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TCF Financial Corporation (TCB - Analyst Report) reported third-quarter 2013 net income of 23 cents per share, in line with the Zacks Consensus Estimate. However, results improved significantly by 17 cents on a year-over-year basis.

Deposits and loans growth coupled with an improving credit quality were the tailwinds for the quarter. Moreover, strong capital position was a positive. However, increase in non-interest expenses reflects undisciplined expense management and decline in the top line came as a headwind.

Net income was $37.9 million, substantially up from $9.3 million in the prior-year quarter.

Performance in Detail

TCF Financial reported total revenue of $306 million in the quarter, down 2.2% year over year, driven by lower net interest income. However, the results outpaced the Zacks Consensus Estimate of $304 million.

Net interest income dipped 0.5% year over year to $200 million. The fall was driven by a downward pressure on yields across the lending businesses mainly due to the persistent low interest rate environment, partially offset by elevated average loan and lease balances. Net interest margin was 4.62%, down 23 basis points year over year.

Non-interest income came in at $106 million, up 7.3% year over year. The increase was primarily attributable to elevated leasing and equipment finance revenues, partially offset by lower banking fees.

TCF Financial reported non-interest expenses of $212 million, up 7.8% year over year. Higher FDIC insurance, elevated operating lease depreciation and increased compensation and employee benefits mainly led to the rise in expenses.

Evaluation of Credit Quality

Overall, credit quality improved for TCF Financial. Provisions for credit losses decreased 74.5% year over year to $24.6 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 32.9% year over year. The fall compared to the prior-year period was mainly attributable to an improved credit quality in the consumer real estate and commercial portfolios.

Moreover, non-accrual loans and leases declined 32.9% year over year to $282.9 million, driven by reduced non-accrual commercial and consumer real estate loans.

Capital Position

TCF Financial exhibited a strong capital position in the quarter. As of Sep 30, 2013, the company’s Tier 1 risk-based capital ratio was 11.36% compared with 11.27% as of Jun 30, 2013. The Tier 1 common capital ratio was 9.55% compared with 9.41% in the prior quarter. Moreover, Tier 1 leverage capital ratio was 9.53%, up from 9.34% in the prior quarter.

As of Sep 30, 2013, total average deposits improved 5.6% year over year to $14.3 billion. Total loans and leases increased 2.0% year over year 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 non-interest income growth. Moreover, a healthy capital position along with strong capital deployment activities is indicative of the company’s robust standing. However, the regulatory pressure, decline in the top line and increase in expenses remain looming concerns.

TCF Financial currently carries a Zacks Rank #3 (Hold). Some Midwest banks that are worth considering include Enterprise Financial Services Corp. (EFSC - Snapshot Report), First Midwest Bancorp Inc. (FMBI - Snapshot Report) and PrivateBancorp, Inc. (PVTB - Snapshot Report). All 3 banks carry a Zacks Rank #1 (Strong Buy).

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