Straight Shooter

If you want to know what Bill Cooper thinks about something, just ask him. Cooper, chairman and chief executive officer of Wayzata, Minnesota-based TCF Financial Corp. for two decades now, tends to be as blunt as a snub-nosed police special. In the 1960s, while getting his accounting degree from Wayne State University, Cooper moonlighted, literally, as a Detroit policeman, often walking a beat from midnight to 8 a.m. He still talks like a cop, and, frankly, it’s not difficult to imagine him as a tough police captain who spits out words like they were .32-caliber slugs.

The 62-year-old Cooper is a darn good banker, too, and that makes it worthwhile to listen to what he says. After spending the early part of his career at the former Michigan National Corp. and Huntington Bancshares, Cooper took over as CEO at TCF in 1985 when the thrift was gravely ill from an overdose of bad commercial real estate loans and some ill-advised derivative investments. Cooper quickly got down to cutting costs as only a bean counter can, then gradually remade the companyu00e2u20ac”including its conversion to a national bank charter in 1997. Cooper’s operating philosophy is pretty easy to sum up: He emphasizes deposit growth over loan volume; worries greatly about asset quality; sells service and convenience through free checking; and offers one of the largest offsite ATM networks in the country and branches that stay open 12 hours a day, seven days a week. Oh yeah, he also thinks most acquisitions are a bad idea and instead prefers de novo branch expansionu00e2u20ac”many of them in supermarkets. Today, TCF has $12.3 billion in assets and operates 430 offices in Minnesota, Illinois, Michigan, Wisconsin, Colorado, and Indiana.

Cooper will step down as CEO later this year, although he has agreed to stay on as a nonexecutive chairman of the board through 2008. His successor will be TCF’s current president and chief operating officer, Lynn A. Nagorske. In a wide-ranging interview with Bank Director Senior Editor Jack Milligan, Cooper talks about his views on expansion, the banking industry’s consolidation, and the challenges of being a corporate director. Asked if he has any misgivings about staying on as chairman while his former No. 2 runs the company, Cooper says candidly (and characteristically) that yes, as a matter of fact, he does.

Talk a bit about your expansion strategy and why you have such a strong and pronounced preference for de novo expansion over acquisitions.

There are a number of reasons but the most important one is that returns are higher. You can pick where you do it and how you do it as opposed to buying somebody else’s mistakes. In my opinion, it’s a better strategy.

With all the de novo expansion that’s occurred over the last few years, do you see any risk that we could reach a saturation point, particularly in markets like Chicago?

De novo expansion is like losing weight; it’s easy to announce, but hard to do. And a lot of what’s announced never happens. And a lot of what is done isn’t successful. It’s just like anything elseu00e2u20ac”you have to do it right. Most of the de novo expansion that’s going on now is with de novo banks and small banks, not the biggest banks. They’ll announce they’re going to open 50 branches but in the background, they’re closing 50. The last piece of data I saw showed most of the big banks are actually reducing their branch systems. It is true that if the branch expansion in total is bigger than the population growth, there’s going to be dilution. That isn’t necessarily all bad. If your bank has a better execution strategy and a bunch of people open branches in bad places and do them in a bad way, you can prosper even if there’s too much of it going on.

Are there any circumstances under which you would do an acquisition?

We might buy a little bank to help get us started in a new market, and we have [done so] in the past. If the marketplace changes in such a way that [takeover] premiums come down so that we can look at it and say it’s a satisfactory return, or if there was a particular circumstance where we saw value above what the price was, then we might do one. But we look at virtually all of them that come around, and we just can’t make them work.

One of the things about doing acquisitions is that there are premises we don’t agree with. In many of these deals the investment bankers talk about the 40% cost takeout, and that’s the profit in the game. We don’t believe that will actually happen. So the primary thing is whether, on a risk-adjusted basis, we think it’s a good enough deal for our shareholders. A lot of it has to do with us. We have $12 billion in assets, and we don’t care whether we get to be a $100 billion banku00e2u20ac”that’s really irrelevant to us. But I do want the stock to be a $100 [a share]. And that happens faster and more surely with de novo expansion than it does with acquisitions.

