TCF Financial Corporation’s (TCB) fourth-quarter earnings of 12 cents per share missed the Zacks Consensus Estimate of 29 cents, marking the company’s second consecutive earnings miss. Moreover, the bottom line was 45.5% lower than the prior-year quarter figure of 22 cents.
For full year 2014, the company reported earnings per share of 94 cents, which lagged the Zacks Consensus Estimate of $1.11 per share. However, it came 14.6% above the 2013 earnings per share of 82 cents.
Even though TCF Financial missed expectations, the stock gained 3.3% in one day’s trading session – reflecting positive sentiment among investors. Top-line growth and reduced balance sheet risk seemed to have rendered the stock as an attractive pick.
Higher expenses and a rise in provisions primarily impacted the fourth-quarter results. These were, however, partially offset by higher interest as well as non-interest incomes. Moreover, improvement in credit metrics and capital ratios, along with increases in loans and deposit base, were the highlights of the quarter.
Net income for the fourth quarter came in at $24.0 million, down 40% from the prior-year quarter. Also, full year 2014 net income was down 14.8% year over year to $174.2 million.
Performance in Detail
TCF Financial reported total revenue of $313.8 million in the fourth quarter, up 2.1% year over year, driven by higher net interest as well as non-interest income. However, the results lagged the Zacks Consensus Estimate of $316.5 million.
For full year 2014, the company reported total revenue of $1.25 billion, up 3.5% year over year. Moreover, the figure marginally surpassed the Zacks Consensus Estimate of $1.24 billion.
Net interest income rose 1.1% year over year to $204.1 million. The rise was primarily driven by increases in 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 fall in average consumer real estate loan balances and downward pressure on margin. Low rate environment resulted in fourth-quarter net interest margin of 4.49%, down 18 basis points (bps) year over year.
Non-interest income came in at $110.0 million, up 4.1% year over year. The increase was attributable to tremendous gains on sales of auto loans and servicing fee income, and consumer real estate loans, although partially offset by lower banking fees and lower other non-interest income.
TCF Financial reported non-interest expenses of $221.8 million, slightly up from $220.4 million reported in the prior-year quarter. The rise was due to increased compensation and employee benefits expenses, higher occupancy and equipment costs, elevated operating lease depreciation, advertising & marketing expenses and other costs, along with higher expenses on foreclosed real estate and repossesses assets, and other credit costs. These were, nevertheless, partly offset by a fall in FDIC expenses.
Credit Quality
Overall, credit quality for TCF Financial reflected improvement. Net charge-offs amounted to $16.6 million in the quarter, down 44.8% year over year. The decline, compared to the prior-year period, was mainly attributable to an improved credit quality in the consumer as well as the real-estate portfolios.
Moreover, non-accrual loans and leases and other real estate owned dropped 18.4% year over year to $282.4 million, mainly driven by sale of troubled debt restructuring (“TDR”) loans, enhanced credit quality trends, and initiatives undertaken to resolve problem loans in the commercial portfolio.
However, provisions for credit losses increased substantially year over year to $55.6 million, owing to sale of loan portfolio during the quarter.
Capital Position
TCF Financial exhibited a strong capital position in the quarter. As of Dec 31, 2014, the company’s Tier 1 risk-based capital ratio was 11.76% compared with 11.41% as of Dec 31, 2013. The tier 1 common capital ratio was 10.07% compared with 9.63% as of Dec 31, 2013. Moreover, Tier 1 leverage capital ratio was 10.07%, up from 9.71% as of Dec 31, 2013.
As of Dec 31, 2014, total average deposits improved 6.6% year over year to $15.3 billion. Total loans and leases climbed 3.5% year over year to $16.4 billion in the quarter.
Our Viewpoint
Consistent top-line improvement reflects TCF Financial’s strong standing in the market. At the same time, strengthening capital position and improving credit quality are expected to favor the company’s future growth. Moreover, we believe the company’s efforts to reduce balance sheet risk and diversify the loan portfolio will augur well for its earnings in the subsequent quarters. Also, slow but steady improvement in the economy will aid future performance of the company.
However, regulatory pressure and persistent low rate environment continue to act as headwinds.
TCF Financial currently carries a Zacks Rank #4 (Sell).
Performance of Other Midwest Banks
Commerce Bancshares, Inc. (CBSH) reported fourth-quarter 2014 earnings per share of 62 cents, which came in below the Zacks Consensus Estimate of 65 cents.
On the other hand, Huntington Bancshares Inc. (HBAN) reported fourth-quarter 2014 earnings per share of 21 cents, outpacing the Zacks Consensus Estimate by 2 cents; while Associated Banc-Corp’s (ASB) fourth-quarter 2014 earnings per share of 31 cents beat the Zacks Consensus Estimate by a penny.
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