TCF Financial (TCB) has spent the last year investing in new business lines, revamping its deposit products and repositioning its balance sheet, and now it's ready to start reaping the benefits.
Though the Wayzata, Minn., company continues to struggle with high levels of problem loans, Chief Executive William Cooper told analysts Wednesday that its core profits are strong and that it can continue to improve earnings without making acquisitions or further tweaking its strategy.
"My preference would be to make more money with what we have in the investments we've made," Cooper said on a call discussing TCF's fourth-quarter results.
Still, while TCF is unlikely to be a buyer, it could be a seller at the right price. The bank's stock is up more than 30% in the past year and some analysts believe it's because investors view it as a takeover target.
Cooper has long maintained that TCF would sell if it was in investors' best interests and he reiterated that position on Wednesday's call. "If someone comes along and offers a great deal we would be happy to sell the bank," he said.
For now, however, the $18.2 billion-asset TCF is fixed mainly on transforming itself from a regional lender to consumers and businesses into a national specialty lender.
Over the last 14 months, the company has acquired a nationwide automobile lending company and established niche businesses financing manufacturers and distributors of lawn equipment, power sports equipment, recreational vehicles and other products. Such loans now make up roughly 35% of TCF's loans, up from 27% at Dec. 31, 2011, and executives say the trend is likely to continue as it de-emphasizes growth in its core markets and focuses on national borrowers.
Craig Dahl, TCF's vice chairman of lending, said the strategy makes sense given the competition for more conventional business and consumer loans.
"We do not feel like we have to fight it out in our geographic markets," Dahl said on the earnings call.
In a follow-up interview, Cooper added that the competition is coming primarily from large banks that are undercutting smaller lenders on rates.
"My whole life in banking my philosophy has been 'stick to your markets,'" Cooper said. But these days, he added, "a regional bank can't just stick to its region because there's not enough loan demand."
TCF reported earnings of $23.6 million in the fourth quarter, an increase of 44% from the same period in 2011. Its net interest margin climbed 89 basis points, to 4.79%, an increase the company attributed primarily to the higher yields on its national specialty loans as well its decision early last year to repay high-cost debt and fund more loans with core deposits.
Still, earnings per share of 15 cents fell four cents short of consensus estimates, largely due to a $10 million charge it took to settle Bank Secrecy Act violations. Analysts also said that its expenses came in higher than expected — its noninterest expense climbed 14%, to $214 million — and they remain concerned with its elevated provision for loan losses.
Kevin Barker, an analyst at Compass Point Research & Trading, says TCF's earnings were skewed by a one-time adjustment that lowered its effective tax rate to 22%. At a more normal tax rate of 38%, he said earnings per share would have been closer to 12 cents.
Cooper said "he would not be surprised" to see the margin shrink in future quarters as rates remain low and competition intensifies, but said he is confident that profitability ratios will continue to improve as TCF builds out its national strategy. A return on assets of 1.2% is possible in the not-too-distant future - especially if it can continue to reduce its level of problem loans, Cooper said. Its ROA at Dec 31 was 0.63%
Barker, however, says that given the low interest rate climate and TCF's high level of problem loans, the bank "will have difficulty meeting the street's expectations" over the next few quarters.
TCF's shares were trading at a 52-week high late Wednesday, to $13.51, but Barker argues that the run-up primarily stems from takeover speculation.
TCF could improve its earnings somewhat by trimming overhead, but the best outcome for shareholders would be for TCF to sell, Barker says.
"If they get an offer for $14 a share, they should take it," he says.