Dear Mr. Berko: I bought 600 shares of TCF Financial at $13.95 in early November of last year. The shares had zoomed to $20 within two months. So I asked my broker whether we should sell any of the shares. He said no and recommended that I buy another 600 shares because he thinks it will be a $30 stock this year. I didn’t take his advice to buy, but I still own the 600 shares, which are down more than 3 points from where I wanted to sell. What should I do? — CL, Detroit
Dear CL: You have good instincts. Though the financial sector continues to maintain some of its momentum, TCF Financial has been one of the laggards and may continue to be so for quite a while.
TCF Financial (TCF-$16.60) is home-ported in the sylvan, pastoral town of Wayzata, Minnesota, where the median home value is $520,900 and the median family income is $65,237. Wayzata, a Sioux word meaning “northern shore,” is 13 miles west of Minneapolis, 8 miles north of Minnetonka and home to 4,300 Wayzatians. But though Wayzata may be a swell place to raise a family, TCF isn’t a swell stock to own.
TCF is a national bank holding company that has $21.8 billion in assets from 331 branches in Illinois, Minnesota, Michigan, Wisconsin, South Dakota, Arizona and Colorado. As you mentioned, TCF surged 43 percent in just two months late last year. This huge rise was the result of better income, potentially higher interest rates and the possibility of bank deregulation under the Donald’s administration.
TCF, founded in 1923, does almost everything that mega-banks do, including financing new and used cars in 50 states. TCF got into auto lending in 2011, when it bought a California startup (Gateway One) run by the best smoothies in the game. So with call centers in Anaheim, Tampa and Atlanta working nights and weekends, within a couple of years TCF was sharing obscene loan fees with car dealers and making high-interest auto loans (with the average loan being $20,000) to over 12,000 dealerships. This national auto loan business became a symbol of TCF’s post-recession image and a key driver of new growth. And by March of this year, TCF had $2.9 billion of auto loans on its books, constituting nearly 20 percent of its loan portfolio.
TCF’s earnings, spurred by that auto lending business, improved from 71 cents a share in 2011 to an estimated $1.31 this year. Its net profit margin was 7.9 percent in 2011, and it’s expected to be 14.8 percent this year. The parsimonious dividend, which paid 20 cents in 2011, was 30 cents last year, and it currently yields a miserly 1.7 percent. It isn’t expected to be increased this year or next. However, thanks to management’s ongoing and excellent cost control efforts, TCF’s bottom line should continue to improve. Still, Deutsche Bank, FBR Capital Markets, Thomson Reuters, S&P Capital IQ and Ned Davis Research have “hold” recommendations on TCF. “Sell” recommendations are not permitted!
Auto loans have surged in the past few years and are among the fastest-growing segments of Americans’ consumer debt. Observers are concerned about the $1.2 trillion of auto loans outstanding. They’re apprehensive about a deteriorating auto market and fearful that default rates could escalate and get out of hand. And they should be, because 6 million borrowers are over 90 days delinquent, and that number is growing.
Drive down any American city’s “auto row” and you’ll see thousands and thousands of new cars, packed tighter than pickles in a jar, molting on sales lots in Wapakoneta, Durham, Cleveland, Vancouver, Wilmington, Phoenix, Oklahoma City, Indianapolis and Bakersfield. So many cars. Where have all the buyers gone? TCF and other lenders may be stuck with loan collateral that’s worth significantly less than the remaining balance. And when the midden hits the windmill, TCF’s loan portfolio could implode.
Take your remaining 3-point profit. Considering the compelling reasons — the huge unsold vehicle inventory, increasing delinquency rates, huge rebates, expiring leases, huge cash-back rewards, deals that offer no interest for 12 months, and the 96-month loan — you’d have to be daft to hold TCF!
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.