Loan charge-offs mar TCF results

TCF Financial Corp. just plowed through another pothole in a rocky year of transformation.

The Wayzata-based bank's third quarter net income plunged 71 percent from last year to $9.3 million, or 6 cents per share, missing Wall Street's consensus earnings estimate of 17 cents.

The bank charged off $43.9 million related to industrywide guidance from regulators on consumer loans to borrowers who have gone through Chapter 7 bankruptcy. The loan reclassification resulted in a net after-tax charge of $20.6 million, or 13 cents a share.

The change will have some impact going forward, but it mainly hit the third quarter, bank executives indicated in a conference call with analysts Friday.

TCF delayed its earnings report a week to ensure compliance with the rules, which have been affecting many banks.

The bank's quarterly results also were affected by setting aside more money to more aggressively address souring commercial loans.

"As we previously said, 2012 was going to be a reinvention restructuring year for TCF, and indeed that is what has turned out," CEO William Cooper told analysts in a conference call.

TCF shares jumped nearly 2 percent Friday to close at $11.33.

"The market's view is that this is setting TCF up for potential improved credit in 2013," said Stephen Geyen, a bank analyst at Stifel, Nicolaus & Co. Inc. in Minneapolis. Geyen said he considers the consumer loan charge-off largely a one-time event.

The charge-off is the latest in a series of challenges for TCF, which is trying to reinvent itself and shift away from consumer loans to higher-margin specialty lending such as inventory and auto finance. In March, the bank announced a major overhaul of its balance sheet that resulted in a net loss of $282.9 million, the lender's first quarterly loss in 17 years.

Because of its new strategy, TCF has largely missed out on the mortgage refinancing boom that's been inflating the profits of rivals such as Wells Fargo and U.S. Bank. Meanwhile, it still carries a large load of residential real estate loans from the past -- consumer mortgages and home equity loans still make up 40 percent of TCF's loan portfolio.

The charge-offs are related to Office of the Comptroller of the Currency (OCC) clarifications issued over the summer regarding consumer loans where borrowers have gone through Chapter 7 bankruptcy but are still current on their payments or less than 60 days delinquent.

TCF noted Friday that 93 percent of the loans it wrote down were less than 60 days past due on their payments.

The bank's net interest margin -- a key gauge that measures the difference between what a bank makes on loans and what it pays out in interest -- was 4.85 percent, up from 3.96 percent a year ago and largely flat from the previous quarter. It's a 14-year high for the bank, and Cooper attributed it to the balance sheet restructuring earlier this year and its shift into higher-yielding loans.

TCF's net interest income from loans grew nearly 14 percent from a year ago to $200.6 million, largely on lower borrowing costs because of its balance sheet restructuring. But it was also up from the previous quarter, mainly due to higher average balances on auto finance loans.

Noninterest income from fees and other service charges dropped 25 percent from a year ago and was down 9 percent from the previous quarter, partly on losing monthly maintenance fees as a result of bringing back free checking.

However, loan originations nearly doubled from a year ago as the bank grows its national leasing and equipment finance, inventory finance and auto finance businesses that it entered last year with the purchase of Gateway One Lending Finance, a privately held used car lender in Southern California.