TEXT - S&P cuts TCF Financial

Thu Nov 29, 2012 6:00pm EST

Overview
     -- The rise in TCF Financial's nonperforming assets in the third quarter 
and the resignation of its chief risk officer have compounded our concerns 
about its credit quality and operational risk. 
     -- We are lowering our long-term issuer credit ratings on TCF Financial 
and its main operating company, TCF National Bank, by one notch to 'BBB-' and 
'BBB', respectively.
     -- Our stable outlook reflects our belief that the company will gradually 
reduce its NPAs over the next year and continue to grow its inventory and auto 
finance businesses.

Rating Action
On Nov. 29, 2012, Standard & Poor's Ratings Services lowered its long-term 
issuer credit ratings on TCF Financial Corp. (TCF) and TCF National Bank by 
one notch to 'BBB-' and 'BBB', respectively. The outlook is stable. We also 
lowered our short-term rating on TCF to 'A-3' from 'A-2'. At the same time, we 
lowered our ratings on TCF's preferred stock to 'BB' from 'BB+' and our rating 
on TCF National Bank's subordinated debt to 'BBB-' from 'BBB'. 

Rationale
The downgrade reflects our lower assessment of TCF's risk position. The rise 
in TCF's nonperforming assets (NPAs) in the third quarter and the recent 
resignation of its chief risk officer have compounded our concerns about its 
credit quality and operational risk. As a result, we are lowering our 
assessment of the company's risk position to "moderate" from "adequate," as 
our criteria describe the terms.

The company's NPAs, including a high level of restructured loans, rose to 
about 7.5% of its loans and other real estate owned in the third quarter from 
6.9% in the prior quarter--a level we previously said could trigger a 
downgrade. New accounting guidance required the company to report all loans to 
borrowers that were previously discharged from Chapter 7 bankruptcy as 
nonaccrual and to charge off those loans to the value of their underlying 
collateral, regardless of how the loan is currently performing.

Even when adjusting for this accounting change, TCF's credit quality has been 
relatively stagnant while many other banks have reported substantial 
improvements. TCF's measure of NPAs--excluding restructured loans and the 
impact of the new accounting guidance--was slightly higher at the end of 
third-quarter 2012 than a year earlier. In addition, in our view, the sharp 
rise in NPAs that related to borrowers that have gone through Chapter 7 
bankruptcy further underlines the higher credit risk of the company's customer 
base. The company also has restructured more loans than most banks on a 
proportional basis to help avoid higher charge-offs and nonaccruals. 
Restructured loans, most of which are still accruing, made up about half of 
the company's NPAs. We expect the reduction in TCF's NPAs to be gradual, and 
we are uncertain how its restructured loans will ultimately perform.

TCF has said that the resignation of its chief risk officer did not result 
from a disagreement with the company. Still, the departure of a senior 
executive, particularly at somewhat of a challenging time, can raise some 
questions and will force TCF to replace one of its most senior and 
long-tenured employees. 

These issues add to our concerns about a rise in TCF's operational risk, 
relating to its growing national lending platforms and alterations to its 
deposit account strategies. TCF's inventory finance business, which it 
launched in 2008, has more than doubled in size since year-end 2011. In 
addition, in 2011, it acquired an indirect auto lender that focused on 
nonprime, used-car loans. We recognize that these types of out-of-market 
lending platforms offer diversification. Still, in the near term, the 
company's quick expansion brings a variety of new risks and management 
challenges.  

The company has also spent much of the last year experimenting with new 
deposit fees--only to revert back to its original free-checking strategy. In 
the process, it lost some customers and its fee income fell. The company, 
which banks many lower-income consumers, believes that its customer fees have 
stabilized, but we are less certain. Regulatory reform related to debit 
interchange and overdraft fees have had a large impact on TCF's noninterest 
income. That reform has probably also weakened the profitability of the 
company's supermarket branches. We believe it historically collected 
significant overdraft and debit card fees from customers that used those 
branches. 

Outlook
Our stable outlook reflects our belief that the company will gradually reduce 
its NPAs over the next year, remain profitable--albeit a lower-than-historical 
level--and continue to grow its inventory and auto finance businesses.

We could raise our ratings on TCF if it substantially reduces its NPAs, 
stabilizes or grows its fee income, and demonstrates further success in its 
national lending platforms over an extended period. We could lower our ratings 
on TCF if its NPAs increase further, particularly if the company's nonaccruals 
(excluding restructured loans) cause the increase. For instance, if the NPA 
ratio rose to 8.5%, the rating could come under pressure.

Ratings Score Snapshot
                                 To                   From
Issuer Credit Rating             BBB/Stable/A-2       BBB+/Negative/A-2
Bank Holding Company Rating      BBB-/Stable/A-3      BBB/Negative/A-2

SACP                             bbb                  bbb+
 Anchor                          bbb+                 bbb+
 Business Position               Adequate (0)         Adequate (0)
 Capital and Earnings            Adequate (0)         Adequate (0)
 Risk Position                   Moderate (-1)        Adequate (0)
 Funding and Liquidity           Average              Average
                                 And Adequate (0)     and Adequate (0)

Support                          0                    0
 GRE Support                     0                    0
 Group Support                   0                    0
 Sovereign Support               0                    0

Additional Factors               0                    0

Related Criteria And Research
Banks: Rating Methodology And Assumptions, Nov. 9, 2011

Ratings List

Downgraded
                                      To                 From
TCF Financial Corp.
 Issuer Credit Rating                 BBB-/Stable/A-3    BBB/Negative/A-2
 Preferred Stock                      BB                 BB+

Downgraded; Ratings Affirmed
                                      To                 From
TCF National Bank
 Issuer Credit Rating                 BBB/Stable/A-2     BBB+/Negative/A-2
 Certificate Of Deposit
  Local Currency                      BBB/A-2            BBB+/A-2
 Subordinated                         BBB-               BBB

Downgraded
                                      To                 From
TCF Capital I
 Junior Subordinated                  BB                 BB+
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