Management Research Paper on Wells Fargo & Company & TCF Financial Corporation

Wells Fargo & Company & TCF Financial Corporation

  1. Brief Description of Companies and Industry.

This paper shall critically analyze and evaluate two banks – Wells Fargo & company, and TCF Financial Corporation – with a view to creating comprehensive company profiles. Wells Fargo and TCF Financial are both players in the financial services sector and have are leading actors within the sector.

            Wells Fargo & Company is currently headquartered in San Francisco. It is a multinational company with American origins which has reached its position of preeminence through a number of mergers and acquisitions (Investor Details, n. pag.). The company operates from more than 9,000 locations in North America and has over 12,500 ATMs, making it the leading bank in terms of branch network in the US (Wells Fargo, n.pag.). The company has over $1.6 trillion worth of assets across its diversified portfolio making it the fourth largest of US banks based on assets. As from July 2013, Wells Fargo has been ranked as the most valuable company within the banking sector by market capitalization with a worth of $236 billion (We’re Strong, n.pag.).

            Wells Fargo was one of the most profitable banks in 2013 despite its revenue dropping slightly from around $91.2 billion in 2012 to around $88 billion in 2013 mainly due to a reduction in operating costs, increased interest income from trading assets, bigger securities portfolio, and decreased costs on deposits (McGrath, n. pag.). However, the company’s net income rose from $18.8 billion in 2012 to $21.8 billion, a testament to the continued profitability of the bank despite the depressed economic fundamentals (Campbell, n.pag.). The company offers a wide range of services, including community banking, mortgage financing, investment services, wholesale banking and securities, and was among the very first banks to introduce internet banking to its customers.

            TCF Financial Corporation (an acronym for Twin City Federal) is a holding company whose principal subsidiary is  TCF National Bank (TCF Bank) that has operations in a number of states, including Arizona, South Dakota, Minnesota, Indiana, Wisconsin, Colorado, Illinois and Michigan, and is headquartered at Wayzata, Minnesota (TCF Financial Corporation, n. pag.). TCF Financial Corporation had revenue of around $1.2 billion in 2013, which was a five percent drop from its 2012 earnings of around $1.3 billion (TCB Company Financials, n. pag.). However, despite the drop in earnings, TCF, for the first time in 22 years, posted a profit in its operations amounting to $132.6 million for the financial year ending 2013 (Cooper, n. pag.). By the end of 2013, the bank had around 430 branches in the states where it has operations and had assets valued at around $18.5 billion. The bank focuses on providing retail and commercial banking in the states in which it operates while also conducting wholesale banking, which includes equipment and auto finance, inventory finance and commercial banking across the US and in a few foreign countries (TCF Financial Corp, n. pag.).

Both Wells Fargo & company, and TCF Financial Corporation operate in the financial services industry albeit at opposite ends of the spectrum, with Wells Fargo & company a financial behemoth, one of the largest banks in the world, with a presence in all of the states in the US and over thirty-five countries around the world. The company has a number of hubs around the US, which serve as regional headquarters for the bank, helping to decentralize operations. TCF Financial Corporation, is a relatively minor player in the financial services industry with a relatively small asset base and a limited presence across the US. The retail banking arm of TCF Financial has no presence overseas since the foreign activities of TCF are limited to its wholesale banking activities.

  • Company History
  • Wells Fargo & company

After the discovery of gold in California in 1849, there was demand for expedite shipping services to move merchandise from the Californian outposts to the East Coast. In 1852, Henry Wells and William Fargo led a consortium of New York investors in creating the Wells, Fargo and company to provide the in-demand freight services and profit from the huge demand for the services (Wells Fargo and Company Established, n. pag.). Other than the freight services it offered through stagecoach lines and the pony express for emergency deliveries, the company from the outset also offered banking services making impressive profits from the traffic in gold dust. The company provided loans to businesses and entrepreneurs, helping to sustain the booming Californian economy.

