Tough Love at TCF
Few corporate executives are as direct, as uncensored, as Bill Cooper, the CEO of TCF Financial Corporation, parent company of TCF Bank. Launching into a conference call with Wall Street research analysts in late January, he fairly crowed as he began his presentation on TCF’s results (NYSE: TCB) for the fourth quarter of 2008.
“Based on today’s earnings reports, TCF is the best dog in the pound,” Cooper said. With most of the nation’s bigger banks still desperately trying to figure out how to recapitalize their balance sheets, he emphasized that the fourth quarter had been TCF’s 55th profitable quarter in a row—almost 14 years.
Cooper does not suffer financial fools gladly. During the conference call, he took aim at his “incompetent” and “illogical” competitors. In a comment on TCF’s operating expenses, he lamented that the company has incurred higher Federal Deposit Insurance Corporation (FDIC) insurance premiums because it is “paying for the sins of its competitors.”
After the conference call, Cooper sat down for an interview with Twin Cities Business at TCF headquarters in Wayzata. His presence there is a story in itself.
Cooper retired as TCF’s CEO on January 1, 2006, a little more than 20 years after he was named chief executive of the predecessor company, Twin City Federal Savings and Loan. He reorganized the S&L into a bank holding company and innovated by being one of the first in the Midwest to open bank branches in supermarkets, stay open seven days a week, and offer “totally free checking” accounts. He tailored TCF banks to a low- to mid-income mass market and expanded into other states. By the time he retired (staying on as board chair), Cooper had more than doubled TCF’s assets to $13.4 billion, and its stock had been posting average annual returns in excess of 20 percent for more than five years.
His handpicked successor, Lynn Nagorske, had increased assets to more than $16 billion two years later. But TCF’s share price was slipping on weaker earnings—back to its 2003 level of around $18 by the end of 2007. Investors blamed the economy, not Nagorske. Still, he suddenly retired in late July 2008, citing burnout. Cooper, 65, was back in the chief executive’s office—just in time to see TCF tested by his industry’s biggest crisis since the savings and loan collapses of the late 1980s.
Today, TCF has about 450 branches in seven states, and total assets of close to $17 billion. That makes it the second-largest Minnesota-based commercial bank after U.S. Bank, which has assets of around $262 billion. TCF has had to increase its reserves to cover growing loan losses in the past year, but it avoided subprime lending and exotic investment instruments, so the hits aren’t what they might have been. The company’s share price has still been sputtering—around $13.50 in late March, down from a 52-week high of $28—but what bank stock hasn’t?
Meanwhile, Cooper has continued to make news. In February, TCF Financial announced that it would move TCF National Bank’s charter to South Dakota, which it said would allow the bank to streamline its regulatory compliance under the laws of its new home state. In March, TCF notified the U.S. Treasury department that it would redeem the $361 million in preferred shares that the government had purchased under the Troubled Asset Relief Program. TCF cited the department’s midstream increases in restrictions on the money as the reason. The company expected to complete that transaction by April 1.
A Detroit native, Cooper did not come from a banking background. His father, a Welsh immigrant who died while Cooper was still a boy, was a draftsman. His mother worked for a railroad as an auditor-clerk. While he studied accounting at Wayne State University during the day, Cooper patrolled Detroit as a cop on the night shift. Asked what lessons he brings forward from his early years on the street to the banking business, he offered a single phrase: “Never get rattled.”
On the Financial Crisis
SW: How did we get into this mess?
BC: A lot of things contributed. First, there were structural problems. For example, the whole trend where a bank originated loans and then sold them to somebody else. The loans were securitized and got good ratings from a 23-year-old Harvard MBA who didn’t have a clue. Then, the securities were sold to people based on their ratings. Since banks weren’t eating what they killed [i.e., keeping the loans they had made on their own balance sheets], they weren’t very picky about what they killed.
We went through this whole process of the deterioration of credit—the subprime explosion, where loans were given to people with bad credit. Incomes were never verified. Loans included variable rates that were bound to rise, and featured high loan-to-value ratios. It doesn’t take a rocket scientist to figure out that this was not going to be a good plan.
