Anyone who thinks credit troubles have crested would be advised to consider TCF Financial's latest earnings report as a cautionary note. Even this well-run bank still spies trouble ahead for loans secured by homes and commercial real estate.
Pelted by rising write-offs and a steep climb in reserves for loan losses, Wayzata-based TCF Financial Corp. reported a 62 percent decline in second-quarter earnings compared with the same period in 2007.
"Call today's report: When bad things happen to good banks," said Sean Ryan, bank analyst at the New York office of brokerage firm Sterne, Agee.
Ben Crabtree, an analyst at the Minneapolis office of brokerage firm Stifel Nicolaus, suggested that more choppy waters might lie ahead. "It's too early to declare victory on credit quality. That's for sure," he said Wednesday.
TCF blames deteriorating loan performance, a slow economy and a necessary leap in reserves against potential loan losses for most of the profit decline. Net earnings of 19 cents a share for the quarter were well below analysts' consensus of 35 cents.
A year ago, TCF earned 49 cents a share.
TCF more than doubled loan loss provisions, to nearly $63 million in the second quarter, up from about $30 million in the first three months of the year. A year ago, loan loss provisions stood at $13 million.
"It's a good management doing the right thing, but playing a bad hand," Ryan said.
The reasons for the bank's decision to build reserves for future loan losses were clear from the second-quarter results. Net charge-offs as a share of consumer loans rose to 0.9 percent, nearly half-again as much as in the first quarter and more than double the pace of a year earlier.
TCF charged off 1.7 percent of commercial loans over April, May and June -- more than triple the rate in the first quarter and 58-fold increase over the second quarter of 2007. The bank said commercial loan troubles centered in Michigan, a hard-hit state in the latest economic downturn.
"The 'new' news is that they're starting to see some stress among their commercial real estate customers," said Terry McEvoy, bank analyst at the Portland, Maine, office of the brokerage firm Oppenheimer & Co. "Home equity losses will begin to stabilize, though I have some concerns about how the commercial real estate loans will perform in the next year," McEvoy said.
Nevertheless, TCF officials said the bank has no need to raise capital. The company declared a dividend of 25 cents per share.
Chief Executive Lynn Nagorske suggested that the bank's balance sheet will remain strong. The bank, he said in a prepared statement, "does not presently expect to raise additional capital through any type of equity offering related to TCF's stock or change its dividend policy."
His comments didn't soothe the market much.
TCF shares closed Wednesday down 85 cents, or almost 6 percent, at $13.41.
Crabtree, the Minneapolis bank analyst, found some pluses in TCF's report. "I'm still reasonably comfortable that the dividend is safe and that earnings will be higher in the second half and in 2009," he said. "They added a lot more loan loss reserves than I thought they would, which helps protect future earnings."
McEvoy found encouragement in TCF's double-digit growth in net interest income and in interest margins year-over-year.
"The core business of lending money and bringing in deposits expanded nicely in the second quarter," McEvoy said. "That's very comforting to see in this environment."
Mike Meyers • 612-673-1746