Let’s talk about your operating strategy. You have said that most of your profitability comes from the deposit side of your balance sheet, not the asset side. You’re very careful with loan growth, you pay a great deal of attention to asset quality, and you focus on a customer segment that has been described as Joe Lunch Bucket.

First of all, one of the things about the banking business most people don’t realizeu00e2u20ac”even bankersu00e2u20ac”is that a lot of your chargeoffs are related to the deposit side. If you can make enough money on the liability side, you don’t have to engage in riskier businesses on the asset side to get a satisfactory return. If you’re not making any money on the liability side and you want to earn 150 [basis points on assets], you’ve got to get that on the asset side. That will push you further out on the risk curve. We look at deposits as a profit center, which most banks don’t. We make half our profits on the liability side, and we’re virtually a 100% secured lender. I’m not in the credit card business because it’s unsecured credit. Even on the commercial side, we make virtually no unsecured credits. So our focus on credit quality is almost a byproduct of the strategy as a whole. It’s a safer, less risky [approach]. You don’t hear of banks failing because of something they did with deposits.

And then we discovered a niche most banks don’t fill, which is basically that Joe Lunch Bucket guyu00e2u20ac”the everyday person. We’re open seven days a week, just like Wal-Mart. You walk into a big bank with $200 in your checking account and a problem, they want you to go away. We really take care of that person. We’re interested in what happens to them. Most of our customers are basically banking out of convenience: lots of branches, lots of hours, open on holidays, open on weekends. They’re not rate shoppers, and that tends to give us a better return. The final thing is, we play the game of a little number times a big number equals a big number. We have 1.6 million checking accounts. We have lots and lots of little customers.

You have said the growing popularity of debit cards could have an impact on the future of ATM networks. Expand on that a bit.

They already have had a big impact on ATM systems. I think about half the ATMs are owned by merchants now, not by banks. But people don’t want to pay the [ATM] fee. You can now use a debit card where you couldn’t write a check and had to use cash or a credit card. You can do cash-backs with debit cards which don’t charge a fee and are very convenient: you’re at the grocery store and you get your $200 you don’t have to go to an ATM and so forth. So the volumes are falling, and one of the things the industry keeps doing is raising the [ATM fee] to make up for the difference. That’s not a good strategy. So there’s going to be a continuing shake-out in that and I suspect over time there are going to be fewer ATMs than there are today.

So it changes the economics of bank-owned ATM networks.

Definitely. Now the merchant-owned ATM systems are a different matter. A merchant can charge whatever fee he wants, and he gets to keep it all. That system is likely going to prevail, or at least be there for a while. But the bank-owned ones probably are going to shrink over time.What do you see as the two or three big industry challenges over the next five years?

I think the regulatory burden is one. Everybody talks about this and always has, but this time it’s different. It is just ridiculous. There’s a [regulatory] examination going on for us all the time, and the risks of failure are huge. You fail one of these exams on bank secrecy, [and you face] multimillion dollar finesu00e2u20ac”and they’re lynching people. You can’t do any expansion, you can’t buy anybody. The risks associated with this are really big. [The regulators] are into the minutia of everything. It’s not only the exams; they come in now and tell you they want to poke for everything. They say, “Hey, your controls over this are great, but where’s the big book where you write it all down?” So now you’ve got to [document your controls] and keep it up. It is a big, big problem.

And then there’s the continuing consolidation in the banking business. The big banks are so big they can do something stupid that’s bad for them, but kills you.

Give me an example of that.

