TCF venture capital unit hunting for de novos

Northwestern Financial Review, Mar 1, 2002

[chronicle]

TCF Financial Corp. of Wayzata, Minn., has begun investing seed money in de novo banks.

The $11.4 billion financial services company is uncovering potential investments by word of mouth and good old-fashioned networking. The bank will invest up to 25 percent of the initial required capital. Gregory J. Pulles, TCF vice chairman and general counsel, said TCF is interested in entering markets it would otherwise probably never end up in. "We're looking for investments everywhere - east coast, west coast, Florida," Pulles said. "We're looking in the Midwest. There are places in Wisconsin and Michigan we're interested in."

The company's venture capital unit began gravitating toward de novos for a couple of reasons. One is obvious: a bank company investing in a bank is bound to know more about the soundness of its investment. The other has to do with a belief in the stability of community banks.

"We're skeptics of the notion of economies of scale. We think that some of America's most profitable banks are small independent banks. We also have a philosophy of de novo expansion versus acquisitions. We think it is very profitable to open a new bank. The returns on de novo branching are very healthy doubledigit returns," Pulles said.

TCF Financial isn't looking for a controlling interest in its potential investments.

"The last thing we want is to actually be involved with the management of one of these institutions. These de novos are being run by strong-minded people with solid business plans," Pulles said. "These people aren't coming to us because they have a desire for someone to interfere in their bank. So we have no intent to interfere."

So far, TCF has invested in two Florida start-up banks-Royal Palm Bank of Naples, established Dec. 17, and Community Bank of Broward in Dania Beach, established Jan. 22. Mark Lund, senior vice president for corporate development at TCF, said the investments were only made several months ago, so it's too early to tell if they are paying off. But Lund has no reservations about the investments and believes they are positive longterm moves.

Pulles said the ideal de novo, in the eyes of TCF, is in a city where two "behemoth banks have just merged." This creates a pool of managers who are unhappy working under a new structure and break off to start their own banks. "Suddenly, there is a void in the market. You have people who know the area and are connected. We think they're a good bet," Pulles said.