At its inception, Wells Fargo & company was mainly known for its efficient freight services that were offered throughout the year, even when routes were blocked by snow in the winter, mainly using stagecoaches to move gold dust, confidential and critical business correspondence and express freight efficiently and expeditiously between different locations. The company introduced the innovative ‘pony express’ which helped to move urgent freight through horseback, which was invaluable during winter when snow blocked the stagecoach routes. When it began business, Wells Fargo rented stage coaches as it did not have its own, but soon became the preferred freight provider due to its reputation for protecting its cargo.

When mining activity in California began to decline in 1855, a number of banks that depended on the mining activity failed due to overexposure to the mining business. However, Wells and Fargo survived and grew to be the most dominant banking and express Freight Company in the West as it continued to deliver mail and supplies to miners. The mail services offered by Wells and Fargo were preferred by consumers even when the Post Office began to offer mail services in the West because they were cheaper and faster. Wells Fargo began its merger and acquisition activities almost at its inception when in 1857 it joined several express companies to form the Overland Mail Company to deliver mail between St. Louis and San Francisco regularly, twice a week, making the company a monopoly in California in the express freight business by the early 1960’s.

In 1866, the company merged with Overland Mail Company together with other major express and stagecoach companies to expand its operations in the West turning the company into the preeminent leader in the provision of transportation services that were reliable and reasonably priced. The organization survived existential threats to its freight business posed by the completion of the transcontinental railroad in 1869 and continued to provide essential transportation services for decades. Up to 1904, Wells Fargo was an amalgamation of the freight and banking services, which operated under the umbrella name. However, in 1905 the company separated its freight and banking services allowing the banking arm to come together with the Nevada National Bank to create Wells Fargo Nevada National Bank (Weiser, n. pag.).

The freight business, just like the banking arm, also went through a series of mergers and acquisitions as it continued to grow and expand its operations. In 1918, it merged forming the American Railroad Express Company leaving the banking arm to keep the Wells Fargo name (Weiser, n. pag.). This merger was mainly due to pressure from the American government, which wanted the express companies to merge in an effort to win World War I. meanwhile, the banking arm, now carrying the Wells Fargo name continued to grow through mergers. After merging with the Nevada National Bank to form the Wells Fargo Nevada National Bank in 1905, the bank merged with Union Trust Company in 1924 forming the Wells Fargo Bank & Union Trust Company (Engstrand, 34).

The company continued to grow and was able to survive the great depression of the 1930’s due to prudent, conservative management and the reinvestment of bank earnings, and between 1943 and the early 1950’s, it embarked on a modest expansion campaign and shortened its name to Wells Fargo bank s that it could capitalize on its frontier image whole also simplifying any further expansion. In the 1960’s, the bank had a number of successful mergers, but still maintained its name through all the mergers. In a bid to compete with Bank of America, which was a dominant player in the 1960’s in the consumer lending business, Wells Fargo teamed with three Californian banks to introduce a Master Charge card, currently named MasterCard, to its customers. The new credit card offered consumers the ability to pay bills, travel and shop at an increased number of locations without the need to carry large amounts of liquid cash although it had high penalties for late payments on outstanding debts.

After an absence of over fifty years, Wells Fargo bank reentered the Southern California market in 1967, and expanded its offices from a paltry 16 to 116 over the next decade. The early 1980’s saw a reduction in the expansion of the bank due to weak performance, although by this time, Wells Fargo bank had 417 offices in the US and abroad, and was the eleventh largest bank in the US and the third largest in California with 396 offices. In the mid 1980’s, the bank increased its retail banking footprint by commissioning an extensive network of automated teller machines (ATMs). In 1986, Wells Fargo acquired Crocker National Corporation from Midland Bank, and in one swoop doubled its branch network in Southern California while increasing its consumer loan portfolio by 85% (Engstrand, 37). The purchase of Crocker National Corporation was a strategy to cement the presence of Wells Fargo in California and substantially increase its physical branch network (Pollack, n. pag.).