Well, pricing. I’ve had some of the big banks offer 20-year, fixed-rate 4% commercial real estate deals in my market. My [customers] are going to refinance, and for that, I get hurt even though I haven’t done anything wrong. Now, it hurts [the big banks], too, and as a matter of fact, most of them have stopped. But in the meantime, a lot of [bad] things happened. So big guys, when they’re around, can just get you, and you run the risk as the [industry’s] consolidation [continues] that it gets predatory. Frankly, I think there’s a bias in the regulatory system against small banks. I think the regulators want the banking industry to consolidate.

Citigroup, J.P. Morgan Chase & Co., and Bank of America Corp. have combined assets of more than $3.6 trillion. If the too-big-to-fail policy wasn’t a reality before, I think it has to be now.

FDIC insurance premiums are based on retail deposits. These institutions are not funded by retail deposits. They’re huge international [companies], so they’re not paying for the risk at all. Frankly, I think insurance ought to be [calculated] off assets, not retail deposits because the federal government, in effect, is guaranteeing institutionalsu00e2u20ac”not just retailsu00e2u20ac”and somebody ought to pay for that. And yeah, they are risky. It isn’t, in my judgment, even good for the banks. Look at Canada, where they’ve only got five large banks and there isn’t one that earns 1% on assets. If you’ve just got a few of them, the regulators turn them into a public utility. You don’t have that hometown banker, and that isn’t necessarily a good thing. If that little guy with his start-up company can’t do business with that little bank, it’s bad for the economy. The little bank will say, “We’ll do this deal because I knew his father and I know him and he’s a good guy and if he can pay me, he will.” At a big bank, it’s just “Show me the numbers”u00e2u20ac”that’s it.

It would be hard to argue that the national regulatory policy in the past 10 years hasn’t been very encouraging of consolidation and large mergers.

I don’t know if there was ever a policy decision that way, but the regulatory burden as it sits on small banks may squash them out. Regulatory burden is an economies-of-scale issue. If you’ve got to do all the same stuff that the big banks do, it will make small banks less efficient.

Let’s switch gears for a moment. What do you look for in a director?

For our situationu00e2u20ac”we’re a public company and a medium-size banku00e2u20ac”I want an entrepreneurial person. We’re not out for that CEO of a big company who wants to come on the board and socialize with people and who really doesn’t, in many cases, understand the nuts and bolts [of banking]. I want somebody who owns the stock and thinks like a partner in our business as opposed to some guy who just squats on the board, if you will. And that’s the kind of board we have.

What do you rely on them to do?

I think the role of a director is not to run the bank. Now in the little banks, it’s different. Maybe they own a piece of it, and it’s a different kind of deal. But in a bigger bank, the board should know enough about the business and what’s going on in the business to make a judgment as to how it’s all going and why. They shouldn’t be making decisions on loans. Just because you own a drugstore doesn’t mean you can make loans. Somebody wants to buy usu00e2u20ac”is that a smart thing to do? Or, we’re going to buy somebodyu00e2u20ac”is that a smart thing to do? Can this CEO run this bank? If not, I’m going to fire him and find somebody who can. Those are the things that a board actually ought to do, and it ought to have directors with enough chutzpah to do it and enough knowledge to know when they should do it.

How much do you rely on your directors for setting the company’s strategic direction?

We go over our strategy with them, although they’re generally not going to change it. They’ll put in great suggestions and say, “You ought to do this and it’ll work better.” You get a lot of that. These are smart guys, but I don’t expect them to run the bank, and they don’t expect to run the bank.

I’m amazed at a situation like Fannie Mae, where you had two things going on: accounting irregularities and compensation decisions that were based on faulty accounting. You have to ask yourself, where was the auditing committee and where was the compensation committee?

