TCF Financial Corp. reported its 60th consecutive quarterly profit last week in spite of worries that new limits on overdraft fees could hit the $18.2 billion-asset company particularly hard.
TCF, in Wayzata, Minn., has been a strong performer throughout the economic downturn, and it handily beat expectations for the first quarter.
Some analysts, however, are concerned about the looming regulation of overdraft fees, which represent a significant portion of TCF's revenue.
The company, with 1.7 million checking account customers — a large number for a bank of its size — created a checking account product in the first quarter that imposes monthly maintenance fees. This product could help stanch losses on overdraft fees once the rule takes effect in July.
Yet Anthony Davis, an analyst at Stifel, Nicolaus & Co., said the move could turn off some customers. "Deposit account growth is sort of the engine that drives this company," he said, "and to the extent that they're no longer offering totally free checking, there's some risk that that could impede deposit growth."
The new rule, which will require that customers opt in to overdraft programs, could hurt TCF's net revenue if overdraft charges diminish. Davis said these charges contribute about 19% of TCF's revenue, compared with just 9% for a typical bank in the Midwest. The rule change has been hanging over TCF's share price for the better part of a year, he said.
"The company has spent a great deal of time and thoughtful effort formulating this strategy," David Rochester, an analyst at FBR Capital Markets, said in a research note published Friday. "And it could very well be successful in maintaining revenues during this transition, but we are more cautious, as other bank management teams highlight the material challenge of maintaining revenues under the new rules."
TCF shares have risen more than 15% since first-quarter results were released Thursday.
Terry McEvoy, an analyst at Oppenheimer & Co., said in a research note that he expects some revenue disruption for TCF and that the fourth quarter and possibly first quarter of 2011 "will see some lumpy results" as the regulatory changes are implemented.
Still, Davis said he is confident that any disruption "is not going to be the undoing of TCF."
In the first quarter the company's banking fees and service charges grew 12% from a year earlier, in part because of increased transaction activities and higher account maintenance fees.
"We're seeing a higher volume of transactions on our debit cards and a higher dollar amount of the purchase price, which affects our revenue significantly," William A. Cooper, the company's chief executive, said in an earnings conference call last week.
TCF reported net income of $33.9 million, a 27.3% rise from a year earlier, largely the result of lower-than-expected provisioning for loan losses, as well as fee income growth and reduced operating expenses.
The $50.1 million loss provision — which beat most analysts' projections by $20 million — stemmed primarily from reduced charge-offs. Nonperforming assets were relatively flat, though consumer delinquencies rose along with classified consumer real estate loans.
TCF raised $165 million in a first-quarter public offering, boosting its capital ratios to their highest levels in 30 years, Cooper said.
"It's nowhere near up to our prior standard of performance, and it's not the end by any means of our credit issues, but maybe it's the end of the beginning," Cooper said. "In general, I think we can see the end of the tunnel."
Lana Chan, a senior banking analyst at Bank of Montreal's BMO Capital Markets, said the company's profit performance was aided by its solid loan portfolio. It has held up better than those of its peers throughout the downturn, she said, by avoiding nonrelationship lending
"They don't tend to chase the flavor-of-the-month that has gotten some other banks in trouble," she said.
TCF is also one of the few banks to report loan growth, up 5% in the quarter.
"Its earnings are not being driven by release of loan-loss reserves solely," Davis said. "It's a real, live growing company."