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Fitch Affirms TCF Financial at 'BBB-'/'F3' Following Mid-Tier Regional Peer Review; Outlook Negative
February 5, 2014 / 9:47 PM / in 4 years

Fitch Affirms TCF Financial at 'BBB-'/'F3' Following Mid-Tier Regional Peer Review; Outlook Negative

(The following statement was released by the rating agency) NEW YORK, February 05 (Fitch) Fitch Ratings has affirmed TCF Financial Corporation's (TCB) ratings at 'BBB-'/'F3'. The Rating Outlook remains Negative. A full list of rating actions follows at the end of this press release. KEY RATING DRIVERS - IDRS, VRs, AND SENIOR DEBT TCB's ratings remain toward the bottom of the peer group, reflecting its relatively higher risk profile across many financial metrics as well as a larger risk appetite relative to the peer group. The Negative Outlook reflects Fitch's continued concerns relating to the company's level of loan growth in its national auto lending portfolio that has yet to fully season and as well as continued double-digit growth in inventory finance. TCB's weak asset quality continues to be a primary ratings driver. Even with NPA levels dropping 11% year-over-year, the bank's ratio of NPAs to total loans (inclusive to accruing TDRs) remains an outlier in the mid-tier regional peer group at 6.18% as of 4Q13 (down from 7.14% a year prior). NPA reduction over the last year has been aided through various workout strategies such as a bulk asset sale in 1Q13 in which the company sold multiple pieces of OREO as well as 2nd lien TDRs that were adversely impacted by regulatory guidance in 3Q12. Fitch notes that year-over-year asset quality improvement is in line with TCB's peer group. Fitch expects NPAs to remain elevated in both absolute and relative terms given TCB's high level of consumer-related accruing TDRs. At 4Q13, consumer-related accruing TDRs, which tend to be much stickier than commercial-related TDRs, made up over 52% of total Fitch-calculated NPAs. This expectation is incorporated in the current rating and today's affirmation. Fitch notes that TCB has 20% of reserves against consumer real estate-related TDRs, a level Fitch current believes is reasonable when considering marks taken on recent TDR bulk loan sales in the industry. TCB continues to put focus on growth in its national lending loan portfolio. Auto loans on balance sheet have grown to $1.2bn from $553 million a year ago. Average balances of inventory finance are up 10% year-over-year. The company's national lending portfolio now makes up around 40% of its overall portfolio. While losses relating to auto and inventory finance have been in line with industry standards over recent periods, these portfolios have yet to fully season or go through a full credit cycle. Looking ahead, Fitch will seek evidence that risk management systems and controls have grown commensurately with the overall portfolio. Fitch has highlighted home equity reset risk as an emerging risk for the industry as many home equity lines of credit will reset to fully amortizing loans over the next several years. Although TCB has the highest percentage of HELOCs to capital, near-term payment shock concerns are mitigated for TCB given the nature of its HELOC portfolio. Fitch notes that 90% of these lines do not mature or begin amortization until 2021, affording TCB ample time to modify these loans or take various measures to help borrowers at maturity or conversion. Given TCB's balance sheet structure (loan-to-deposit ratio of 110%) and overall business strategy of lending in higher-yielding asset classes, Fitch expects the company to generate a relatively higher level of PPNR and ROA compared to peers. While TCB's earnings remain in-line with peer averages, risk-adjusted earnings, measured by net income to risk-weighted assets (RWA) are in the bottom quartile of the peer group, thus constraining the bank's rating at its current level. Earnings have historically been supported by a low-cost deposit base which generated a relatively higher level of noninterest income than peers. While deposit pricing through the industry has converged to historic lows bringing TCB's cost of deposits in-line with peer averages, Fitch would expect the company's earnings to benefit relatively more in a rising rate scenario given the likely sticky nature of its low-balance, high volume deposit base. This expectation is reflected in today's rating affirmation. Similar to earnings, Fitch believes that TCB's current business strategy requires higher-than average capital levels. The company has not increased its dividend nor has it done share buy backs similar to most in the mid-tier regional peer group. Therefore, even with year-over-year net loan growth of 3%, the company's Total tier 1 Risk Based capital ratio has increased 32 bps to 11.4%. Fitch's expectation that the company will continue to retain capital to keep pace with loan growth is incorporated into today's rating actions. RATING SENSITIVITIES - IDRS, VRs, AND SENIOR DEBT Fitch will continue to monitor credit risk in TCB's growing national lending platform in relation to those that contend in similar lending spaces. If Fitch observes a