Yield curve? Minnesota-based TCF Financial
OK, that's not exactly true. A flat yield curve isn't doing TCF any favors. But this mid-cap bank is doing pretty well all the same. In the third quarter, revenue rose more than 3% and net income climbed 6%, as net interest margin stayed at a nice, high 4.43% (though down from 4.56% a year ago).
Results were achieved through a nearly 3% increase in net interest income and a better than 3% gain in non-interest income. The non-interest side was a bit mixed -- the company experienced strength in corporate equipment leasing and finance, and card revenue offset some weakness in banking fees and ATM revenue. Average loan balances grew almost 10% in the quarter, and average deposit balances grew at a similar rate, with non-interest-bearing deposits making up almost 29% of the total -- but up only 4%.
TCF has a good history of generating excellent returns on capital, and this quarter was no exception. Return on assets actually improved by a tiny bit to 2.07%, while return on equity improved to 27.4%. Even though many financial websites categorize TCF as a money-center bank -- a bizarre assessment, in my book -- I think of it more as a Midwest regional bank. By that standard, it has the highest return on equity of the bunch -- even better than Motley Fool Income Investor recommendation and fellow Minnesotan U.S. Bancorp
One area where this bank is not doing so well is in its non-interest expenses, which climbed by more than 4% this quarter. Though TCF does not provide an efficiency ratio in the press release, we can still calculate one. There are at least four methods of calculating doing so, and the simplest is to just divide non-interest expense by revenue. By that standard, TCF had a ratio of 61.2% in the third quarter -- worse than last year's 60.6%. Although the company is incurring expenses related to expansion and new branch openings, a ratio above 60% isn't generally considered too great. Still, with such high returns on assets and equity, I'm not worried.
Up to now, TCF has succeeded by being a little different -- it's been opening branches in supermarkets and on college campuses and targeting generally customers in the middle and lower class. That's beginning to change, now that TCF is starting to go after more affluent customers. There are risks in this strategy, but it shouldn't obscure the fact that this is a well-run bank with very attractive yield spreads and a reasonable valuation and dividend payout.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).