TCF Builds Momentum in Specialty Lending

If there's one word to describe bankers' outlook for 2014 it would be "cautious."

While many bankers are relatively upbeat about loan growth, their overall message in fourth-quarter earnings calls has been that regulatory costs, pricing pressure and expenses associated with reducing overhead could suppress profits and compress margins over the next several quarters.

But William A. Cooper, the chairman and chief executive of TCF Financial (TCB) in Wayzata, Minn., has a far rosier view of the future. In a conference call discussing TCF's fourth-quarter results Wednesday, Cooper — who has been in the banking business more than four decades and has run TCF since the mid-1980s — says he is "as optimistic as I've ever been about our prospects."

Cooper has spent the last two years transforming TCF from a traditional lender focused on local markets to a national one targeting dealers in a range of niche industries — from powerboats to snowmobiles to lawn equipment — and the shift appears to be paying off.

Core revenues climbed 3.2% last year at a time when most banks' revenues are shrinking, loan growth is outpacing that of its peers, and its net interest margin of 4.68% at Dec. 31 ranks among the highest in the industry.

"The significant investment that we made in new businesses is really starting to pay dividends," Cooper said on a call with analysts. "We're one of the very few banks that increased its net interest margin in the [fourth] quarter... and that core revenue number is one of the best in the business."

In the fourth quarter the $18.4 billion-asset TCF earned $35.1 million, up 49% from the same period in 2012. Net interest income ticked up 0.4% year over year, to $201.9 million, thanks to higher average loan-and-lease balances in the automobile- and inventory-finance businesses.

Terry McEvoy, an analyst with Oppenheimer & Co., says that TCF once made its living off of mortgage lending and fees from checking accounts, and had to reinvent itself following the housing bust and the implementation of new laws that essentially limited what banks could collect on overdrafts and interchange fees on debit cards.

The results over the last few quarters prove that Cooper's decisions to enter the automobile lending business and expand in areas like inventory- and equipment-financing were good ones.

"We have seen three consecutive quarters of growth in all the right areas for the market to give TCF credit for the new business mix they have," says McEvoy, who recently upgraded TCF's stock from "hold" to "buy."

Scott Siefers, an analyst at Sandler O'Neill & Partners, says that sustaining the momentum in specialty lending is perhaps TCF's biggest challenge in 2014. A number of regionals are expanding into new areas of lending in search of higher yields, and the increased competition could nibble away at TCF's market share and profit margins.

Still, it's possible the new business lines could deliver even stronger returns this year if TCF can hold the line on expenses, Siefers says. TCF's expenses have increased as the company has built out the new business lines, but Siefers expects that trend to abate this year.

"The last year or two have been investing years, [but] I don't expect the investment spend to be a meaningful drag on earnings" in 2014, he says.

Cooper, for his part, is not just optimistic about TCF's prospects — he's bullish on midsize banks in general.

With larger banks burdened by higher capital requirements under Basel III and costs related to federal stress tests, Cooper believes that banks in the $10 billion to $50 billion range are "sitting... in the sweet spot of banking."

"We compete against the largest banks in the marketplace who have, by far, the biggest market share, and those banks are going to be required to compete in a more difficult environment," Cooper says. "I think it's [good news] for midsize banks."