected its net interest margin -- a key measure of profitability that measures the difference between what banks earn on assets and what they pay out on funding -- to settle back to about 4.6 percent around 2013 after rising above that in the next few quarters.

Investors gauging future earnings power were unmoved. TCF shares closed Thursday at $11, unchanged.

"The earnings power is still suspect," said Andrew Marquardt, head of bank research for New York-based Evercore Partners. "This is still a story in transition."

The large quarterly loss is mainly a result of the hit the bank took from refinancing and eliminating some of its high-cost, long-term debt as TCF shifts from long-term assets such as mortgages to short-term assets including car loans and inventory financing.

But the bank also got smacked on fees and service charges. TCF has been struggling to recoup the significant card revenue it lost after regulatory changes, and its efforts to raise more money through changes to checking accounts and overdraft fees have resulted in some customer backlash. Trying to address that, the bank recently gave retail customers a choice of overdraft charges -- per bounced check, or per each day the account is overdrawn.

TCF Chairman and CEO Bill Cooper acknowledged fee challenges in a conference call with analysts Thursday.

"A significant number of people have left the banking system and are simply operating on cash to avoid service charges," Cooper said. "And indeed we have had attrition."

In an interview, Cooper said the attempts to offset lost card revenue are a challenge for a bank that built itself on free checking, and that is more of a retail bank than most banks its size. The restructuring, however, he deemed "very successful."

"It accomplished exactly what we wanted to accomplish, he said. "The rocket has left the launching pad."

While TCF's big bank rivals in town ride a mortgage refinancing wave, TCF has shifted away from that business. Its net interest income rose 3.5 percent from a year ago on growth in inventory finance and auto finance portfolios.

While leasing and equipment finance revenue fell 14.5 percent from a year ago, it jumped 24 percent the previous quarter. In an interview, Cooper said the revenue tends to be "lumpy" and bounces around quarter to quarter.

Peyton Green, a bank analyst at Sterne, Agee & Leach, said the restructuring was the obvious way for TCF to improve profits, and that he was optimistic the earnings would come.

"They've had a very difficult four years through 2011, and this is the last painful year for them," Green said.

Jon Arfstrom, a bank analyst with RBC Capital Markets in Minneapolis, said he expects the bank to return to the black next quarter as the checking account troubles pass and its inventory and auto financing operations gain traction.

"They should be nicely profitable," he said.

On Monday, TCF announced a quarterly cash dividend of 5 cents per common share payable May 31.

Jennifer Bjorhus • 612-673-4683

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