Market Overview

Fitch Downgrades TCF Financial L-T IDR to 'BBB' on Continued Asset Quality Deterioration

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CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has downgraded the long-term Issuer Default Ratings (IDRs) for TCF Financial Corporation (TCB) and its principal banking subsidiary TCF National Bank to 'BBB' from 'BBB+'. The Rating Outlook remains Negative. A full list of ratings is provided at the end of this release.

Today's rating action is reflective of TCB's continued asset quality deterioration. Non-performing assets (NPAs), inclusive of troubled debt restructurings (TDRs) increased $192 million to $1.15 billion at third quarter 2012 (3Q'12) totaled and represented 7.5% of total loans and real estate owned (REO). This represents a sizeable increase from a year ago when NPAs stood at $959 million and 6.7%, respectively. Similarly, net charge-offs and provisions spiked in 3Q'12 (2.74% annualized) relative to recent quarters.

The most recent increase in 3Q'12 NPAs were driven by OCC guidance related to performing consumer loans discharged from Chapter 7 bankruptcy. This new guidance requires lenders to charge off loans to the fair value of the underlying collateral in circumstances when a borrower's debts have been discharged in bankruptcy and the borrower has not reaffirmed the debt. This action needs to be taken regardless of payment status. Even setting aside this guidance, Fitch calculated NPAs for TCF have increased in each of the last five quarters and have shown few signs of abating.

The application of the new guidance resulted in $43 million and $32 million of incremental charge-offs and provisioning, respectively. This also resulted in $103 million of accruing TDRs being placed on non-accrual status. Fitch recognizes that the loans charged off as a result of the OCC guidance will likely have a higher recovery rate than other loans that have been charged off but the majority of the charge-offs are not anticipated to be recovered. Fitch further notes TCB's considerable level of consumer loan balances in bankruptcy court ($94 million in 2Q'12) that could result in additional charge-offs in coming quarters as a result of the OCC guidance.

Regardless of the 3Q'12 charge-offs, TCB's ratings had a Negative Rating Outlook due to relatively poor asset quality measures, but more importantly, due to TCB's strategy shift a year ago which emphasizes a national lending platform of indirect prime and non-prime auto and inventory finance. This stands in contrast to TCB's historical focus of traditional consumer and commercial lending within its geographic footprint.

Loan growth within these loan categories has been robust and Fitch views this growth with caution as the underlying loans have not had time to fully season. Fitch will continue to view TCB's growing proportion of national lending products as a less proven, and, therefore, riskier operating strategy until loan growth slows and the underlying portfolio proves, over time, to be of high credit quality

This rating action comes on the heels of TCB's recent balance sheet optimization initiative whereby TCB prepaid several long-term FHLB facilities while absorbing significant pre-payment penalties. Fitch viewed the initiative as credit neutral as the positive impacts of lower asset sensitivity and greater forward earnings power were offset by lower levels of tangible common equity in the near term.

The Outlook for TCB's ratings remains Negative as trends in asset quality remain at odds with peer institutions that are largely experiencing significant improvements in the levels of NPAs, net charge-offs (NCOs) and provisioning while TCB's trends remain negative. Fitch notes that the Outlook horizon, typically 12-18 months, may be shorter in this instance if current asset quality trends do not show sustained improvement.

Rating Drivers and Sensitivities

If asset quality trends begin to show clear and consistent positive trajectory while earnings normalize at levels consistent with similarly rated institutions, the Outlook could be revised to Stable. In the long term, if the newer national lending products season and show solid credit performance through the cycle, ratings could be affected positively . Conversely, TCF's ratings are sensitive to asset quality trends, which, if they remain volatile and negative, could result in a further downgrade of TCF's ratings.

TCB is an $18.9 billion bank holding company with operations in Minnesota, Illinois, Wisconsin, Michigan, Indiana, Colorado, Arizona, and South Dakota.

Fitch has downgraded the following ratings:

TCF Financial Corporation

--Long-term IDR to 'BBB' from 'BBB+';

--Viability to 'bbb' from 'bbb+';

--Preferred stock to 'B+' from 'BB-'.

TCF National Bank

--Long-term IDR to 'BBB' from 'BBB+';

--Viability to 'bbb' from 'bbb+';

--Subordinated debt to 'BBB-' from 'BBB';

--Long-term deposits to 'BBB+' from 'A-'.

Fitch has affirmed the following ratings:

TCF Financial Corporation

--Support at '5';

--Short-term IDR at 'F2';

--Support floor at 'NF'.

TCF National Bank

--Support at '5'

--Short-term IDR at 'F2';

--Short-term deposits at 'F2';

--Support floor at 'NF'.

The Rating Outlook is Negative.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);

--'Risk Radar' (Oct. 15, 2012);

--'Rating Bank Regulatory Capital and Similar Securities' (Dec. 15, 2011);

--'New Accounting Guidelines Could Push Up Q3 U.S. Bank TDRs' (Oct. 12, 2012;

-- 'Troubled Debt Restructurings' (Dec. 9, 2011);

-- 'Troubled Debt Restructurings' (May 16, 2011).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Risk Radar October 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=691996

Rating Bank Regulatory Capital and Similar Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656371

Troubled Debt Restructurings (Accounting Standards Update Set to Increase TDR Recognition)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628437

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Fitch Ratings
Primary Analyst
Justin Fuller, CFA, +1 312-368-2057
Director
70 West Madison
Chicago, IL 60602
or
Secondary Analyst
Brandon Bajema, CPA, CFA, +1 312-606-2332
Associate Director
or
Committee Chairperson
Christopher Wolfe, +1 212-908-0793
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
Email: brian.bertsch@fitchratings.com

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