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TCF Financial Lags Ests, Revs Dip

Zacks Equity Research

TCF Financial Corporation (NYSE:TCB - News) reported fourth-quarter 2011 earnings of 10 cents per share, lagging the Zacks Consensus Estimate by 4 cents. This also compares unfavorably with the prior-year quarter’s earnings of 24 cents and prior quarter’s earnings of 20 cents.

The results declined primarily due to lower top line growth, driven by reduced net interest and non-interest income. Moreover, a decline in net interest margin added fuel to the fire. These negatives were partly offset by deposits growth and declining non-performing assets.

Net income came in at $16.4 million in the reported quarter, down from $33.9 million in the prior-year quarter and from $32.3 million in the prior quarter.

For the full year, net income was $109.4 million or 71 cents per share, down from $150.9 million or $1.08 per share in the prior-year period. The full year earnings also missed the Zacks Consensus Estimate by 3 cents per share.

Performance in Detail

TCF Financial reported total revenue of $271.7 million in the quarter, down 14.0% year over year (y/y) and 7.5% sequentially, attributable to lower net interest income and other non-interest income. Additionally the results were below the Zacks Consensus Estimate of $282.0 million.

For full year, total revenue was $1.1 billion, down 7.5% from $1.2 billion in the prior year. Revenue results also lagged the Zacks Consensus Estimate of $1.2 billion.

Net interest income (AMEX:NII - News) inched down 0.5% year over year and 1.5% sequentially to $173.4 million. The y/y decline was a result of reduced levels of higher yielding fixed-rate consumer real estate loans and declines in leasing and equipment finance and commercial real estate portfolio balances and average yields, partially offset by a drop in the average deposit rates. Moreover, the sequential drop was mainly due to lower average balances in inventory finance, commercial real estate and consumer real estate loans.

Net interest margin (NYSE:NIM - News) in the quarter was 3.92%, declining 13 basis points (bps) year over year and 4 bps sequentially. Increased asset liquidity and reduced levels of higher yielding 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 $98.3 million, down 30.5% y/y and plummeted 16.6% from $117.8 million in the prior quarter. The decreases were driven by lower banking fees and service charges, reduced card and leasing, and equipment finance revenues.

Non-interest expense was $187.5 million, growing 0.8% y/y, driven by increased occupancy and equipment expenses and other core operating expenses, partially offset by decreased marketing and advertising expenses. However, expenses dropped 0.7% sequentially, attributed to lower compensation and employee benefits costs, reduced FDIC and deposit account premiums.

Evaluation of Credit Quality

Though the level of non-performing assetsdeclined for the fifth consecutive quarter, credit quality remained challenging in the quarter due to uncertain ongoing economic environment.

Provisions for credit losses plunged 23.7% year over year to $59.2 million, owing to reduced commercial and leasing and equipment finance net charge-offs. However, provisions increased 13.2% sequentially, largely due to augmented net charge-offs in the commercial portfolio.

Net loan and lease charge-offs were $57.9 million in the quarter, down 10.8% from $64.9 million in the prior-year quarter. The drop was primarily due to a decline in commercial leasing and equipment finance charge-offs, partly offset by increased charge-offs in consumer real estate. Yet, the charge-offs climbed 8.4% sequentially from $53.4 million due to an increase in commercial real estate net charge-offs on apartments, retail services, hotels and motels, and as a result of a hike in commercial business net charge-offs.

Allowance for loan and lease losses was $255.7 million, compared with $265.8 million in the prior-year period and $254.3 million in the prior quarter.  Non-performing assets fell 10.9% year over year to $433.2 million in the fourth quarter of 2011 and inched down 1.1% sequentially.

Moreover, non-accrual loans and leases decreased 13.6% to $298.3 million year over year, driven by a decline in commercial and leasing and equipment finance non-accrual loans. The sequential drop of 3.0% resulted from a fall in commercial non-accrual loans.

Capital Ratios

As of December 31, 2011, the company’s total risk-based capital was $2.0 billion, or 14.80% of risk-weighted assets, up from $1.8 billion, or 12.86% of risk-weighted assets at the end of the prior-year quarter. Tier 1 common capital was $1.7 billion, or 12.67% of risk-weighted assets, up from $1.5 billion, or 10.47% of risk-weighted assets at the end of the year-ago quarter.

The tier 1 leverage ratio and tier 1 common risk-based capital ratio dropped to 9.15% and 11.74% from 9.42% and 12.11%, respectively, in the prior quarter, mainly due to the addition of goodwill and intangible assets acquired in the purchase of Gateway One.

As of December 31, 2011, total deposits grew 5.7% y/y and inched up 0.4% sequentially to $12.1 billion.

Peer Performance

Among TCF Financial’s peers,Commerce Bancshares Inc. (NasdaqGS:CBSH - News) reported fourth-quarter 2011 earnings of 73 cents per share, ahead of the Zacks Consensus Estimate of 70 cents. However, after considering litigation settlement charges related to debit overdraft fees, Visa Inc. (NYSE:V - News) indemnification obligation costs and losses on held-for-sale real estate property, the company reported earnings per share of 69 cents.

Commerce Bancshares’ fourth quarter year-over-year results benefited from higher net interest income and a drop in operating expenses, which was partially offset by lower fee income. Moreover, the company’s credit quality and capital ratios showed improvement. However, weak loan demand and low interest rates dragged down the average loans.

Our Take

In December 2011, TCF Financial completed the acquisition of Gateway One Lending & Finance LLC. From now on, Gateway will be a wholly-owned subsidiary of TCF National Bank. With the acquisition of Gateway One, the company 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 Financial reported positive net income. We expect the company to maintain its superior position in the market based on its positive approach to market conditions, recent acquisitions and declining non-performing assets. However, the regulatory reforms and low interest rate environment might affect the company’s near-term results to some extent.

TCF Financial currently retains its Zacks #3 rank, which translates to a short-term ‘Hold’ rating.

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