The 1980’s was an era of deregulation and regional banks suddenly found themselves competing with larger national banks, a trend that put them at a distinct competitive disadvantage. The merger between Wells Fargo and the Crocker National Corporation, a subsidiary of Britain’s Midland Bank, was a merger of two equals, forced together by circumstances that were hostile to small regional banks. The merger helped the two companies to form a bigger bank that enjoyed economies of scale that could compete with the other big banks within the financial sector. In addition, the merger was also necessary for the preservation of Crocker National Corporation, which was weighed by a number of questionable debts.

The 1990s were characterized by a recession that led Wells Fargo to slash its workforce and lean heavily on technological innovations to improve its financial fundamentals. In 1995, the company initiated merger talks with American Express with a view to bolster its global presence. However, the merger fell through due to personnel and systems problems, although it could have been interesting given that both companies were started by Wells and Fargo. When the proposed merger with American Express failed, Wells Fargo turned its attention to First Interstate Bancorporation and implemented a hostile takeover of the bank at a cost of $11.6 billion (Hansell, n. pag.), a deal that helped to make Wells Fargo the eight-largest bank in the US with an asset base of around $108 billion. The deal to acquire First Interstate Bancorporation was significant because it helped Wells Fargo to not only bolster its position in California but also helped the bank to expand out of California for the first time through First Interstate Bancorporation’s presence in 12 Western and Sun Belt states (Peltz, n. pag.). Although First Interstate was a relatively large bank, it had failed to take advantage of its inherent advantages to expand its operations, making it vulnerable to hostile a takeover.

Wells Fargo growth strategy was still centered on mergers, and in 1998, the bank entered into a merger of equals with Norwest in a deal worth $31.4 billion (Murray, n. pag.). The combined bank had an asset base of $191 billion, had branches in 21 states, over 20 million customers and retained the iconic and well-known Wells Fargo name (Sinton, n. pag.). The merger created the seventh-largest bank in the US with over 2,800 branches spread in the West and Midwest of the US and over 90,000 employees. Wells Fargo’s merger with the Minneapolis based Norwest was advantageous to Wells Fargo since it helped the bank to introduce its presence to a number of states, and there was minimal geographical overlap between the two banks hence reducing the need for massive restructuring.

The merger between Norwest and Wells Fargo presented a clash of cultures and came at a time that Wells Fargo was experiencing some operational problems stemming from the hostile takeover of First Interstate. Norwest offered a wide range of products and pursued a branch-heavy strategy with a highly decentralized management structure, which emphasized on catering to the needs of clients and rural markets. Wells Fargo on the other hand, had a centralized structure and focused on traditional commercial banking, a sector that had been having diminishing returns as well as using ATMs and alternative outlets like supermarkets in place of branches. Despite the cultural differences between the two merging banks, what is indisputable is that the merger helped to create a mega bank and put Wells Fargo on the path towards becoming one of the largest banks in the world.

The global financial crisis that came to a head in 2008 was a trying time for US banks but also provide an opportunity to strike deals at very low prices for those financial institutions that had a modicum of health. The financial crisis was mainly precipitated by defaults in sub-prime residential mortgage-backed securities (RMBS) and valuation losses in collateralized debt obligations (CDOs) securities whose underlying collateral had sub-prime RMBS. Wells Fargo had very little exposure to mortgage backed securities and was able to go through the financial crisis relatively unscathed. Wachovia, the fourth largest bank in the US in 2007, on the other hand, had a massive exposure to the sub-prime RMBS and sub-prime RMBS backed CDOs after acquiring Golden West Financial Corporation in 2006 at a cost of approximately $25.5 billion as it tried to expand its banking franchise into California. Unfortunately, most of the loans held by Golden West Financial Corporation were toxic, a reflection of the poor due diligence conducted by Wachovia during the acquisition period.

