TCF Financial Corp., an active buyer of banks and thrifts for a decade, is turning from mergers in order to open supermarket branches.

"At these prices," said TCF chairman and chief executive officer William A. Cooper, branch "expansion has a much higher rate of return than acquisitions." In an interview last week, he said he had looked at several possible bank deals but passed.

Minneapolis-based TCF has opened 135 branches, including 119 supermarket offices, in the past three years. The number of supermarket outposts is expanding so rapidly that TCF is poised to become the first large banking company with more than half its branches in supermarkets, Mr. Cooper said.

Nearly half of $9.4 billion-asset TCF's 300 branches are in grocery stores, and another 19 are to be opened by yearned.

While traditional bank branches have more growth potential, Mr. Cooper said, supermarket banks are more profitable. TCF's traditional branches earn about 1% on assets; supermarket banks that have been open at least three years, 2%.

TCF's largest concentration of supermarket branches is in Chicago, where the banking company this year agreed with Jewel-Osco, the city's largest grocer.

In January, TCF took over 80 branches in Jewel-Osco stores that had been operated by BankAmerica Corp. BankAmerica dropped its agreement with the chain last year after deciding the supermarket branches were unprofitable.

Mr. Cooper said he believes he can make the locations pay off but said TCF continues to lose money on them due to start-up costs. Each branch costs $300,000 to $400,000 to open but should be profitable within two to three years, he said.

In Mr. Cooper's view, BankAmerica did not market the branches well and tried to appeal to upscale customers. TCF's typical customers, by contrast, are "middle class and down," he said.

But at least one investor doesn't yet buy into the supermarket idea.

"The cards are still on the table from my point of view," said Carl Dorf, a senior portfolio manager at Pilgrim America, Phoenix. "I'm not saying" the Jewel-Osco deal "won't work, but it's a decent sized bet for them."

Mr. Dorf, whose fund owns 0.20%, or 182,000 shares, of TCF stock, said banking companies have trouble making money in supermarkets because such offices do not generate loans.

But Mr. Cooper said the locations are valuable because they attract deposits, which TCF views as cheap funding for loans.

However, he also said start-up costs have had an effect on earnings. The opening of supermarket branches over the past three years has led to a $4.7 million reduction in earnings for the first half of 1998, Mr. Cooper said. TCF made $80 million during the first six months of the year.

Mr. Cooper added that the Jewel-Osco deal was a cost-efficient way to enter the attractive Chicago market. TCF plans to open another 70 Jewel- Osco branches in the next five years.

"The Jewel transaction, in my humble opinion, is going to be a home run for us," Mr. Cooper said.

Analyst Ben Crabtree of Dain Rauscher Inc., Minneapolis, agreed. "The grocery store strategy, especially at TCF, really pays off."

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