I read Fannie Mae’s annual report. We pass them around. A lot of our guys are accountantsu00e2u20ac”I’m a CPA by backgroundu00e2u20ac”and I remember circling a big debit from the cancellation of derivativesu00e2u20ac”$4 billion or whatever it wasu00e2u20ac”and writing “tick, tick, tick.” This wasn’t even secret accounting, you know what I mean? And maybe the accounting was right, but you don’t cancel derivatives and book losses and book them [as] assets and think, “Gee, that’s the way it works.” I don’t care what kind of accountant you are. [Editor’s note: Last fall Fannie Mae agreed to change the method by which it accounted for derivatives used for hedge purposes and to restate its earnings from 2001 through mid-2004.] And the regulatorsu00e2u20ac”nobody was doing their job because of [Fannie’s] big political power. I’ll say this in defense of some of these boards: If management’s going to screw anyone, they’ll screw you. If they’re going to really cook the books, you’re not going to find it, and neither are the CPAs.

If you’ve got a whiff of [dishonesty], get off the board or get rid of them. One or the other, that’s the way it ought to happen. But really and truly, the board at Enron was a pretty good board when you look at it. The stuff they [its management was] involved inu00e2u20ac”unless they told you, unless you reviewed the documentsu00e2u20ac”you never could have figured that out. I believe [former Enron Chairman] Ken Lay didn’t know what was going on. I really believe that. He was kind of cruising along and these guys were doing all this stuff and he didn’t understand what they were doing.

So be real sure who you’ve got in terms of [their ethics]. If a guy cheats at golf and cheats on his wife, then you ought to worry about it.

So personal integrity is important to you?

Absolutely, and it’s not impossible to make those judgments. There are a lot of people we won’t lend money to because we know who they are. We just won’t do business with them.

What’s the future hold for you, personally? How much longer will you stay on as CEO?

The remainder of this year, and I’ll stay on as chairman for three years. And frankly, I have had a little problem with doing that, but the board wanted me to stay on as chairman. I have reservations about it in terms of dividing the authority. There are reasons, perhaps, not to do that and maybe it’s more selfish [but] I decided to do it because I like it so much. [Designated successor] Lynn Nagorske and I are old friends; we’ve worked together for a long time, and I’m confident we can work that out.

And how did you choose your successor?

I’ve been CEO at TCF for almost 20 years. If you run a company for 20 years [and] don’t have your replacement, they should fire you. I really don’t like the idea of having three guys out there in a race for it. What are they going to do? They’re going to slit each other’s throat, [and] the two guys that don’t get it are going to leave. I also don’t believe you should go outside [the company]. You should be able to find a [successor inside]. Lynn Nagorske is about 20 IQ points smarter than I am, and he’s been here a long time. I can go down the court, pass the ball, and know where he’s at. We went through [the process] in a very logical way. This didn’t just happen. We started talking about it a couple of years ago. Everybody has known it was going to be Lynn for a couple of years. It’s going to be a very smooth transition; frankly, Lynn’s run the bank for the last couple of years anyway.

What will be your role as nonexecutive chairman?

Sit on the board [and do] what a board member is supposed to do. But it isn’t going to be to run the banku00e2u20ac”that’s going to be Lynn’s job.

Do you think it’s going to be uncomfortable for him to have you on the board as a nonexecutive chairman?

I don’t know. That’s something I have worried about. [CEOs] stay on too long. That’s the reason why I decided to leave at 62. I’m the longest-tenured public company CEO in Minnesota [and] somebody probably shouldn’t do it that long. Obviously Lynn wouldn’t tell me if it did, but he says it doesn’t bother him. I’m going to try and do my best to let Lynn run the company. He’s extremely competent, and I’m willing to run my money with Lynn Nagorske. I own a lot of stock in this company; I own 4 million shares and I’m perfectly happy to run that money with Lynn, [to] put my bet there.

What will you do when you retire?

My wife says that me being retired and home is like having a Steinway in your kitchen. Actually, it’s something I worry about. I’ve been working since I was 14 years old. But my son is forming a bank in Columbus, Ohio, and I’m going to invest in it and that will be fun. I’ve got a number of little investments around, and I’m very involved in education, which I’m planning to spend some more time onu00e2u20ac”educating kids and so forth. So I’m sure I’ll find things to keep me busy.