By mid 2008, Wachovia was drowning in its own debts, principally coming from the mortgage book it inherited from Golden West Financial Corporation, and it was in danger of collapsing and filing for bankruptcy. The US government wary of the repercussions of having yet another major financial house collapse tried to engineer an acquisition or merger of Wachovia with another bank to forestall the worst-case scenario, and after some negotiations with Citigroup there was a gentleman’s agreement for Citigroup to buy a part of Wachovia at around $2.2 billion. However, after a change in tax law, Wels Fargo quickly reentered the negotiating table after initially walking away with a deal worth approximately $15.4 billion to buy all of Wachovia (Appelbaum, n. pag.). The deal was surprising because it involved the merger of a relatively financially healthy bank, to a bank that was on the verge of going under from the weight of its non-performing loan portfolio. In addition, the deal was done quickly at the height of the financial crisis when it was not yet clear where the crisis was heading, whether it could get worse or improve.

The deal did not include any government guarantees about the losses that were to be expected from Wachovia, a guarantee that had been part of the Citigroup deal (Enrich and Fitzpatrick, n. pag.). The deal represented a massive risk for Wells Fargo because Wachovia’s financial woes had the potential to poison Wells Fargo’s balance sheet and subsume it within the crisis. However, there were also immense opportunities for Wells Fargo that made the risk worthwhile (Hitt et al.,198). The merger of Wells Fargo and Wachovia created a super bank with assets worth $1.4 trillion, doubling the size of Wells Fargo and creating the fourth-largest bank by assets in the US (Stempel, n. pag.). Wells Fargo had generally escaped the effects of the financial crisis despite being the second largest mortgage lender mostly because it lent money cautiously and was not caught up with the craze with which its rivals collected sub-prime mortgages. Despite fears that the deal with Wachovia could be detrimental to its financial health, the deal proved an astute piece of business that has enabled Wells Fargo to grow into the large national and international bank that it is today through the harnessing of the synergies provided by Wachovia.

The company is currently a diversified financial services provider with three major banking operating divisions – community, wholesale and wealth, and brokerage and retirement (Wells Fargo & Co. n. pag.). The company has a presence in all of the US states and provides other services through subsidiaries like mortgage banking, securities brokerage and investment, equipment leasing, brokerage services, agriculture finance, trust and investment advisory services, venture capital investment among others. As a means of streamlining its services, restructuring its services, reducing operating costs and concentrating on its core business, the company recently sold around 40 of its regional insurance brokerage and consulting offices.

  1. TCF Financial Corporation

TCF Financial Corporation was founded in 1923 at Minneapolis, Minnesota as Twin City Building and Loan Association by life insurance entrepreneur, who felt that incorporating the savings business into his venture would make it more viable and attractive to prospective investors (Inskip, n. pag.). The company weathered public skepticism in its early years of existence to keep on growing. The great depression of the 1930’s adversely affected the association’s earnings, but growth returned to firmer ground when the federal government introduced an insurance program for Savings and Loan associations. The company changed its name to Twin City Federal Savings and Loan Association in 1936 when it received a federal charter and its resources tripled from $3.5 million over the next three years. The early 1940’s saw the company experience exponential growth, and by 1943, TCF S&L association was the seventh largest S&L association in the US.  

            One of the reasons for rapid growth was that the association had conducted an aggressive marketing campaign, making it highly visible and increasing the brand awareness. Unlike banks, whose interest rates were capped, S&Ls were not similarly constrained and could offer higher rates to savings accounts, hence attracting more deposits to their accounts, in addition to a post-World War II housing boom helping TCF S&L grow rapidly as it dedicated its fund to long-term mortgages. The leadership provided by Larsen was instrumental in beating competition from other S&Ls and helped to keep TCF S&L on the growth path over two decades in the 50‘s and 60’s (Inskip, n. pag.).

