TCF Financial Corp. reported lower-than-expected earnings, mostly because of higher credit costs in its home equity portfolio, but the Wayzata, Minn., company said it would continue to make such loans as others scale back.
William Cooper, the $16.5 billion-asset TCF's chief executive, said in an interview Wednesday that despite a rise in nonperforming assets in the third quarter, it wants loan growth of between 8% and 10% on an ongoing basis and would specifically focus on making more home equity loans.
"We don't have to compete anymore against illogical competitors like Wamu or IndyMac," which failed under the weight of bad mortgages, "so we can now make higher-quality loans with higher spreads," said Mr. Cooper, who retook the helm in July.
TCF can be more aggressive because it raised $115 million in a August trust-preferred offering, increasing its Tier 1 capital ratio to 9.03% and its total risk-based capital ratio to 11.93%. The company will also make more commercial mortgages to owners of office buildings and shopping centers, and it is doing more equipment financing and leasing.
Mr. Cooper contended that TCF can achieve its lending goals even though nonperforming assets more than doubled from a year earlier and rose 24.8% from the second quarter, to $200 million. Most of the increase came in its home equity portfolio.
Credit quality will improve next year as home prices stabilize, he said, and TCF can ramp up lending in the sector because it is adopting tougher underwriting standards, including lower loan-to-value ratios.
In an interview last month, Mr. Cooper said that he was "perfectly happy" to make a home equity loan "on a $70,000 house; it was a mistake to make it on a $120,000 house" when property values were inflated.
On Wednesday he said that he does not believe that credit deterioration will spread materially into the commercial and industrial loan portfolio.
Lana Chan, an analyst at Bank of Montreal's BMO Capital Markets Corp., is not as bullish on TCF.
"I'm definitely worried about the trend we're seeing across the industry, with nonperformers going up on the commercial side," Ms. Chan said. Still, TCF has "decent capital ratios" to absorb higher losses.
TCF said its third-quarter net income fell 49% from a year earlier but rose 27% from the second quarter, to $30.1 million, or 24 cents a share, which fell five cents short of the average estimate of analysts polled by Thomas Reuters. The provision for credit losses nearly tripled from a year earlier but fell 17% from the second quarter, to $52.1 million. Chargeoffs more than doubled from a year earlier but were flat from the second quarter, at $30 million. TCF also recorded a $4.1 million increase in severance and separation costs, which included costs related to the abrupt retirement of Lynn Nagorske as its CEO in July.
Steven Alexopoulos, a JPMorgan Securities Inc. analyst, wrote in a note issued Wednesday that average deposits declined at an annual rate of 5.5% from the second quarter, while deposits declined at annual rate of 11.7%, or nearly $300 million.
Something "very surprising to us" was the fact that "the bulk of the decline did not come from CD runoff, but rather was in core deposit categories such as checking and savings accounts, which each declined 10% and 13% annualized, respectively," Mr. Alexopoulos wrote. "The company attributes the decline to high deposit pricing competition."
Mr. Cooper said core deposits should grow as TCF opens more branches. Total deposits were flat from a year earlier, at $9.8 billion.