relative divergence of credit costs in these portfolios that point toward lax underwriting or monitoring, negative rating action is possible. Further, if current trends of asset quality within TCB's legacy book reverse, negative pressure could be placed on the bank's ratings. Should operating results fall behind peer averages consistently on a risk-adjusted and non-risk-adjusted basis without a material shift in strategy or due to elevated credit costs, ratings could be pressured over the long term. Fitch believes TCB's ratings are constrained from upward movement in the near term given growth strategies and relative asset quality. Over the long term, if asset quality metrics in the legacy book come more in line with higher rated peers and credit quality in the national lending portfolio remains in line with industry averages, leading to positive operating results, TCB's ratings or Outlook could be positively impacted. KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by TCB and its subsidiaries are all notched down from TCB's VR of 'bbb-' in accordance with Fitch's assessment of each instrument's respective non-performance and relative Loss Severity risk profiles, which vary considerably. RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES TCB's subordinated debt and other hybrid capital ratings are is sensitive to changes in TCB's VR. Rating sensitivities for the VR are listed above. SUBSIDIARY AND AFFILIATED COMPANY KEY RATING DRIVERS TCF National Bank, NA is a wholly owned subsidiary of TCB. TCF National Bank's ratings are aligned with TCB reflecting Fitch's view that the bank subsidiary is core to the franchise. SUBSIDIARY AND AFFILIATED COMPANY RATING SENSITIVITIES TCF National Bank's ratings are sensitive to changes to TCB's VR or any changes to Fitch's view of structural subordination between bank subsidiary and holding company. Rating sensitivities for the VR are listed above. KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR TCF's Support Rating and Support Rating Floor of '5' and 'NF' reflect Fitch's view that the company is unlikely to procure extraordinary support should such support be needed. KEY RATING SENSITIVITIES- SUPPORT RATING AND SUPPORT RATING FLOOR TCB's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need. Fitch reviewed TCB's ratings as part of the mid-tier regional bank review. The 19 banks in today's review include: Associated Banc-Corp (ASBC), BOK Financial Corp (BOKF), Cathay General Bancorp (CATY), City National Bancorp (CYN),Cullen/Frost Bankers, Inc (CFR), East West Bancorp, Inc. (EWBC), First Horizon National Corp (FHN), First National of Nebraska, Inc. (FNNI), First Niagara Financial Group, Inc. (FNFG), First Republic Bank (FRC), First Merit (FMER), Fulton Financial Corp (FULT), Hancock Holding Company (HBHC), People's United Financial, Inc. (PBCT), Synovus Financial Corp (SNV), TCF Financial Corp (TCB), UMB Financial Corporation (UMB), Webster Financial Corp (WBS), Wintrust (WTFC). Fitch has affirmed the following ratings with a Negative Outlook: TCF Financial Corp. --Long-term IDR at 'BBB-'; --Viability at 'bbb-'. --Preferred stock at 'B'; --Short-term IDR at 'F3'; --Support Ratings at '5'; --Support Rating Floor at 'NF'. TCF National Bank --Long-term IDR at 'BBB-'; --Viability at 'bbb-'; --Long-term deposits at 'BBB'; --Subordinated Debt at 'BB+'; --Short-term IDR at 'F3'; --Short-term Deposits at 'F3'; --Support Ratings at '5'; --Support Rating Floor at 'NF'. Contact: Primary Analyst Bain K. Rumohr, CFA Associate Director +1-312-368-3153 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Justin Fuller, CFA Director +1-312-368-2057 Committee Chairperson Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --2014 Outlook: U.S. Banks (Nov. 21, 2013) --U.S. Banks: Liquidity and Deposit Funding (Aug. 8, 2013) --U.S. Banks: Interest Rate Risks (What Happens When Rates Rise) (June 18, 2013) --U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In? (July 11, 2013) --Global Trading and Universal Banks - Periodic Review (Dec. 12, 2013) --Fitch Fundamentals Index - U.S.; Index Trend Analysis 4Q13 (Jan. 15, 2014) --Risk Radar Global - Q313 (Sept. 5, 2013) --Fitch Global Corporate Rating Activity – Third Quarter 2013 (Dec. 5, 2013) --U.S. Banking Quarterly Comment: 4Q13 (Earnings Continue to Tick Up, but Challenges Remain) (Jan. 27, 2014) --Global Financial Institutions Rating Criteria (Jan. 31, 2014) --Assessing and Rating Bank Subordinated and Hybrid Securities (Jan. 31, 2014) Applicable Criteria and Related Research: 2014 Outlook: U.S. Banks here U.S. Banks: Liquidity and Deposit Funding here U.S. Banks: Interest Rate Risks (What Happens When Rates Rise) here U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In? here Global Trading and Universal Banks - Periodic Review here Fitch Fundamentals Index here Risk Radar Global - Q313 here Fitch Global Corporate Rating Activity —Third-Quarter 2013 here U.S. Banking Quarterly Comment: 4Q13 (Earnings Continue to Tick Up, but Challenges Remain) here Global Financial Institutions Rating Criteria here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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