TCF Financial Corporation’s (TCB) third quarter 2010 earnings came in at 26 cents per share, 3 cents below the Zacks Consensus Estimate of 29 cents. This compares favorably with the earnings of 14 cents in the prior-year quarter.
Increased non-interest expenses, sluggish economic recovery and increased regulatory trouble have affected the quarter results.
Net income came in at $36.9 million, significantly up from $17.5 million in the year-ago quarter. Total revenue was $311.7 million, up 7.7% from $289.5 million year over year, surpassing the Zacks Consensus Estimate of $306 million.
Quarter in Detail
Net interest income was $173.8 million, up 7.6% from $162.5 million in the year-ago quarter. Decreased rates paid on deposits and growth in loans and leases led to an increase in income, which was partially offset by increased non-accrual and restructured loans and leases.
Lower average rates on deposits attributed to net interest margin of 4.12%, up 20 basis points year over year. Lower yields on new loan and lease production and the impact of higher balances of non-accrual loans and leases negatively affected the margin.
Non-interest income came in at $137.9 million, up 7.7% from $128.1 million in the prior-year quarter, attributed to higher card revenue and leasing and equipment finance revenue. These increases were partly offset by decreased banking fees and service charges.
Non-interest expense was $191.8 million, up 0.8% from $190.3 million in the prior-year quarter. The increase in non-interest income reflects higher occupancy and equipment expense, higher FDIC premiums and increased foreclosed real estate and repossessed asset expenses, partially offset by lower compensation and employee benefits costs and decreased marketing and advertising expenses.
Evaluation of Credit Quality
Overall, mixed trend in credit quality was recorded, as a decline in provision for credit losses was offset by increase in other credit metrics.
Provisions for credit losses plunged 21.5% year over year to $59.3 million. Decrease in reserves for restructured consumer real estate loans and lower levels of provision in excess of net charge-offs in the consumer real estate portfolio as the rate of increase in losses reduced due to a significant year over year decrease.
Net loan and lease charge-offs were $57.8 million, up 8.5% from $53.3 million year over year. The increase was primarily due to increase in commercial real estate and consumer real estate net charge-offs, partially offset by decrease in commercial business net charge-offs.
Allowance for loan and lease losses was $253.1 million, up 17.3% from $215.7 million year over year. Non-accrual loans and leases spiked 37.6% to $369.8 million year over year driven by an increase in non-accrual commercial and consumer real estate loans.
Non-performing assets increased 39.4% year over year to $506 million in the third quarter of 2010.
Capital Ratios
At the end of the reported quarter, the company’s total risk-based capital was $1.8 billion, or 12.73% of risk-weighted assets, up from $1.5 billion, or 11.12% of risk-weighted assets at the end of 2009. Tier 1 common capital was $1.3 billion, or 9.45% of risk-weighted assets, increased from $1.0 billion, or 7.65% of risk-weighted assets at the end of 2009.
Performance by Peers
Major competitors of TCF, Wells Fargo & Company (WFC) and U.S. Bancorp (USB), reported positive income surpassing the Zacks Consensus Estimate. The results were bolstered by a slowdown in provision for credit losses reflecting improvement in credit quality.
Our Take
Many banks have suspended their foreclosures due to paperwork flaws. TCF having no such issues continues to process foreclosures which act as a positive catalyst for the company. We expect TCF to maintain its superior position in the market based on its strong results. However, the regulatory reform might affect the company’s near-term results to some extent.
TCF currently retains its Zacks #3 Rank, which translates to a short-term Hold rating. Considering the fundamentals, we are maintaining our Neutral recommendation on the stock.
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