            Since the profitability of S&Ls was tied to the strength of the economy and the homebuilding industry with S&Ls being responsible for about 40% of all mortgages issued in the 1960’s, TCF like many of the S&Ls in the US began to invest in commercial real estate ventures which promised higher returns in a bid to increase profitability, although this was coupled with higher risk. In the early 1980’s, inflation was skyrocketing and interest rates were quickly eroding the value of traditional mortgages while new federal legislation had drastically changed the investment landscape to the disadvantage of S&Ls who now had to look for new ways to increase profitability. By the mid 1980’s, TCF S&L was also suffering from the weight of questionable investments it made in the building industry as well as unsound business practices and was on the verge of collapsing, and hence the company appointed William Cooper as the new CEO in 1985 and charged him with salvaging the company from collapse (TCF Financial Corporation History, n. pag.)

            Cooper implemented aggressive cost-cutting measures and restructured the company, retiring and sacking thirty-five senior level managers and tying pay to performance for branch managers. To raise capital for growth, Twin City Federal enlisted in the bourse as TCF Banking and Savings and at the same time, Cooper began to disengage from the real estate industry by selling off its New York real estate subsidiary at a loss of approximately $200 million among other measures. Cooper then concentrated on reinvigorating the banking branch of TCF and introduced Totally Free Checking to target low and middle income earners where consumers paid only for checks and incurred no other service charge in interest free accounts. This measures saw the company raise cheap capital and by 1988, the consumer loans portfolio was approximately $1 billion a significant increase from the $200 million in 1986.

            TCF made its first acquisition on 1987 when it bought approximately $300 million of insured from an Illinois based S&L, marking its first step in its expansion drive. In 1988 TCF entered into the supermarket business opening its first store, Cub Foods stores, in Eagan, Minnesota. At the end of the 1980’s, TCF changed into a federal savings bank and began to trade at the New York Stock Exchange (NYSE) as TCF Bank Savings fsb. Between 1989 and 199, the government seized a total of six hundred and thirty-three thrifts and the S&L industry was faced with tighter regulation from federal regulators. Despite the blight outlook for thrifts, TCF survived the tempestuous early 1990’s and had considerably reduced its non-performing loans from $15 million in 1986 to approximately $87 million in 1991.

             In the mid-1990’s, TCF implemented an aggressive expansion policy by acquiring and merging with a number of other financial organizations leading to a period of exponential growth. In 1993, TCF acquired the Milwaukee, Wisconsin based Republic Capital Group, Inc. in a deal worth $960 million helping TCF to increase its branch network considerably. In addition, the company spent $14.5 million to buy $220 million worth of deposits from the Pontiac, Michigan based First Federal Savings and Loan Association that had ran into financial difficulties and collapsed (Holley, n. pag.). The two deals helped TCF to have a presence in states that hitherto it had not had any business in hence expanding its branch network into more states. In 1995, TCF pulled one of the biggest acquisitions in its history when it acquired the Michigan based Great Lakes Bancorp in a deal worth $2.4 billion enabling it to add 39 offices to its Michigan operation instantly. This deal helped to increase the size of TCF into a relatively large regional bank and gave it economies of scale.

            The sound business approach pursued by TCF helped to make it the most profitable and financially secure thrift in the US by1996, while also being ranked as the fourteenth largest savings bank in the US with assets worth approximately $7 billion. To consolidate the banks growth, Cooper converted TCF from a thrift, to a bank in1997, while also acquiring Winthrop Resources Corporation a deal that helped TCF enter into the leasing business. In the same year, TFC acquired Bank of Chicago (TCF Bank to Acquire, n. pag.) which had approximately $193 million worth of assets enabling TCF to have a presence in Chicago. In 1998, TCF acquired seventy-six bank branches in Jewel-Osco stores from BankAmerica Corp, which was disposing the supermarket chain due to unprofitability caused mainly by focusing on upscale products that did not fit the prevailing customer profile. TCF turned the branches back to profitability by introducing products that were relevant to low and middle-income earners.

