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TCF Financial's (TCB) Q1 Earnings Lag Estimates on High Costs

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TCF Financial Corporation reported first-quarter 2017 earnings per share of 25 cents, lagging the Zacks Consensus Estimate and the prior-year quarter figure of 26 cents.

The results were affected by a decline in non-interest income as well as elevated expenses. However, on a positive note, the quarter witnessed marginal top-line growth and improved credit quality.

The company reported net income of $46.3 million, down 3.7% from $48 million in the prior-year quarter.



Higher Expenses Offset Revenue Growth

Total revenue came in at $325.6 million in the quarter, up a marginal 0.4% year over year. However, the top line missed the Zacks Consensus Estimate of $328 million.

Net interest income was up nearly 4.9% year over year to $222.1 million. The rise was mainly attributable to higher average balances of inventory finance loans, equipment finance loans and leases, securities available for sale, loans and leases held for sale, commercial loans along with higher average yields on variable and adjustable rate of consumer, commercial and inventory finance loans. However, the rise was partially offset by reduced average consumer real estate loan balances.

Net interest margin of 4.46% expanded 9 basis points (bps) year over year due to higher yields on variable and adjustable rate loans along with higher average balances of interest earning assets.

Non-interest income came in at $103.5 million, down 8.1% on a year-over-year basis. The decline was mainly due to loss on sale of auto and real estate loans. Ongoing consumer behavior changes, along with higher average checking account balances per customer, also resulted in the downside.

TCF Financial reported non-interest expenses of $244 million, up 6.9% from the prior-year quarter. The rise mainly reflected significant increases in operating lease depreciation expenses, foreclosed real estate and repossessed assets and other expenses.

As of Mar 31, 2017, total deposits displayed a marginal improvement over the previous quarter to $17.1 billion. The increase was mainly due to growth in average checking balances, partially offset by decrease in money market balances and certificate of deposits. Average loans and leases inched up 2.9% sequentially to $18 billion in the quarter. The rise was due to increase in leasing and equipment finance, inventory finance and commercial portfolios.

Credit Quality Improves

Net charge-offs, as a percentage of average loans and leases, declined 16 bps year over year to 0.11%. The decline was chiefly attributable to the recovery of  previously charged-off consumer real estate non-accrual loans that were sold, partially offset by an increase in net charge-offs in the commercial portfolio and auto finance portfolio.

Further, non-accrual loans and leases and other real estate owned fell 29.1% year over year to $170.9 million.

Moreover, provisions for credit losses were $12.2 million, down 35.3% year over year, primarily due to a recovery of previous charge-offs relative to consumer real estate non-accrual loans that were sold.

Capital Position Weakens

As of Mar 31, 2017, common equity Tier 1 capital ratio was 10.11% compared with 10.24% as of Mar 31, 2016. Total risk-based capital ratio was 13.46% compared with 13.69% as of Mar 31, 2016. Tier 1 leverage capital ratio was 10.64%, down from 10.73% as of Mar 31, 2016.

Our Viewpoint

Continued improvement in credit quality in consumer real estate portfolio is expected to back future growth. Also, margin pressure is expected to ease in the rising rate environment. The company’s increasing loans and strong deposit mix keeps us encouraged about its organic growth prospects.

However, we remain apprehensive owing to several issues, including a decline in fee income, increasing cost base, and a stringent regulatory landscape.

TCF Financial Corporation Price, Consensus and EPS Surprise

TCF Financial currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other banks, Boston Private Financial Holdings, Inc. (BPFH - Free Report) and Trustmark Corporation (TRMK - Free Report) are slated to announce their first-quarter earnings on Apr 26 while SVB Financial Group (SIVB - Free Report) will announce its first-quarter results on Apr 27.

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