TEXT - S&P cuts TCF Financial
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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