The whole derivative business was also part of the problem. Extraordinarily complex, derivatives started out as hedges against risk and ended up being used for speculation. The amount of derivatives [in the market] was much huger than the amount of risk they were covering. And you can’t figure them out since they’re contracts—they’re all different.
SW: You don’t let the accountants off the hook, either.
BC: The move to mark-to-market accounting is baloney and doesn’t have anything to do with reality, marking investments way below their economic value. For example, say you own $2 billion of an investment, and someone else trades $100,000 at a lower price. You’re then forced to write down your investment [to reflect the “market” price]. None of that makes any sense, and it creates huge volatility. If the investment is going to pay off over its life and you’re holding it, why would you mark it down? The accounting industry carries a heavy burden on this.
SW: What about the monetary policy promulgated by the Federal Reserve?
BC: [Former Fed Chairman Alan] Greenspan thought we were in a period of deflation. What it really was was a period of huge productivity increases. He took rates down to a 40-year low and kept them there for two years. He created a bubble by putting a huge amount of money into the economy at a time when it didn’t need it. It turbo-charged the increase in home values far beyond what happens in a normal environment [and] contributed hugely to the housing bubble, which was bound to burst. When it did, all this bad lending came to the fore.
SW: Given all the contributing factors, how do we get out of this mess?
BC: Well, this is a time to lower rates, and [policymakers] did. In the last recession, inflation was high—interest rates were 18 percent, which made it very difficult to work it out. Today, we’re not in a period of inflation. So, they have a lot of tools to use and they’ve used them.
I’m not going to be picky about some of the decisions, like the TARP money that went into the banks. People can argue whether it was a good idea or a bad idea. [The financial system] was going to fail if they didn’t do it. It was going to be the Great Depression. It kept the really big banks from going into the tank. If you go back to the 1930s, one of the big mistakes made then was to let the big banks fail. When the regulators let Lehman fail, that really got it going. They never should have done that.
SW: What happened with big banks?
BC: You’ve heard of the concept of too big to fail? What that really means is too big to manage. It is impossible to manage Citigroup. That company is in every country in the world, in every complex business. How in the world could the board and CEO know what the hell was going on? Some of the executives said their bank didn’t own any of the securities that have now proven to be toxic. But shortly thereafter, they book an $8 billion loss. Was [the CEO] lying? It would be better if he was. Rather, he didn’t know.
But what have [regulators] done in this process? They’ve crammed NatCity [National City Bank] into PNC [PNC Financial Services Group]. They’ve crammed Countrywide into Bank of America. They’ve crammed Merrill Lynch into Bank of America—making them bigger, even more complex. That concept of pushing bad banks into good banks may be a flawed concept. The long and short of it is that they are going to have to put more capital into those banks to make up the difference.
SW: Critics say we’ve thrown a lot of money at the banking crisis, but we still haven’t fixed it.
BC: Because it’s bigger than we thought it was. But we’re at the back end. I really believe that.
SW: Are you a betting man?
BC: I’ve made my bet. I own 5 mil- lion shares [of TCF]. Things will get better towards the end of ’09.
SW: Some would say that the job now is to figure out who are going to be the survivors and get rid of the dead-banks-walking.
BC: One flawed idea is not foreclosing on homes. The best thing to do is flush it. Take the medicine. In taking that medicine, however, you don’t want a crash. You don’t want to ruin confidence in the system. We came close to that. The faster that we roll it through, the better off we are.
SW: A lot of people are arguing for a new comprehensive regulatory framework for the financial services industry.
BC: A lot of what is going on in regulation is politically motivated. Sometimes there is a huge overreaction, and they run around and bayonet the wounded to make themselves look tough after the fact. The SEC [Securities and Exchange Commission] had the perfect powers to do what they needed to. They just didn’t do it. They had people tell them exactly what was going on with Madoff and they didn’t do anything.
