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TCF Financial Corporation’s (TCB - Analyst Report) second-quarter 2011 earnings came in at 19 cents per share, lagging the Zacks Consensus Estimate by 2 cents. Moreover, this compares unfavorably with the earnings of 20 cents in the prior quarter and 32 cents in the prior-year quarter.

Decreased non-interest income, increased non-interest expenses, sluggish economic recovery and increased regulatory trouble have affected the quarter results. These negatives were partly offset by deposits growth.

Net income came in at $29.8 million in the reported quarter, modestly in line with the prior quarter and down from $45.0 million in the year-ago quarter.

Performance in Detail

Net interest income (NII) was relatively flat year over year at $176.2 million, while it inched up 1.3% sequentially. The sequential improvement was attributable to the increase in the higher-yielding inventory finance portfolio and lower rates paid on deposits and decreased interest expense on long-term borrowings. However, growth in lower yielding variable-rate consumer real estate and commercial loans and persistent low interest rate environment were the downside.

Net interest margin (NIM) in the quarter was 4.02%, down 17 basis points (bps) year over year and 4 bps sequentially. Increased asset liquidity and growth in lower yielding variable-rate loans and leases attributed to the lower interest rate environment, negatively affecting the margin. However, lower average rates on deposits and long-term borrowings partially offset the decline.

Non-interest income came in at $114.1 million, moderately flat sequentially and plummeted 16.0% from $135.9 million in the prior-year quarter. This dip was attributable to decreased banking fees and service charges.

TCF reported total revenue of $290.3 million in the quarter, down 7.0% from $312.4 million year over year, below the Zacks Consensus Estimate of $298.0 million.


Non-interest expense was $196.0 million, up 3.6% from $189.1 million in the prior-year quarter. The increase in non-interest expense reflects higher compensation and employee benefits costs, higher FDIC premiums, increased foreclosed real estate and repossessed asset expenses and increased deposit account premiums. These increases were partially offset by lower occupancy and equipment expense and decreased marketing and advertising expenses.

On a sequential basis, non-interest expense surged up 1.1%, driven by higher deposit account premiums and other expenses.

Evaluation of Credit Quality

Overall, improvement in credit quality was recorded with the decline in level of non-performing assets, provisions for credit losses and net charge-offs.

Provisions for credit losses was down 2.9% sequentially to $44.0 million, owing to decreased commercial and leasing and equipment finance net charge-offs, partly offset by higher consumer real estate net charge-offs.

Net loan and lease charge-offs were $43.8 million in the quarter, down 21.6% from $55.8 million sequentially. The decrease was primarily due to decline in commercial net charge-offs.

Allowance for loan and lease losses was $255.5 million, modestly stable compared with the prior quarter. Non-performing assets inched down 0.7% sequentially to $458.2 million in the second quarter of 2011. However, non-accrual loans and leases increased 0.8% to $321.7 million sequentially, driven by a surge in commercial non-accrual loans.


Capital Ratios

At the end of the reported quarter, the company’s total risk-based capital was $2.0 billion, or 14.83% of risk-weighted assets, up from $1.8 billion, or 12.98% of risk-weighted assets at the end of 2010. Tier 1 common capital was $1.6 billion, or 11.79% of risk-weighted assets, up from $1.4 billion, or 9.71% of risk-weighted assets at the end of 2010.

Our Take

Despite sluggish economic recovery and regulatory issues, TCF reported positive net income. We expect TCF to maintain its superior position in the market based on its positive approach to market conditions and improving credit quality. However, the regulatory reform and low interest rate environment might affect the company’s near-term results to some extent.

TCF currently retains its Zacks #3 rank, which translates to a short-term ‘Hold’ rating. However, TCF’s closest competitor Commerce Bancshares Inc. (CBSH - Analyst Report) maintained a Zacks #2 rank, which translates into a short-term ‘Buy’ rating.

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