TCF Financial Misses Q3 Earnings Estimates, Shares Fall - Analyst Blog

Shares of TCF Financial Corporation (TCB) fell 3.5% in one day's trading following the third-quarter 2014 earnings release on Oct 24, before the market opened. The company reported earnings per share of 29 cents, missing the Zacks Consensus Estimate by a penny. The bottom line, however, came in line, comfortably higher than the the prior-year quarter figure of 23 cents.

Results were impacted by higher expenses, partially offset by higher revenues and lower provision for credit losses. However, asset quality and capital position remained strong during the quarter. Further, loans and deposits continued to grow.

Net income was $52.3 million, up 22.3% from the prior-year quarter.
 

Performance in Detail

TCF Financial reported total revenue of $320.3 million in the third quarter, up 4.7% year over year, driven by higher net interest as well as non-interest income. Moreover, the results outpaced the Zacks Consensus Estimate of $313 million.

Net interest income rose 2.3% year over year to $204.2 million. The rise was primarily attributable to elevated average loan and lease balances in the auto finance, inventory finance, and leasing and equipment finance businesses, along with reduced borrowing costs. These positives were, however, partially offset by a downward pressure on yields across the lending businesses, mainly due to the persistently low interest rate environment. Net interest margin was 4.60%, down 2 basis points year over year.

Non-interest income came in at $116.2 million, up 9.3% year over year. The increase was driven by gains on sales of auto loans and consumer real estate loans, and higher other non-interest income and servicing fee income, although partially offset by lower banking fees.

TCF Financial reported non-interest expenses of $219.7 million, up 3.5% year over year. The rise was due to higher occupancy and equipment costs, elevated operating lease depreciation, increased compensation and employee benefits, advertising & marketing expenses and other expenses, along with higher expenses on foreclosed real estate and repossesses assets. These were, nevertheless, partly offset by a fall in FDIC expenses and other credit costs, and lower deposit account premiums.

Credit Quality

Overall, credit quality for TCF Financial showed improvement. Provisions for credit losses dropped 36% year over year to $15.7 million, owing to a decline in reserve requirements in the consumer real estate portfolio.

Net charge-offs amounted to $26.9 million in the quarter, down 2.5% year over year. The decline, compared to the prior-year period, was mainly attributable to an improved credit quality in the consumer portfolio.

Moreover, non-accrual loans and leases and other real estate owned inched down 1.6% year over year to $342.7 million, mainly driven by enhanced credit quality trends and initiatives undertaken to resolve problem loans in the commercial portfolio.

Capital Position

TCF Financial exhibited a strong capital position in the quarter. As of Sep 30, 2014, the company's Tier 1 risk-based capital ratio was 11.64% compared with 11.41% as of Dec 31, 2013. The tier 1 common capital ratio was 9.94% compared with 9.63% as of Dec 31, 2013. Moreover, Tier 1 leverage capital ratio was 10.19%, up from 9.71% as of Dec 31, 2013.

As of Sep 30, 2014, total average deposits improved 5.9% year over year to $15.2 billion. Total loans and leases increased 4.6% year over year to $16.4 billion in the quarter.

Our Viewpoint

Despite a rise in expenses, we expect the company to maintain its superior position in the market based on its positive approach to market conditions and top-line growth. At the same time, a healthy capital position, along with strong capital deployment activities, is indicative of the company's robust standing.

However, regulatory pressure and increase in expenses remain as looming concerns.

TCF Financial currently carries a Zacks Rank #3 (Hold).

Performance of Other Midwest Banks

Commerce Bancshares, Inc. (CBSH) reported third-quarter earnings per share of 72 cents, beating the Zacks Consensus Estimate by a penny.

Huntington Bancshares Inc. (HBAN) reported adjusted earnings per share of 20 cents in third-quarter 2014, marginally beating the Zacks Consensus Estimate of 19 cents.

Associated Banc-Corp (ASBC) reported third-quarter 2014 earnings per share of 31 cents, outpacing the Zacks Consensus Estimate by a penny.