TCF Financial Corporation (TCB) reported second quarter 2012 net income of 20 cents per share, marginally beating the Zacks Consensus Estimate by 2 cents. Reported earnings also improved from the adjusted net loss of $1.78 per share in the prior quarter and net income of 19 cents in the prior-year quarter.

Adjusted net loss in the prior quarter included an after-tax charge of $1.87 per share, associated with the repositioning of certain investments and borrowings of TCF Financial's balance sheet.

Improved net interest income coupled with reduced non-interest expenses were the positives for the quarter. Moreover, full quarter impact of the balance sheet repositioning added fuel to fire. Yet, lower non-interest income and deteriorating credit quality were the dampeners.

Net income for the reported quarter stood at $31.5 million, up from net loss of $282.9 million in the prior quarter and net income of $30.4 million in the prior-year quarter.

Performance in Detail

TCF Financial reported total revenue of $311.1 million in the quarter, down 10% sequentially, attributable to lower non-interest income, partially offset by higher net interest income. However, the results outshined the Zacks Consensus Estimate of $289.0 million.

Net interest income climbed 10% sequentially to $198.2 million. Full quarter impact of the balance sheet repositioning, which reduced the cost of borrowings acted as a positive for the earnings. However, decreased interest income on mortgage-backed securities and lower interest income on loans and leases partially offset the increase.

Net interest margin in the quarter was 4.86%, improving 72 basis points (bps) sequentially. Lower average cost of borrowings resulting from the balance sheet repositioning and growth in inventory finance and auto finance portfolios drove the sequential improvement. These positives were partly offset by reduced levels of higher yielding loans in the consumer portfolio due to persistent lower interest rate environment and augmented balances in higher rate deposit accounts.

Non-interest income came in at $112.9 million, significantly down 32% sequentially. The decrease was primarily attributable to reduced net gains on securities (down 83% sequentially), though partially offset by higher banking fees and service charges coupled with increased fees and other revenues.

TCF Financial reported non-interest expenses of $203 million, down 72.9% sequentially from $748.7 million. Last quarter's results included a loss of $550.7 million on termination of debt. Moreover, reduced deposit account premiums added to the decline in expenses.

Evaluation of Credit Quality

With the increased level of non-performing assets in the quarter, due to elevated non-accrual loans, primarily in commercial real estate, credit quality also deteriorated.

Provisions for credit losses climbed 11.5% sequentially and 23.0% year over year to $54.1 million, owing to increased provision expense on commercial loans and reserve loss on one large lease exposure.

Net loan and lease charge-offs were $44.9 million in the quarter, up 15.4% sequentially and 2.5% year over year. The rise compared to the prior periods was mainly attributable to the upsurge in commercial real estate net charge-offs. Allowance for loan and lease losses was $274.2 million, up 3.4% sequentially and 7.3% year over year.

Moreover, non-accrual loans and leases climbed 5.0% sequentially and 0.7% year over year to $324.4 million, driven by a rise in commercial real estate non-accrual loans and one big non-accrual lease, though partially offset by lower consumer real estate non-accrual loans.

Capital Position

As of June 30, 2012, the company's total risk-based capital was $1.9 billion, or 13.11% 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 $1.5 billion, or 10.53%, 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 surged to 8.64% and 9.26% from 7.68% and 9.04%, respectively, in the prior quarter.

As of June 30, 2012, total deposits grew 6.3% sequentially and 9.3% year over year to $13 billion. Period end loans and leases were $15.2 billion, up 0.2% sequentially and 4.1% year over year.

Dividend Update

Concurrent with the press release, TCF Financial declared a quarterly cash dividend of 5 cents per common share. The dividend will be paid on August 31, 2012 to stockholders of record as on August 15, 2012.

Peer Performance

Among TCF Financial's peers, Commerce Bancshares, Inc. (CBSH) reported second quarter 2012 earnings of 80 cents per share, significantly outpacing the Zacks Consensus Estimate of 72 cents. However, after considering loan recoveries and interest income on non-performing commercial loans as well as early pay-off of commercial real estate loan, the company reported earnings of 84 cents.

This also compares favorably with the prior-quarter's earnings of 75 cents per share and the year-ago quarter's earnings of 74 cents.

Commerce Bancshares' year-over-year results benefited from higher net interest income and a decrease in operating expenses, partially offset by a lower fee income. Moreover, credit quality and capital ratios continued to show improvements.

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 net interest margin in the coming quarters.

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, healthy capital position is indicative of the company's robust standing. Additionally, reduced operating expenses reflect prudent expense management. 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.
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Tickers in this Article: TCB, CBSH

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