TCF Financial drew many questions Thursday about its recent disposal of $405.9 million in crisis-era mortgages that are costing the company at least $44 million to sell.
The sale, to an unnamed distressed-asset investor in December, was the "last chapter from the residential home crisis as it relates to TCF," Chief Executive William Cooper said.
The loans' low rates and long durations made them unprofitable for the Wayzata, Minn.-based company, and keeping them would cost it even more once rates begin to rise. Most of the loans were performing , have an average maturity of 27 years and pay a 3% fixed rate.
Investors have swooped into the crowded market for legacy mortgages in hopes of lucrative, but slowly diminishing, returns. Major buyers of these assets are focusing on a now-smaller supply of distressed loans. Those firms include Pretium Partners, managed by ex-Goldman Sachs mortgage pro Donald Mullen; Selene Investment Partners, managed by the so-called godfather of mortgage bonds, Lewis Ranieri; Angelo, Gordon & Co.; Blackstone Group; Oaktree Capital; and Loan Star Funds, among others.
Another $200 million in mortgages remain in TCF's legacy portfolio. About $88 million are bad loans, and they are "making their way through the system," according to a company spokesman. At least $112 million of the remaining troubled debt restructurings are accruing.
TCF reserved $56 million for credit losses, primarily to account for the sale, which included a direct $23 million charge, plus another $21 million in incremental provisioning.
"We have mixed feelings on the sale," said Sandler O'Neill bank stock analyst Scott Siefers. "Several years out of the financial crisis, it is tough to witness a company still dealing with these legacy problems," he said, adding that the company had already reserved $7 million against the loans and he is skeptical that the sale will be TCF's final credit cleanup.
The sale will help improve net interest margin in future quarters, Cooper and other executives said. The servicing costs saved may add up to $5 million a year, and regulatory costs related to the loans may save the company another $9 million a year, Cooper said. The sale will be accretive in 2015 and payback will take less than three years, according to investor slides.
The $19 billion-asset company disappointed analysts Thursday when it reported a fourth-quarter profit of $19.1 million, or 12 cents per share, a 45.5% decline from a year earlier. Revenue of $313.8 million rose 2.1% over the same time period. Net interest income of $204 million fell from the third quarter, but rose 1.1% from the fourth quarter of 2013. Total banking fees fell 6.7%, to $57 million, from the year-earlier quarter.
Low oil prices propelled consumer borrowing, and loan growth topped estimates, according to Wells Fargo analysts. Gains on sales in auto lending of $12.9 million in the quarter, up 78%, provided a bright spot for TCF. The company grew its auto loan and lease portfolio by 54%, to $1.9 billion, since last year. The company securitized a portion of its auto portfolio and took a $7 million gain from the transaction, resulting in stronger fee income.
Analysts expressed concern over the company's ability to maintain and increase strong origination volumes, and continued to highlight the large nonperforming loan book compared to peers. The company's shares should trade at a "slight discount" as a result, said Kevin Barker, an analyst at Compass Point Research & Trading.
John Armstrong, a bank analyst at RBC Capital Markets, noted that the $3.5 billion in loan and lease originations were up 12.6% from fourth quarter last year, but he wondered if the run rate is expected to slow.
Craig Dahl, TCF's vice chairman, responded that the fourth-quarter origination bump was very strong, and that more fees can be expected through a new mortgage correspondent channel executed at the branch level.