Geoff Gannon May 23, 2006

On TCF Financial Corporation

TCF Financial Corporation (TCB) operates branches in Illinois, Minnesota, Michigan, Wisconsin, Colorado, and Indiana. The majority of the bank’s branches are located in Illinois, Minnesota, and Michigan. The bank, founded as a mutual thrift in 1923 with $500, now has almost $14 billion in assets and more than 1.6 million checking accounts.

Over the last ten years, TCF has averaged a 1.77% return on assets and a 21.93% return on equity.


TCF collects low cost deposits by banking to the common man. Fee income accounts for an unusually large portion of the bank’s earnings. These fees greatly reduce TCF’s cost of funds, because they offset much of the interest paid on the deposits. To the extent that loans are made from deposits, this greatly increases profitability.

Unfortunately, TCF has a very high loan/deposit ratio (more than 110%), so not all of the bank’s loans are made from low cost deposits. However, TCF continues to grow, so the loan/deposit ratio should come down in the natural course of future expansion.

TCF’s growth strategy is simple and unorthodox. William Cooper, TCF’s Chairman and then CEO, outlined the bank’s strategy in a March 15th, 2004 interview with The Wall Street Transcript:

We are different because we tend to bank to the everyday person. We don’t have an emphasis on banking the rich. We have a product structure and a service convenience level. We’re open seven days a week, 364 days a year.



TCF has one of the country’s largest supermarket branch systems. These tend to be the bank’s most profitable branches. One of the differences between TCF and other banks is the nature of their supermarket branches.

TCF actively seeks small deposits and structures their supermarket branches so that they can act as full service branches. In effect, TCF brings the bank to its customers. It’s a different approach entirely, as Mr. Cooper explained in the same interview:

In the supermarket you have to get out there and sell things to people who weren’t there particularly to buy a banking service. So you need people, for instance, who have worked at The Limited or sold shoes or whatever who can get out and really sell in a much more aggressive manner.



While many other banks have been closing their branches in favor of doing more online banking, TCF has been growing its bricks and mortar presence. Much of that growth has come in urban areas like Detroit, where some of TCF’s competitors have been less interested in doing business.

Many of the company’s competitors look to the suburbs – where the greatest concentration of wealth is. TCF looks for population density first. The company aims to make a small amount of money on each customer and multiply that over a huge number of customers.

TCF’s approach to expansion is essentially the same as many retailers. The company goes where potential customers already are (including supermarkets), fosters a recognizable image, and employs true salespeople to deal directly with customers.

Probably the biggest difference between TCF and its competition is the bank’s reliance on de novo expansion. Many of the bank’s branches are fairly new, having been built within the last decade. TCF focuses on de novo expansion, because new locations provide growth through greater penetration of the local area. Slowly, but surely, new branches increase business long after they’ve been established.

Banks that rely on growth through acquisitions tend to end up with a much older collection of branches. The hunt for growth becomes something of a treadmill, as acquisitions provide only a one time boost to revenues. Banks that use the same approach as successful retailers (expanding through new store openings) tend to also enjoy the benefits of growth as the new locations mature.

Mr. Cooper made TCF’s commitment to this approach clear with his concluding remarks to The Wall Street Transcript:

Our strategy is going to stay pretty much the same. And if you look around the world at the successful retailers, such as Wal-Mart or Target or Starbucks and so forth, most of those companies have grown de novo, opening new stores. Not through acquisitions and that’s the way we plan to do it.



TCF currently trades at well over 3 times book. The shares yield less than 3.5%. This is not a cheap stock.


TCF is an interesting, innovative bank trading at a premium to its peers. Ultimately, a bank’s value is derived from its assets. The extent to which a bank can develop significant economic assets that don’t appear on the books is quite limited.

TCF has a solid recent record of earning great returns on assets and equity. However, this record has to be maintained in the face of tough competition in the years ahead. The odds are stacked against maintaining such stellar returns on equity in such a largely undifferentiated industry.

TCF’s advantage is cultural. Can that advantage be maintained? It’s hard to say, but there is certainly no margin of safety at these prices, despite the seemingly reasonable P/E ratio.

There’s a reason banks don’t normally trade at high price-to-book ratios (for long).

Investors should be absolutely certain TCF’s moat is wide and its competitive advantage truly durable, before considering purchasing shares at anywhere near today’s prices.

This post is the second in a week long series of five posts on specific banks earning above average returns. The idea is to look at the bank’s business and ask why it is capable of earning above average returns. For a discussion of why banks, on average, earn returns above those of many other public companies, see my earlier post: “On Banks”. The fact that any particular bank is profiled this week should not be viewed as an indication that the bank’s shares are attractive at the current price.