OREANDA-NEWS. Fitch Ratings has affirmed TCF Financial Corp.'s (TCB) ratings at 'BBB-/F3'. The Rating Outlook remains Stable.

The rating action follows a periodic review of the midtier regional banking group, which includes BankUnited Inc. (BKU), BOK Financial Corp. (BOKF), Cathay General Bancorp (CATY), East West Bancorp (EWBC), First Republic Bank (FRC), First Horizon National Corp. (FHN), First National of Nebraska Inc. (FNNI), Fulton Financial Corp. (FULT), Hilltop Holdings, Inc. (HTH), Synovus Financial Corp. (SNV), TCF Financial Corp. (TCB), Trustmark Corp. (TRMK), UMB Financial Corp. (UMBF) and Wintrust Financial Corp. (WTFC).

Company-specific rating rationales for the other banks are published separately, and for further discussion of the midtier regional bank sector in general, refer to the special report titled 'U.S. Banks: Midtier Regional Bank Periodic Review,' to be published shortly.

KEY RATING DRIVERS

IDRs, VRs, AND SENIOR DEBT
Today's action primarily reflects TCB's steady operating performance, stable asset quality and continued capital build. Fitch notes that TCB's ratings remain toward the bottom of its peer group and are likely constrained, due to its relatively higher risk profile across various financial metrics as well as a larger risk appetite as reflected in continued outsized loan growth. Moreover, Fitch views TCB's relatively high level of nonperforming assets (NPAs) as well as the potential financial impact from a recent Consumer Financial Protection Bureau (CFPB) regarding past practices as a rating constraint over the near to medium term.

As expected, TCB continues to put focus on growth in its national lending loan portfolio in order to diversify its balance sheet and revenue mix. Growth has continued to be aggressive in the indirect auto space which TCB entered in 2011. This space is unique for the peer group. Auto loans on balance sheet have grown 39% from third quarter 2014 (3Q14) to 3Q15 and now make up around 14% of the company's loan book, up from 11% a year prior. This growth rate in auto has outpaced nearly all competitors that lend in the indirect auto space. While losses relating to TCB's auto book have been in line with industry standards over recent periods, in Fitch's view, the portfolio still has yet to go through a full credit cycle. Furthermore, Fitch notes that growth in the portfolio is likely depressing loss ratios from quarter to quarter.

Positively, TCB has shown the ability to manage growth and concentrations in its auto portfolio through the use of securitization. The company has now completed three auto securitizations over the last six quarters totalling $881 million and recognizing gains of $22 million. In Fitch's view, the securitization transactions primarily reflect substantial appetite for auto-related paper by investors. Still, the transaction also points toward the increased credibility of TCF and its management team that heads the unit within the indirect auto lending space. Fitch also believes the transactions show the infrastructure and risk management systems TCB has built over the past few years in order to gather and store the data necessary to execute on securitizations.

Also mitigating some of Fitch's loan growth concerns is the company's ability to generate and maintain a reasonable level of capital. Although TCB recently raised its dividend, it has not performed any material share repurchases like some banks have. Instead, management has chosen to use capital generation as a way to support growth. Therefore, the company's Total Risk Based capital ratio has increased 20 basis points (bps) year-over-year to 13.84%.Its common equity tier 1 (CET1) ratio is up nearly 40bps since 1Q15 to 10.04%. This type of capital retention that builds capital is expected by Fitch and has been incorporated into the bank's current rating and the outlook.

NPAs and credit costs remain elevated compared to higher rated institutions but are within expectations. TCB's level of NPAs to total loans and other real estate owned (ORE) was 2.4% compared to the peer average of around 1.6%. TCB still has $150 million in accruing TDRs, which make up more than a third of its NPAs. Most of them are consumer-related which tend to be much stickier than commercial-related TDRs. Fitch expects TCB to maintain a reserve against the remaining accruing TDRs in line with past practices at close to 20% of unpaid balances, a level Fitch believes is reasonable when considering marks taken on past bulk loan sales and those announced around the banking industry. These expectations are incorporated in the current rating of 'BBB-' and today's affirmation.

Fitch notes that 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. Over 90% of the bank's total deposits are FDIC insured, a level relatively greater than peers.

As noted above, TCB's deposit base has historically generated a higher level of fee income when compared to peers and the industry. Some of this fee income has been reduced due to consumer behavior and the Durbin Amendment. However, Fitch notes that the level is still outsized relative to most.

Fitch believes that this is likely a cause of the CFPB's recent letter to TCB indicating that its enforcement office is considering recommending that the CFPB take legal action against TCF related to compliance with laws relating to unfair, deceptive and abusive acts and practices in connection with some deposit product administration. The outcome and timing of any potential legal action against TCB is presently unclear and thus not explicitly incorporated in TCB's ratings. However, the presence of potential legal action does constrain TCB's rating from upward rating movement in the near to medium term.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

TCB's subordinated debt is notched one level below its Viability Rating (VR) of 'bbb-' for loss severity. TCB's preferred stock is notched five levels below its VR of 'bbb-', two times for loss severity and three times for non-performance. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The uninsured deposit ratings of TCB are rated one notch higher than TCB's Issuer Default Rating (IDR) and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

HOLDING COMPANY

TCB's Issuer Default Rating (IDR) and VR are equalized with those TCF National Bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities.

SUPPORT RATING AND SUPPORT RATING FLOOR

TCB has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, TCB is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.
RATING SENSITIVITIES

VR, IDRs, AND SENIOR DEBT
Fitch will continue to monitor credit risk and risk appetite 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 and lead to earnings performance deterioration negative rating action is possible.

Over the rating horizon, Fitch expects TCB's absolute and relative auto loan production to continue to slow given the level of growth the asset class has experienced since TCB got into the space at the end of 2011. However, should auto growth continue to outpace the industry by multiples and the book near 20% of TCB's loan portfolio, adverse rating action could ensue as Fitch would view the exposure as significantly outsized compared to similarly rated institutions and outside of Fitch's expectations.

As mentioned above, TCB will likely be subject to some sort of regulatory action from the CFPB related to its past deposit practices. While the ultimate outcome of said regulatory action is not incorporated into TCB's rating, the company could see pressure on its ratings should the action place strain on the company's ability to generate a reasonable ROA or maintain adequate capital. Fitch considers TCB's current operating performance as reasonable and its current capital levels as adequate relative to its risk profile.

As noted above, Fitch believes TCB's ratings are constrained from upward movement in the near term given its current business strategies, relative asset quality and potential legal action against it. Over the long term, if asset quality converges with higher rated peers, credit quality in the national lending portfolio remains in line with industry, leading to operating result more in line with higher rated peers while maintaining capital levels at or above current levels, TCB's ratings or Outlook could be positively impacted.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings for TCB's and its operating companies' subordinated debt and preferred stock are sensitive to any change to TCB's VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The long- and short-term deposit ratings are sensitive to any change to TCB's long- and short-term IDR.

HOLDING COMPANY

Should TCB's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.

RATING SENSITIVITIES - SUBSIDIARY AND AFFILIATED COMPANY

As the IDRs and VRs of the subsidiaries are equalized with those of TCB to reflect support from their ultimate parent, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in TCB's IDRs.

SUPPORT RATING AND SUPPORT RATING FLOOR

Since TCB's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.

Fitch has affirmed the following ratings with a Stable 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'.