TCF chief: Plenty of places to blame

  • Article by: CHRIS SERRES , Star Tribune
  • Updated: January 22, 2009 - 8:54 PM

TCF Chief Executive Bill Cooper sees the Federal Reserve -- and the banking industry -- as the villains in the subprime crisis that is punishing his company.

These days, nearly everyone seems to have someone to blame for the current financial crisis.

On Thursday, TCF Financial Chief Executive Bill Cooper pointed a finger at the Federal Reserve system and at his own big-bank competitors, blaming them both for the housing bubble that has led to devastating loan losses at banks across the country.

"The higher charge-offs that we have at TCF are primarily due to the imprudent behavior of our competitors in this subprime [mortgage] market, which poked a hole in the housing bubble," Cooper said in a conference call with investors after his bank released fourth-quarter earnings.

Under ordinary circumstances, criticizing one's own industry is not an effective way to soothe jittery investors. But these are not ordinary times in the banking sector. Indeed, far from scaring people away, Cooper's combative comments may have reminded investors that not all banks are the same, and that TCF's loan losses -- which more than doubled in the fourth quarter, to $37.1 million -- while significant, are not nearly as troubling as the industry's as a whole and are less than some analysts had anticipated.

On Thursday, the Wayzata-based regional bank reported that fourth-quarter profit plunged 56 percent, to $27.7 million, or 20 cents a share, compared with $62.8 million, or 50 cents a share, a year earlier. Revenue declined 2.3 percent, to $272.1 million, from $278.4 million a year earlier. Yet investors largely looked past the bank's declining profit and focused instead on the relatively low loan losses.

TCF shares rose $1.04 Thursday, or 9.5 percent, to close at $11.96 a share.

Cooper, who returned as TCF's chief executive in July, in a conference call with analysts gave reason for optimism -- a rarity these days. Home prices in areas where TCF does business have begun to stabilize, he said. And while TCF's past-due and uncollectible loans are still increasing, the pace of those increases have slowed considerably since last fall. Some analysts believe that's a hopeful sign that the worst of TCF's loan problems are behind it.

"The expectation going into the fourth quarter was banks would lose money and managers would use the opportunity to throw in the kitchen sink and take every possible loss they could," said Jon Arfstrom, a bank analyst at RBC Capital Markets. "So when a company makes people feel confident they can manage through it, the stock goes up."

The mere fact that TCF made a profit amid a severe recession and talk of financial collapse was greeted with some relief. On Thursday, a spate of banks -- including CIT Group Inc., SunTrust Banks Inc., KeyCorp and Fifth Third Bancorp -- posted quarterly losses as an increasing percentage of their customers fell behind on their loans. Bank stocks have lost about 30 percent of their value so far in 2009, while TCF shares are down just 12 percent.

"Looks like, at least in terms of today's earnings reports, we may be the best dog in the pound," Cooper said at the start of Thursday's conference call.

But TCF still faces significant headwinds. It's a consumer-oriented bank that generates about a quarter of its revenue from fees and service charges. As unemployment has increased and consumer spending has declined, the bank's fee income has also fallen, because people are writing fewer checks and overdrawing their accounts less frequently, the bank said. TCF also owns a large leasing and equipment finance business, which could experience slowing revenue growth as problems in the housing sector spread to other areas of the economy, analysts said.

And some industry observers take issue with Cooper's view that TCF's loan losses are the fault of bigger banks. Though TCF did not make subprime mortgages, option adjustable-rate mortgages or other aggressive forms of home loans, it did make home mortgages in some areas where housing prices had become unrealistically high, and the bank could have reduced its exposure to those markets sooner, some analysts said.

"That argument only goes so far," said Mark Henneman of St. Paul-based money management firm Mairs & Power, which owns TCF shares. "When loans starting going bad, they could have stopped making those loans. And they didn't."

Because TCF's charge-offs and overdue loans decelerated somewhat, the bank does not have to dip as much into its cash earnings to bolster reserves. In the fourth quarter, TCF increased its allowance for loan and lease losses by $13.5 million, far less than the $78 million it added the previous quarter.

Even so, analysts cautioned that the pace of loan write-offs could quicken again if the job market continues to deteriorate. "No one knows where the bottom is," said Ben Crabtree, a bank analyst with Stifel Nicolaus. "If unemployment hits 12 percent, no one's reserves will be adequate."

Chris Serres • 612-673-4308

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