Regulatory Change on Mortgages Hammers TCF's 3Q Earnings

Changes in guidance such as this one can affect can affect earnings. Image: Thinkstock

TCF Financial Corp. took a net after-tax charge of $20.6 million, or 13 cents per common share, as a result of new regulatory guidance involving homeowners who have been through bankruptcy.

TCF had delayed its announcement by a week to take more time to figure out the impact of the regulatory directive, which has battered other banks.

The charge was a major blow to TCF's quarterly earnings, which totaled $9.3 million, or 6 cents per diluted common share. That was down from $32.2 million in the same period a year earlier.

"While the third-quarter results were not what we anticipated due to the impact of the adoption of the clarifying regulatory guidance, we believe we are on the right track as we work through the remainder of 2012 and move forward with our strategy into 2013," TCF Chief Executive Officer William Cooper said in a news release.

Investors overall were expecting the bank's earnings to take a hit.  

The regulatory guidance was issued in June by the Office of the Comptroller of the Currency. It requires banks to write down the value of mortgages to collateral value in cases where the borrower has been through Chapter 7 bankruptcy. The rationale is that such loans pose a higher risk of default.

But affected banks have countered by arguing that many of the borrowers in question have continued to pay and will continue to do so. For example, some people file for bankruptcy in order to discharge medical bills, but they keep paying their mortgages.

In addition to taking a charge, TCF moved $103.2 million of mortgage loans to nonaccrual status in order to comply with the guidance. More than 80% of those loans are first mortgages, and more than 90% of them were less than 60 days past due as of Sept. 30, according to the company.

During a conference call with analysts, Cooper, TCF's often-outspoken CEO, was restrained in his comments about the regulatory guidance. But he said that the directive will alter how banks deal with borrowers who have been through bankruptcy, making banks more likely to pursue foreclosures.

"There's certainly less incentive to work with a customer in terms of loan concessions and so forth, given that the loan has already been written down," Cooper said.

Chief Financial Officer Mike Jones said that in future quarters TCF expects to recover the charges it took. But in response to an analyst's question, he declined to offer a specific timetable. "The vast majority of these loans were current and have been current for a long time," Jones said.

For the quarter, TCF, which has $17.5 billion of assets, reported $312 million in revenue. That was 6% higher than in the third quarter of 2011, on the strength of strong net interest income, which was up 14% from the year-earlier period.

The rising net interest income was driven by a net interest margin of 4.85% — a high margin compared with most other banks, but one that Cooper said he expects to decline somewhat in coming quarters.

TCF is hardly the only bank to be negatively impacted by the OCC guidance. In the third quarter, JPMorgan Chase, Wells Fargo, and Citigroup  charged off a total of $2 billion due to the new rules.

Other banks that have taken writedowns include First Horizon National, Huntington Bancshares, PNC Financial Services Group, and Bank of America.