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TCF Financial Corporation (TCB - Analyst Report) reported first-quarter 2013 net income of 16 cents per share, marginally below the Zacks Consensus Estimate of 19 cents. However, results improved slightly on a sequential basis.

Loans and deposits growth coupled with improving credit quality were the tailwinds for the quarter. Moreover, decreased non-interest expenses reflect better expense management. However, a decline in total revenue driven by reduced interest as well non-interest income was a headwind for the quarter.

Performance in Detail

TCF Financial reported total revenue of $292 million in the quarter, down 3.1% sequentially, attributable to lower non-interest and net interest income. Moreover, the results lagged the Zacks Consensus Estimate of $298.0 million.

Net interest income dipped 1% sequentially to $199 million. The fall was driven by lower interest income from loan and leases. Net interest margin was 4.72%, contracting 7 basis points sequentially, primarily due to lower yields in the commercial portfolio.

Non-interest income came in at $93 million, down 7.9% sequentially. The decrease was primarily attributable to lower fees and service charges, and reduced leasing and equipment finance revenues.

However, TCF Financial reported non-interest expenses of $204 million, down 4.7% sequentially. Lower FDIC insurance, reduced operating lease depreciation and decreased other expenses led to a contraction in expenses.

Evaluation of Credit Quality

With the decreased level of non-performing assets in the quarter, overall credit quality improved. Provisions for credit losses dipped 22.4% sequentially to $38 million, owing to decreased charge-offs in the consumer real estate portfolio and reduced reserve balances on the leasing and equipment finance portfolio.

Net charge-offs were $41 million in the quarter, down 9.9% sequentially. The fall compared with the prior period was mainly attributable to improved credit quality in the consumer real estate portfolio.

Moreover, non-accrual loans and leases inched down 9.5% sequentially to $343 million, driven by a dip in commercial and consumer real estate non-accrual loans.

Capital Position

TCF Financial exhibited a strong capital position in the quarter. As of Mar 31, 2013, the company’s Tier 1 risk-based capital ratio was 11.14% compared with 11.09% as of Dec 31, 2012. The tier 1 common capital ratio was 9.24% compared with 9.21% in the prior quarter. Moreover, Tier 1 leverage capital ratio was 9.23%, up from 9.21% in the prior quarter.

As of Mar 31, 2013, total average deposits improved 2% sequentially to $14 billion. Period end loans and leases were $15.6 billion, up 1.2% sequentially.

Peer Performance

Commerce Bancshares, Inc.’s (CBSH - Analyst Report) first-quarter 2013 earnings of 67 cents per share missed the Zacks Consensus Estimate by a penny. Further, the earnings came in below 72 cents reported in the prior quarter and 70 cents in the prior-year quarter.

Marginally lower-than-expected results were attributable to reduced top-line growth, partially offset by a fall in operating expenses. Further, capital and profitability ratios deteriorated. Yet, a marked improvement in the credit quality as well as sustained growth in loans and deposits was the tailwind.

Our Viewpoint

We expect the company to maintain its superior position in the market based on its positive approach to market conditions and decreasing expenses. Moreover, a healthy capital position is indicative of the company’s robust standing. However, the regulatory pressure and decline in top line remain looming concerns.

TCF Financial currently carries a Zacks Rank #3 (Hold). Among other Midwest banks, Mercantile Bank Corp. (MBWM - Snapshot Report) carries a Zacks Rank #1 (Strong Buy) while Privatebancorp Inc. (PVTB - Snapshot Report) carries a Zacks Rank #2 (Buy).

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