(TCB) TCF Financial Earnings Lag Estimates by a Penny

Last week, TCF Financial Corporation (TCB) reported third-quarter 2011 earnings of 20 cents per share, lagging the Zacks Consensus Estimate by a penny. Moreover, this compares unfavorably with 26 cents in the prior-year quarter while favorably with the earnings of 19 cents in the prior quarter.

On a year-over-year basis, decreased non-interest income and reduced net interest margin were the negatives. These negatives were partly offset by deposits growth and decreased non-interest expenses.

Net income came in at $31.7 million in the reported quarter, up from $29.8 million in the prior quarter and down from $36.9 million in the year-ago quarter.

Performance in Detail

Net interest income (NII) was relatively flat sequentially at $176.2 million, while inched up 1.3% year over year. The improvement was attributed to increase in the higher-yielding inventory finance portfolio and lower rates paid on deposits and decreased interest expense on long-term borrowings. However, growth in lower yielding variable-rate loans and reduced interest income on consumer real estate loans were the downside.

Net interest margin (NIM) in the quarter was 3.96%, down 18 basis points (bps) year over year and 6 bps sequentially. Increased asset liquidity and growth in lower yielding variable-rate loans and leases attributed to the lower interest rate environment, negatively affected the margin. However, lower average rates on deposits and long-term borrowings partially offset the decline.

Non-interest income came in at $117.8 million, up 3.2% sequentially but plummeted 14.6% from $137.9 million in the prior-year quarter. The sequential improvement was driven by higher banking fees and service charges, while year-over-year dip was attributed to decreased banking fees and service charges.

TCF reported total revenue of $293.8 million in the quarter, down 5.7% from $311.7 million year over year, below the Zacks Consensus Estimate of $295.0 million.

Non-interest expense was $189.7 million, down 3.2% sequentially and 1.1% year over year. The decrease in non-interest expense reflects lower compensation and employee benefits costs and decreased marketing and advertising expenses, partly offset by higher deposit account premiums.

Evaluation of Credit Quality

Overall, improvement in credit quality was recorded with the declinein level of non-performing assets, provisions for credit losses and net charge-offs.

Provisions for credit losses plunged 11.8% year over year to $52.3 million owing to decreased commercial and leasing and equipment finance net charge-offs.

Net loan and lease charge-offs were $53.4 million in the quarter, down 7.6% from $57.8 million in the prior-year quarter. The decrease was primarily due to decline in commercial leasing and equipment finance, partly offset by increased charge-offs in consumer real estate.

Allowance for loan and lease losses was $254.3 million, modestly stable compared with the prior-year quarter. Non-performing assets inched down 13.4% year over year to $438.1 million in the third quarter of 2011. Moreover, non-accrual loans and leases decreased 16.8% to $307.7 million year over year, driven by a decline in commercial non-accrual loans.

Capital Ratios

At the end of the reported quarter, the company’s total risk-based capital was $2.1 billion, or 15.28% of risk-weighted assets, up from $1.8 billion, or 12.98% of risk-weighted assets at the end of 2010. Tier 1 common capital was $1.7 billion, or 12.22% of risk-weighted assets, up from $1.4 billion, or 9.71% of risk-weighted assets at the end of 2010.

Our Take

During the quarter, TCF Financial signed an agreement with BRP, one of the world’s premier manufacturers of powersports equipment. The company expects the transaction to deliver considerable loan balances in both the U.S. and Canada’s inventory finance business beginning in 2012.

Further, the company announced its plan to acquire Gateway One Lending & Finance, LLC. TCF signed a definitive agreement for the acquisition, which is anticipated to be completed by the end of 2011, subject to customary closing conditions.

With the acquisition of Gateway One, TCF Financial will be able to diversify its business and provide plenty of growth opportunities in the large U.S. auto lending market. Moreover, the company will be able to further grow high quality assets with solid risk-adjusted returns through national specialty finance lending programs. TCF Financial will have new revenue source and opportunities for balance sheet growth in the current challenging economic environment.

Despite sluggish economic recovery and regulatory issues, TCF reported positive net income. We expect TCF to maintain its superior position in the market based on its positive approach to market conditions, recent acquisitions and improving credit quality. However, the regulatory reforms and low interest rate environment might affect the company’s near-term results to some extent.

TCF currently retains its Zacks #3 Rank, which translates to a short-term Hold rating. Moreover, TCF’s closest competitor Commerce Bancshares Inc. (CBSH) maintained a Zacks #3 Rank.

COMMERCE BANCSH (CBSH): Free Stock Analysis Report

TCF FINL CORP (TCB): Free Stock Analysis Report

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