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TCF Financial Reports Loss, Rev Up

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TCF Financial Corporation reported first-quarter 2012 adjusted net loss of $1.78 per share, better than the Zacks Consensus Estimate loss of $1.81. Adjusted figure includes after-tax charge of $1.87 per share, associated with the repositioning of certain investments and borrowings of TCF Financial’s balance sheet.

Excluding one-time after-tax charges of $295.8 million, net income stood at $12.9 million or 9 cents per share, down from $16.4 million or 10 cents per share in the prior quarter and $30.3 million or 21 cents per share in the prior-year quarter.

Loss recorded on prepayment of debt increased the non-interest expenses significantly in the quarter. Yet, higher revenue, driven by increased net interest and non-interest income were positives for the quarter. Moreover, a rise in net interest margin added fuel to the fire.

Performance in Detail

TCF Financial reported total revenue of $345.5 million in the quarter, up 27.2% sequentially and 19.9% year over year, attributable to higher net interest and non-interest income. Additionally, the results also outshined the Zacks Consensus Estimate of $297.0 million.

Net interest income climbed 3.9% sequentially to $180.2 million. Increased growth in the inventory finance and auto finance portfolio, coupled with lower average cost of borrowings, cumulated in the sequential rise. However, lower mortgage-backed securities balances due to the balance sheet repositioning, which completed in March 2012, partially offset the climb.

Moreover, net interest income grew 3.6% year over year, mainly due to lower average balances and cost of borrowings attributed to the balance sheet repositioning. Additionally, lower average borrowings, declined rates on diverse deposit products along with elevated average loan and lease balances, based on the growth in the inventory finance and auto finance portfolios, were positives for the income. Yet, a fall in consumer and commercial real estate portfolio balances and average yields partly offset the rise in income.

Net interest margin in the quarter was 4.14%, improving 22 basis points (bps) sequentially and 8 bps year over year. Lower average cost of borrowings resulting from the balance sheet repositioning drove the improvement.

Non-interest income came in at $165.3 million, significantly up by 68% sequentially and 45% year over year. The increases were driven by net gains on securities, though partially offset by lower banking fees and service charges, coupled with reduced fees and other revenues.

TCF Financial reported non-interest expense of $748.7 million, including $550.7 million loss on termination of debt. During March 2012, the company restructured $3.6 billion of long-term borrowings having 4.3% weighted average rate that resulted in such pre-tax loss.

Evaluation of Credit Quality

Though the level of non-performing assets remained flat for the quarter, credit quality was a mixed bag.

Provisions for credit losses plunged 18.1% sequentially to $48.5 million, owing to reduced commercial net charge-offs and lower provision expense on consumer real estate TDRs. However, provisions increased 7.2% year over year, largely due to augmented reserves on the inventory finance portfolio.

Net loan and lease charge-offs were $38.9 million in the quarter, down 32.8% sequentially and 30.2% year over year. The plunge was mainly attributable to the decline in commercial real estate and leasing and equipment finance charge-offs.

Allowance for loan and lease losses was $265.3 million, up 3.8% sequentially and 3.9% year over year. Moreover, non-accrual loans and leases climbed 3.6% sequentially to $308.9 million, driven by a rise in commercial real estate non-accrual loans, though partially offset by lower commercial business non-accrual loans. Yet, loans dropped 3.2% year over year resulting from a fall in leasing and equipment finance non-accrual loans, partially offset by elevated commercial real estate non-accruals.

Capital Position

As of March 31, 2012, the company’s total risk-based capital was $1.7 billion, or 11.88% of risk-weighted assets, down from $2.0 billion, or 14.80% of risk-weighted assets at the end of 2011. Tier 1 risk-based capital was $1.4 billion, or 9.97%, down from $1.7 billion, or 12.67% of risk-weighted assets as of December 31, 2011.

The tier 1 leverage ratio and tier 1 common capital ratio dropped to 7.68% and 9.04% from 9.15% and 11.74%, respectively, in the prior quarter.

As of March 31, 2012, total deposits inched up 1.7% sequentially and 5.1% year over year to $12.3 billion. Period end loans and leases were $15.2 billion up 7.5% sequentially and 2.8% year over year.

Our Take

In March 2012, TCF Financial repositioned its balance sheet with the prepayment of $3.6 billion of long-term debt. Moreover, it also sold $1.9 billion of mortgage-backed securities. The restructuring of the balance sheet has reduced interest rate risk of the company and is expected to be more accretive to the net interest margin.

We expect the company to maintain its superior position in the market based on its positive approach to market conditions and improving top-line growth. However, the regulatory reforms might affect the company’s near-term results to some extent.

TCF Financial currently retains its Zacks #3 rank, which translates to a short-term ‘Hold’ rating.

Among TCF Financial’s peers, Citizens Republic Bancorp Inc. will be reporting its first-quarter 2012 results on April 26, 2012, after the market closes.

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