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TCF Financial Corporation (TCB - Analyst Report) reported second-quarter 2013 net income of 21 cents per share, in line with the Zacks Consensus Estimate. However, results improved by a nickel on a sequential basis.

Deposits growth coupled with improving credit quality were the tailwinds for the quarter. Moreover, a rise in total revenue driven by increased interest as well non-interest income was a positive. However, increase in non-interest expenses reflects undisciplined expense management.

Net income was $34.1 million, up 33.8% from $25.5 million in the prior quarter.

Performance in Detail

TCF Financial reported total revenue of $302 million in the quarter, up 3.4% sequentially, driven by higher non-interest and net interest income. Moreover, the results outpaced the Zacks Consensus Estimate of $300 million.

Net interest income surged 1.5% sequentially to $202 million. The rise was driven by elevated average loan balances, partially offset by reduced interest income from lower average balances of consumer real estate loans. Net interest margin was 4.72%, in line with the prior quarter.

Non-interest income came in at $100 million, up 7.6% sequentially. The increase was primarily attributable to higher banking fees and elevated leasing and equipment finance revenues.

On the flip side, TCF Financial reported non-interest expenses of $209 million, up 2.2% sequentially. Higher FDIC insurance, elevated operating lease depreciation and increased compensation and employee benefits led to the rise in expenses.

Evaluation of Credit Quality

Overall, credit quality improved for TCF Financial. Provisions for credit losses decreased 15.1% sequentially to $32.6 million, owing to the decline in net charge-offs in the consumer real estate portfolio.

Net charge-offs were $27.7 million in the quarter, down 32.4% sequentially. The fall compared to the prior period was mainly attributable to improved credit quality in the consumer real estate and commercial portfolios.

Moreover, non-accrual loans and leases declined 18.9% sequentially to $278.5 million, driven by the sale of loans during the reported quarter.

Capital Position

TCF Financial exhibited a strong capital position in the quarter. As of Jun 30, 2013, the company’s Tier 1 risk-based capital ratio was 11.27% compared with 11.14% as of Mar 31, 2013. The tier 1 common capital ratio was 9.41% compared with 9.24% in the prior quarter. Moreover, Tier 1 leverage capital ratio was 9.34%, up from 9.23% in the prior quarter.

As of Jun 30, 2013, total average deposits improved 0.6% sequentially to $14.1 billion. Period end loans and leases decreased modestly to $15.6 billion in the quarter.

Our Viewpoint

We expect the company to maintain its superior position in the market based on its positive approach to market conditions and top-line growth. Moreover, a healthy capital position along with strong capital deployment activities is indicative of the company’s robust standing. However, the regulatory pressure and increase in expenses remain looming concerns.

TCF Financial currently carries a Zacks Rank #4 (Sell). However, some Midwest banks that are worth considering include Mercantile Bank Corp. (MBWM - Snapshot Report), First Interstate Bancsystem Inc. (FIBK - Snapshot Report) and First Merchants Corporation (FRME - Snapshot Report). All these 3 carry a Zacks Rank #1 (Strong Buy).

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