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TCF Financial Corporation (TCB - Analyst Report) reported fourth quarter 2012 net income of 15 cents per share, marginally below the Zacks Consensus Estimate of 18 cents. Moreover, results compared unfavorably with adjusted net income of 19 cents in the prior quarter.

Lower-than-expected results were impacted by a dip in total revenue and elevated non-interest expenses. Yet, loans and deposits growth coupled with improving credit quality were the tailwinds for the quarter.

For the full year 2012, net loss reached $218.5 million or $1.37 per share, compared with net income of $109.4 million or 71 cents per share in the prior-year period. The full year earnings were above the Zacks Consensus Estimated loss of $1.34 per share.

Full year results included after-tax charge of $20.6 million or 13 cents per share, based on the impact of the implementation of the clarifying regulatory guidance in the third quarter and $295.8 million or $1.87 per share, associated with balance sheet repositioning in Mar 2012.

Performance in Detail

TCF Financial reported total revenue of $301.2 million in the quarter, down 3.7% sequentially, attributable to lower non-interest income. However, the results surpassed the Zacks Consensus Estimate of $297.0 million.

For full year 2012, total revenue was $1.3 billion, up 11% from $1.1 billion in the prior year. Revenue results also outpaced the Zacks Consensus Estimate of $1.2 billion.

Net interest income climbed 0.3% sequentially to $201.1 million. The augmentation was driven by lower interest expenses. Net interest margin was 4.79%, contracting 6 basis points sequentially, primarily due to lower yields on new originations in the national lending portfolio.

Non-interest income came in at $100.1 million, down 10.7% sequentially. The decrease was primarily attributable to lower ATM revenue and reduced gain on sale of auto loans and consumer real estate loans.

TCF Financial reported non-interest expenses of $214.0 million, up 8.7% sequentially. Elevated deposit account premiums, higher compensation and increased other expenses led to a surge in expenses.

Evaluation of Credit Quality

With the decreased level of non-performing assets in the quarter, credit quality improved on the whole. Provisions for credit losses dipped 49.6% sequentially to $48.5 million, owing to non-recurring impact associated with the adoption of clarifying bankruptcy-related regulatory guidance in the third quarter.

Net charge-offs were $45.6 million in the quarter, down 56.4% sequentially. The fall compared to the prior period was mainly attributable to additional net charge-offs of $43.9 million related to the implementation of bankruptcy-related regulatory guidance included in the third quarter.

Moreover, non-accrual loans and leases inched down 10% sequentially to $379.5 million, driven by a dip in commercial non-accrual loans. However, allowance for loan and lease losses increased to $267.1 million, up 0.9% sequentially.

Capital Position

As of Dec 31, 2012, the company’s total risk-based capital ratio was 11.09% compared with 12.67% as of Dec 31, 2011. The tier 1 common capital ratio was 9.21% compared with 11.74% in the prior year.

As of Dec 31, 2012, total deposits improved 15.2% year over year to $14.1 billion. Period end loans and leases were $15.1 billion, up 4.1% year over year.

Peer Performance

Among TCF Financial’s peers, Commerce Bancshares, Inc. (CBSH - Analyst Report) reported fourth quarter 2012 earnings of 72 cents per share, in line with the Zacks Consensus Estimate as well as the prior-quarter earnings. However, this compared favorably with the year-ago quarter’s earnings of 66 cents.

Results for the quarter were aided by an augmented top line, partly offset by higher expenses. Credit quality and capital ratios showed mixed trends. However, sustained growth in loans and deposits were the highlights for 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 improving net interest income. Moreover, a healthy capital position is indicative of the company’s robust standing. However, the regulatory reforms might affect the company’s near-term results to some extent.

TCF Financial currently carries a Zacks Rank #3 (Hold). Among peers, Zacks Rank #1 (Strong Buy) stocks include First Interstate Bancsystem Inc. (FIBK - Snapshot Report) and Old Second Bancorp Inc. (OSBC - Snapshot Report).

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