The problem is that government agencies are inherently not equipped to do a very good job on that stuff. Particularly when the banks are as big as they are. What I would like to see is an agency that is only responsible for safety and soundness: How good? How sound? That’s all. And if there are other agencies needed to examine, for example, compliance, that’s all they do.
SW: What do you mean by safety and soundness? Capital ratios and liquidity?
BC: That’s part of it. An Enron-like example: Some banks have created off-balance-sheet subsidiaries with lots of risk. Some regulator should have rung the bell on that and said you can’t do that. Or look at the subprime phenomenon: You’re making bad loans to bad people without checking their credit in a housing boom. You’ve got a problem coming. Stop. As opposed to the idea that we want you making loans to poor people—that’s the political influence.
SW: How serious a problem is the credit shortage, and what should be done about it?
BC: We talked earlier about how loans were packaged and sold off. That’s over, done with. Now, you book a loan, you’ve got to put it on your balance sheet. We had easy credit. Look what it got us. But I would say this: If you’re a good credit and want to buy a house today, you can get a loan at 4.5 percent. If you’re a company that is decently solid, you can get a loan.
SW: The loan spigot is open?
BC: The banking industry grew its loan portfolio considerably in the fourth quarter. But there are not as many loans being booked as before, because the banks are not making the loans that they sold off to the suckers. A lot of people used to feel they could get credit for anything. Now they can’t, and it’s somehow the banks’ fault.
On the Path Ahead for TCF
SW: In this period of financial upheaval, some survivors are growing aggressively by acquisition. Wells Fargo’s acquisition of Wachovia comes to mind. Do you see TCF growing this way?
BC: First, let me tell you about how acquisitions have worked in the banking business. The bank CEO gets paid based on how big the bank is. Not how good the bank is, but how big it is. The board brings in compensation consultants once a year and hears about how executives at $50 billion banks make this much, and executives at $10 billion banks make that much. So, what do you want to do? Get to $50 billion, whether it’s a good idea or not.
At TCF, we’ve never had goals about how big we want to be. We’re a big enough bank to compete successfully. Our results now are better than everybody’s. And before this crisis, they were far better.
SW: Comment on your branch system.
BC: We’ve opened 115 new branches since 2003—new branches because they’re more profitable. We haven’t found acquisitions we would do. In most cases, they’ve destroyed shareholder value. They made you bigger. But they didn’t make you better.
SW: But there is the need to grow deposits.
BC: Yes, we have to grow. Plus, in this environment, there may be some opportunities to buy branch systems. If I could buy another 25 branches in Chicago, I’d love to do that. Or another 25 branches in Denver, I’d love to do that.
On the other hand, with everyone wondering where the abyss is, do you want to blow your capital on an acquisition? Which a lot of people have done. We’re pretty careful. We own our stock. This is how it works at TCF: If we get an acquisition to look at, the first guys who have to be talked into it are management, because they want to know how it’s going to affect their stock. It ain’t how big we going to get. They want to know how it’s going to affect earnings per share.
SW: In November, TCF participated in the Troubled Asset Relief Program (TARP), receiving $361 million. Given the relative stability of TCF, why did you participate?
BC: We could have said no, but we were largely encouraged to do it. The way the program was set up, if you didn’t get the TARP money, you were now labeled as a failing bank—because they weren’t going to give the money to the banks that weren’t going to survive. If you didn’t take it, now you’re on everybody’s [bad] list, and that becomes a self-fulfilling prophecy.
The other thing is that the TARP money is relatively cheap capital at 5 percent dividends plus warrants [to buy common stock.] We couldn’t have raised that capital any other way at those prices. And looking at the state of the economy, having a nice capital cushion isn’t the worst thing.
SW: Does the TARP money put strings on executive com-pensation?
BC: Yes, but it didn’t create a problem for us. We didn’t pay any bonuses [for 2008]. We don’t pay bonuses when we have a bad year. You can’t tie risky behavior to comp plans. We don’t do that. Our board can reduce a comp plan to zero any time they want.