            The financial crisis of 2008 had a negative impact on the earnings of TCF and the bank has yet to fully recover from the crisis as a tighter regulatory framework has sliced into its income from fees (Bjorhus, n. pag.). In addition, the bank is closing 37 branches in Chicago that are located in the Jewel-Osco grocery stores in a restructuring process to reduce costs occasioned by changing consumer behavior (Daniels, n. pag.). Currently, the bank has an asset base worth around $18.8 billion, 380 branches in Wisconsin, South Dakota, Minnesota, Illinois, Michigan, Colorado, Indiana and Arizona, and provides commercial and retail banking services in addition to a number of subsidiaries through which it offers auto finance, equipment finance and commercial leasing service in all the states of the US. Although TCF offers commercial inventory finance services across the US and in Canada, it remains a relatively small financial organization that can be easily taken over by other companies especially since it has been experiencing poor returns on equity.

  • Justification for selection

Banks in the US can be classified into two general categories- national banks, which have a presence across all the states in the US, and regional banks, which have a presence in a few states. Wells Fargo is a national bank that has a presence across all of the states in the US. Its retail and commercial banking services are offered across the country in addition to other services offered by its subsidiaries. The bank recently became the biggest bank by market value with a valuation of around $178 billion which is approximately $9 billion more than its closest competitor, JP Morgan (Popper, n. pag). Wells Fargo has had a remarkable growth trajectory and for nearly every single year over the past four decades, the company has returned a profit and its earnings has increased for a remarkable 35 out 42 years (Huber, n. pag.).

            Wells Fargo is also one of the very few banks that came through the 2008 financial crisis relatively unscathed and if anything, it increased the value of its assets through the acquisition of the ailing Wachovia bank. The value of its shares has increased steadily over the years and its book value has compounded at an average of 11.1% over the last four decades. In addition, the compounded stock price over the last decade is at an average of 11.4% excluding dividends while earnings per share have grown from $0.04 four decades ago to over $4.00 currently, a compounded rate of around 11.7%. Therefore, the value of the company has increased steadily and it provides an apt example of a company that has exploited its potential and the synergies from mergers and acquisitions to steadily increase its value.

            Wells Fargo has a high credit quality, which has helped it to minimize the number of non-performing loans on its books, helping it to maintain growth and profitability (Chaudhuri and Raice, n. pag.). Wells Fargo has posted quality earnings over the past decade making the company one of the premier stocks in the bourse. However, a recent decline in earnings-per-share threatens to negatively impact on the quality of the stock (Defotis, n. pag.). Despite recent slowdown in earnings, Wells Fargo remains one of the most valuable mega banks with a solid asset base. The quality of its investments is very sound, which is surprising considering that Wells Fargo is the biggest mortgage lender (Chaudhuri and Raice, n. pag.). Wells Fargo, unlike its competitors invested conservatively in the mortgage business hence most of its commitments in the mortgage industry are of a good quality. Although Wells Fargo has some operations internationally, its level of diversification internationally as well as by business lines is inferior compared to its peers, making its earnings are highly dependent on the strength of the US economy.

            TCF on the other hand is on the other end of the spectrum of financial organizations, being a regional bank that operates in a few states. The bank’s assets of around $18 billion dollars area drop in the ocean compared to the trillion-dollar asset base of Wells Fargo. TCF bank is one of the most successful regional banks and during the 1990’s consistently outperformed its peers and witnessed a period of stellar growth. The bank underwent massive expansion and acquired a number of other thrifts as it pursued an aggressive expansion policy. The bank identified a niche market and introduced products targeted at its market, a strategy that helped it to expand rapidly as well as turnaround unprofitable businesses that it acquired during its expansion drive. The value of TCF increased exponentially through the 1980’s and 90’s and by the early 90’s, the value of its assets had grown above the billion dollar threshold and by the mid 90’s, TCF was one of the most valuable thrifts in the US.

             The quality of TCF investments has been questionable, and hampered the growth of TCF at some point in its history. TCF’s exposure to the mortgage industry was especially detrimental to its growth because some of the mortgages it had were risky and led to losses due to defaults. However, after disengaging from some of the risky mortgage ventures, TCF credit quality improved and the company returned to a path of growth and profitability.

