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Riding on higher revenues, TCF Financial Corporation (TCB - Analyst Report) reported fourth-quarter 2013 adjusted net income of 25 cents per share, beating the Zacks Consensus Estimate by 2 cents. Moreover, results improved significantly by 10 cents on a year-over-year basis.

Deposits and loans growth coupled with top-line improvement were the tailwinds for the quarter. Moreover, strong capital ratios and an improving credit quality were the positives. However, increase in non-interest expenses reflected undisciplined expense management.

Net income was $40.7 million, up 72.5% from $23.6 million in the prior-year quarter. Including net after-tax charge of $5.6 million or 3 cents per share, associated with the realignment of 46 branches, net income came in at $35.1 million or 22 cents per share.

For full-year 2013, net income reached $132.6 million or 82 cents per share, compared with a net loss of $218.5 million or $1.37 per share in the prior-year period. The full-year earnings per share missed the Zacks Consensus Estimate by a penny. Notably, prior-year results include net after-tax charge of $295.8 million or $1.87 per share, associated with the balance sheet repositioning in first-quarter 2012.

Performance in Detail

For full-year 2013, total revenue was $1.21 billion, down 5% from $1.27 billion in the prior year. Revenue results were in line with the Zacks Consensus Estimate.

TCF Financial reported total revenue of $307 million in the final quarter, up 2% year over year, driven by higher net interest as well as non-interest income. Moreover, the results outpaced the Zacks Consensus Estimate of $305 million.

Net interest income inched up 0.4% year over year to $202 million. The rise was primarily driven by elevated average loan and lease balances in the auto finance and inventory finance businesses along with reduced rates on deposit products. These positive were partially offset by a downward pressure on yields across the lending businesses mainly due to the persistent low interest rate environment. Net interest margin was 4.67%, down 12 basis points year over year.

Non-interest income came in at $104 million, up 3.7% year over year. The increase was primarily attributable to gains on sales of auto loans and higher other non-interest income, partially offset by lower leasing and equipment finance revenues.

TCF Financial reported non-interest expenses of $220 million, up 3% year over year. Higher occupancy and equipment costs, 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 53% year over year to $22.8 million, owing to the decline in net charge-offs in the consumer real estate portfolio.

Net charge-offs were $30.1 million in the quarter, down 33.8% year over year. The fall compared to the prior-year period was mainly attributable to an improved credit quality in the consumer real estate portfolio.

Moreover, non-accrual loans and leases declined 27% year over year to $277 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 Dec 31, 2013, the company’s Tier 1 risk-based capital ratio was 11.41% compared with 11.09% as of Dec 31, 2012. The tier 1 common capital ratio was 9.63% compared with 9.21% in the prior-year quarter. Moreover, Tier 1 leverage capital ratio was 9.71%, up from 9.21% in the prior-year quarter.

As of Dec 31, 2013, total average deposits improved 4.4% year over year to $14.4 billion. Total loans and leases increased 2.7% year over year to $15.8 billion in the quarter.

Competitive Landscape

Among other Midwest banks, Huntington Bancshares Incorporated’s (HBAN - Analyst Report) fourth-quarter 2013 earnings beat the Zacks Consensus Estimate, Associated Banc-Corp’s (ASBC - Analyst Report) results were in line, while results at Commerce Bancshares, Inc. (CBSH - Analyst Report) lagged the Zacks Consensus Estimate.

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 #3 (Hold).

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