There is, however, the business of a clawback. You got a bonus two years ago and things got worse, so they can make you give the money back: ‘Look at Bob Rubin [former chair of the executive committee at troubled Citigroup]. He made $180 million. You know what? Maybe he ought to give it back.’ That’s a dangerous legal precedent and I don’t support it, but you can understand how they feel that way.
SW: At today’s stock price of around $11 and a dividend of $1 per share per year, TCF is yielding about 9 percent. That’s a handsome yield.
BC: Maybe it’s a good stock to buy (laughs). We earned our dividend last year; most banks didn’t. We expect to more than earn it next year . We have a very serious board that owns a lot of stock. Every quarter, we go through an analysis about whether it is prudent to increase or decrease the dividend. A lot of people live on that dividend. We have a kind of compact with those shareholders.
SW: With the changing financial landscape, are there businesses you want to get out of?
BC: We look at that all the time. We recently stopped selling annuities and mutual funds in our branches, which had been a pretty big business for us. I have a moral obligation to my customers. When I sell them an annuity, I’ve got to be real damn confident in the insurance company that I’m selling. Do I want to sell an AIG annuity? It isn’t prudent. Whose annuity is prudent to sell? We didn’t make enough money to take that kind of risk for our customers or ourselves. So, we got out of that business.
SW: Businesses to get into?
BC: We are getting into the inventory finance business through our equipment finance group. At the end of the year, we had $5 million in such loans outstanding as we just entered the business. Right up our alley. Secured lending. On the other hand, we got out of the student loan business. The government took the profit out of it, so we left it.
SW: What businesses will you steer clear of?
BC: There are a lot of things we won’t get into. In the whole bank, we have just $50 million of unsecured loans. I don’t want to be in the credit card business. I don’t want to be making $18,000 unsecured loans even to people with good credit. I don’t want to be in the car business. There ain’t enough money in it. It’s a commodity business.
SW: What do you think about the new TCF Bank stadium at the University of Minnesota?
BC: It’s great. It turned out to be one of the best-designed stadiums in the country. You know that fans call the basketball arena [Williams Arena] the Barn. I heard on the radio the other day that some are already calling the new stadium the Vault.
There were two aspects to the stadium deal. One was charity: The university is a primary economic and cultural engine in Minnesota. The other part was business: There are 280,000 U of M graduates who live in the Twin Cities. Of all the things that I’ve ever done in the bank, people are most appreciative of the stadium. They walk up and say thank you. Plus, we got access to all of the current students.
SW: You have Republican Party ties and chaired the party in Minnesota from 1997 to 1999. When Senator Norm Coleman made a tribute to you in Congress in 2006, he said your hero was Reagan. Why Reagan?
BC: The same reason everyone else thinks that way. Reagan actually got it done. He was a great president. He had the right ideas. He never gets credit for it, but he was a hugely successful manager who hired the right people. He created a boom. He turned it around internationally. When asked what he expected to do about the Cold War, he said, ‘Win it.’ My ideas and philosophies mirror his.
SW: You’re 65. How long will you be CEO?
BC: Don’t know. I really don’t. I’m healthy and I like [the job].
BW: Have you moved back here from Florida?
BC: Most of my family is in Columbus, Ohio. I spent 10 years there, my kids went to college there, and I have eight grandchildren there. I also have two adopted children, the youngest of whom is a senior in high school in Columbus. We didn’t want to move her, so my wife is in Columbus with her. We’ve kept a house in Wayzata, but I’m kind of a commuter husband at this point.
SW: What do you want your legacy to be?
BC: A lot of people have invested a ton of money with me—both depositors and shareholders. I would like them to have a positive experience. And right now, they’re not. I really want that to happen. I really love it when I walk around and people come up and say, ‘Boy, I really love that stock. I’ve done great.’ And I really dislike it when I walk around and get ‘What the hell happened to your stock?’
I represent the shareholders, plus I own a lot of [the stock]. When I’m all done, I want everyone to say, ‘I made money on that deal.’