Gild may be off the lily for a TCF deal

Me: Seen all over town. Draw crowds in supermarkets. In the right hands, promise alluring rewards.

You: A player, financially secure, eager to reach out to a companion with delectable assets.

Can it be six months since the first reports spread that TCF Financial was flashing leg in the banking world, looking for a suitor to pay as much as $5 billion for the keys to the front door?

A lot has happened -- much of it not pretty -- since September, when Crain's Chicago Business and the American Banker said that the Wayzata-based bank was looking for the right match.

The marriage market for banks has gotten a lot less friendly. More than $100 billion in subprime mortgage write-offs have a way of taking the romance out of banking.

Nevertheless, TCF could still have plenty of appeal for the right suitor. To be sure, the bank has sharply increased loan loss reserves over the past year to cover a rise in defaults. But, so far, it's escaped writing off a flood of loans.

Even in a tough environment, TCF in 2007 opened 20 additional branches, posted higher profit and increased its dividend.

In brief, TCF "avoided all the razzle-dazzle that [marked the] banking industry and avoided getting burned," said Ben Crabtree, a banking analyst at the Minneapolis office of Stifel Nicolaus, a St. Louis-based brokerage firm.

The bank has other things going for it, as well.

Selling convenience -- more than half its 450-plus branches are in supermarkets -- TCF has a lower cost of deposits than most banks and $16 billion in assets in seven states, including growth markets in and around Chicago and Denver.

"As banks today struggle to bring in deposits, TCF continues to demonstrate the ability to bring in those deposits and keep the costs low," said Terry McEvoy, bank analyst at Oppenheimer & Co. in Portsmouth, N.H.

In a recent report, Crabtree noted that TCF is still a top performer in its basic business.

"On a year-over-year, average balance basis, loans were up 6 percent and earning assets up 9 percent in the [fourth quarter], in both cases beating our expectations and the trends we are seeing at most other Midwest banks," Crabtree wrote.

The bank also has done better than many in curbing costs.

Crabtree noted that TCF's operating expenses have been trending down in recent years -- from 4.8 percent of average assets in 2005 to 4.37 percent last year. He expects that to fall to 4.2 percent this year and 4.15 percent in 2009.

But beauty also comes with flaws. TCF also has 56 branches in economically troubled Michigan, and the Twin Cities no longer is the growth market it once was.

Who are the likely buyers? Crabtree thinks the Royal Bank of Scotland, which does business in Chicago and Detroit, would like to extend its footprint in those markets and venture into places such as Denver and the Twin Cities.

Other prospects include National City Bank of Cleveland, which expanded in Chicago through an acquisition last year, and the Bank of Montreal.

"Bank of Montreal, which owns Harris Bank in Chicago, has made it clear it would like to be bigger in the whole Great Lakes area," Crabtree said.

If TCF changes hands, the $37 to $41 a share price speculated about by Crain's last fall probably is a thing of the past. At $41, TCF would be worth about $5 billion -- double its recent market cap of about $2.5 billion.

Gone, too, is the prospect of a quick deal. Six months, in the view of analysts, is a long time to shop yourself without a hint of an announcement.

The questions for TCF executives, who won't comment about sale speculation, seem clear.

"Where do we go from here? Do we wait, or swallow our pride and accept a lower price?" McEvoy said.

What would TCF fetch in today's market?

Estimates vary, but all end at less than $30 a share. That's still half again what the stock has been getting in recent trading, but some of the estimates are well below $30.

One of the most optimistic estimates comes from Crabtree. He figures TCF could get 16 times earnings, or about $28 a share. "I could be accused of adopting a glass-half-full attitude on this," he said.

Gary Townsend, a partner at Hill-Townsend Capital in Chevy Chase, Md., is more dour. He doubts that TCF could attract a buyer above its current price. When Commerce Bank, a regional that many compare with TCF, was acquired last year, Commerce got a price far lower than anticipated, he said.

"In the present market, it's difficult," Townsend said. "You have to have a high level of confidence that what you buy isn't going to hurt you."

Crabtree said TCF may be a victim of timing, with only time able to elevate its worth to a level that stockholders would cheer.

"Everyone's afraid of buying something and discovering they've got a great big pile of wormwood," he said.

Mike Meyers • 612-673-1746