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TCF Financial (TCF) Up 5.3% on Q4 Earnings Beat, Merger Deal

Zacks Equity Research

Shares of TCF Financial Corporation TCF gained 5.3% following the release of fourth-quarter 2018 results and announcement of its merger deal with Chemical Financial Corporation CHFC.

Earnings per share of 51 cents surpassed the Zacks Consensus Estimate of 47 cents. However, the reported figure compares unfavorably with the prior-year tally of 57 cents.

The company witnessed top-line growth in the reported quarter. Moreover, lower non-interest expenses and provision for credit losses partly supported the bottom line. Also, loan and deposit balances displayed improvement.

TCF Financial reported net income of $85.7 million for the fourth quarter compared with $101.4 million recorded in the year-ago quarter.

Earnings per share for 2018 came in at $1.74 per share, which lagged the Zacks Consensus Estimate of $1.87. However, the figure compares favorably with earnings of $1.44 per share reported in 2017. The company’s net income for 2018 amounted to $304.4 million, up from $268.6 million witnessed in the previous year.

Revenues Improve, Cost Down

Total revenues for the fourth quarter came in at $377 million, up 3.9% year over year.  The top-line figure also surpassed the Zacks Consensus Estimate of $367.53 million.

Total revenues for 2018 came in at $1.46 billion, up 6.5% year over year. Further, the revenue figure outpaced the Zacks Consensus Estimate of $1.45 billion.

Net interest income for the fourth quarter climbed 2.9% year over year to $248.9 million. This upside stemmed from increased interest income on loans and leases held for investment, along with and debt securities available for sale, partially offset by rise in interest expenses.

Net interest margin of 4.6% expanded 3 basis points (bps) year over year due to elevated average yields on the variable and adjustable-rate loan portfolios on rising rates. This was partly offset by higher cost of funds and decreased interest income on auto finance loans.

Non-interest income came in at $128.1 million, up 6% on a year-over-year basis. Increased card revenues, along with leasing and equipment finance income, were partially muted by lower servicing fees and decreased net gains on sale of loans.

TCF Financial reported non-interest expenses of $250 million for the quarter, down 28.1% from the year-earlier quarter. The decline primarily resulted from lower other expenses.

As of Dec 31, 2018, average deposits came in at $18.5 billion, up 1% from the prior quarter end. Average loans and leases inched up nearly 1% sequentially to $18.6 billion.

Credit Quality: A Mixed Bag

Non-accrual loans and leases, and other real estate owned slipped 9.9% year over year to $123.3 million in the fourth quarter. Further, provisions for credit losses were $18.9 million, down 15.1% year over year.

However, net charge-offs, as a percentage of average loans and leases, expanded 8 bps year over year to 0.46%. The upswing chiefly resulted from elevated net charge-offs in the commercial and inventory finance portfolios.

Capital Position

As of Dec 31, 2018, Common equity Tier 1 capital ratio was 10.82% compared with 10.79% as of Dec 31, 2017. As of Dec 31, 2018 total risk-based capital ratio was 13.38% compared with 13.90% as of Dec 31, 2017. Tier 1 leverage capital ratio was 10.44% on Dec 31, 2018, down from 11.12% as of December 2017 end.

Share Repurchase

During the quarter, the company repurchased common stock worth $63 million.

TCF Financial announces merger with Chemical Financial

Concurrently, TCF Financial announced its merger with Chemical Financial Corporation into “TCF Bank” in an all-stock deal. Per the terms of the agreement, TCF shareholders will receive 0.5081 of Chemical common stock for each share of TCF, based on a fixed exchange ratio. TCF shareholders will hold 54% of the merged entity.

The merger is projected to deliver 31% EPS accretion to TCF Financial by 2020. Further, $180 million (pre-tax) of cost savings are anticipated. In addition, the efficiency ratio is expected to be 53%. Projected merger and integration costs are $325 million (pre-tax).

The deal will likely close in late third quarter or early fourth quarter of 2019.

Our Viewpoint

TCF Financial’s continued top-line improvement indicates the company’s robust position in the market. Lower provisions and non-interest expenses are likely to aid its near-term growth.

TCF Financial Corporation Price, Consensus and EPS Surprise

TCF Financial Corporation Price, Consensus and EPS Surprise | TCF Financial Corporation Quote

TCF Financial currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Banks

Citizens Financial Group CFG delivered a positive earnings surprise of 4.3% in fourth-quarter 2018, riding on higher revenues. Adjusted earnings per share of 98 cents topped the Zacks Consensus Estimate of 94 cents. Also, the bottom line improved 38% from the prior-year quarter.

People's United Financial Inc. PBCT reported fourth-quarter 2018 operating earnings of 36 cents per share, surpassing the Zacks Consensus Estimate of 34 cents. Also, the reported figure improved 16% year over year.

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