Opening 105 supermarket branches took a toll last year on TCF Financial Corp. of Minneapolis, its chief executive officer acknowledges.
Return on equity fell 206 basis points, to 17.51%, and return on assets plummeted 15 basis points, to 1.62%.
Profits rose 8%, to $156 million, but that "wasn't as good as growth in earnings in previous years," CEO William A. Cooper noted.
And though per-share earnings of $1.69 met Wall Street expectations, the historically well-regarded stock has taken a tumble. Shares were trading at $24.375 at midday Wednesday, well below the 52-week high of $37.25.
Mortgage prepayments also hurt profits, and the company took charges and made provisions totaling $5.7 million in the fourth quarter, partly to get out of an unprofitable auto lending business.
But at $10 million the new branches were particularly expensive. And none of them are expected to turn a profit until sometime next year.
Nevertheless, Mr. Cooper, who is also chairman, said his supermarket strategy beats acquiring banks, which he said is even more costly.
With its share price down, he said, TCF would have to pay cash for acquisitions. And he would rather buy a leasing company or another specialty business than a bank, he said.
TCF, which has $10.2 billion of assets and a foothold in the Chicago, Detroit, Denver, Milwaukee, and Minneapolis markets, is considered a takeover prize itself. But Mr. Cooper said he would sell only "if someone wants to pay us a very big price."
Right now though, he said, he plans to remain independent. And in his view, internal growth means more grocery store branches.
More than half of TCF's 311 branches are in now stores. Only one of those opened last year was a traditional branch.
The company plans to open 40 supermarket branches this year, including 25 in Chicago. Last year's expansion was also mostly in Chicago, where TCF took over BankAmerica Corp.'s unprofitable Jewel-Osco branches.
That was a big bite, Mr. Cooper acknowledged, but he said he has no regrets. Opportunities to expand through supermarkets will shrink as banks enter partnerships with large chains, he said.
"We think that option is going to be done in the next few years," he said. "We had to make hay while the sun shines."
Mr. Cooper's overall strategy centers on taking deposits to provide cheap funding for consumer loans. Under the TCF formula, each supermarket branch has to break even within two years.
TCF draws customers with free checking accounts. The company earns about $120 in fees per account each year and has 920,000 accounts, having added 140,000 last year.
Though analysts have favored the stock, "the jury is still out" on the supermarket gambit, said analyst Joseph Duwan of Keefe, Bruyette & Woods Inc.