            Wells Fargo and TCF are two banks that are at opposite ends of the financial services spectrum. Wells Fargo is one of the oldest banks in the US, having begun offering banking services in the mid 19th century while TCF is s relatively new entrant in the banking scene, having converted from a thrift to a bank in 1997. Wells Fargo is a multinational banking giant that has a presence across the US and many countries in the world; while TCF is a regional bank with limited presence internationally, that has carved a niche for itself as a bank for low and middle-income earners. The two banks have been chosen to contrast the growth opportunities and challenges that banks face, whether they are multinational behemoths or small regional banks

  • Resource based model

Wells Fargo and TCF operate within the banking industry and ideally, they have the same access to resources. However, TCF and Wells Fargo are at opposite ends of the financial services spectrum with Wells Fargo being a multinational super bank while TCF is a relatively small regional bank with limited overseas presence. The resource based model, which is based on the concept that organizations are a collection of resources and capabilities that are unique and should be taken into consideration when formulating internal strategy vis a vis the external environment, can be used to explain the differences between TCF and Wells Fargo ((Hitt et al., 17).

            Wells Fargo has prudently invested in its business and has actively reinvested its earnings back into the business. In addition, the bank cautiously invested in mortgages, a conservativeness that has helped Wells Fargo to continue having a profitable mortgage arm despite the crash of the housing bubble post 2008. Currently, Wells Fargo is the largest mortgage lender in the nation and surprisingly, it has the lowest provision for non-performing mortgages, a testament to the bank’s due diligence in the mortgage issuing process. The bank, despite being one of the largest in the world has a very low profile in Wall Street, having largely avoided the Wall Street trading craze that most banks got caught up in, which will later prove disastrous to their financial health. Instead, the bank has concentrated on the basics of banking, taking in deposits and issuing loans to customers, earning its money from fees and interest.

            The company also used the 2008 financial crisis to strike a deal – the acquisition of Wachovia – which helped to catapult it to the league of financial behemoths. The acquisition was made possible through sound business practices that enabled Wells Fargo to have the financial might to pull off the deal. The deal was a classic example of a ‘speculate to accumulate’ maneuver, where Wells Fargo took a huge gamble that paid off handsomely. Wells Fargo has also diversified its business, giving it more revenue streams and opportunity to grow. The diversification helps to shield Wells Fargo from financial shock if one of its operations runs at a loss. In addition, the size of the company helps it have economies of scale, giving it room to maneuver and make investments that help it to increase its value.

            TCF on the other hand, has a limited access to resources owing to its size. The company has limited diversification making it vulnerable to economic crisis. The 2008 economic crisis negatively affected the company’s earnings leading to downsizing as it tried to survive the economic downturn. TCF is similar to Wells Fargo because in the 1990’s, the company outperformed its peers and survived while others collapsed. Although it has recovered sluggishly after the 2008 economic crisis, it is notable that the company survived the crisis and is slowly returning to growth and profitability. TCF has been unable to effectively exploit the synergies that are due to its nice market and has seen growth reduce significantly. There is a possibility that the most viable option available to TCF is to merge or be acquired by a bigger bank that could give it the resources needed to expand its operations and consolidate its market.

  • Diversification

Wells Fargo is relatively well diversified company offering financial services that has three main operating segments namely community banking, wholesale banking and wealth, brokerage and retirement services. The bank offers services to retail customers, taking deposits and offering loans to clients through its numerous stores and offices across the nation. The company also offers mortgage services to retail consumers, and is currently the largest mortgage lender in the US, and its conservative approach to issuing of mortgages has helped the company to have one of the best performing mortgage books in the US, with the number of non-performing mortgages being much lower compared to its peers. The company also provides commercial and corporate banking through its offices and stores and has extended the service provision to the internet platform. The retail, commercial and corporate banking services are offered not only within the US but also around the world through affiliate institutions and subsidiaries.

            Wells Fargo also offers other services like equipment leasing, securities brokerage and investment banking, data processing services, venture capital investment, agriculture finance, insurance agency and brokerage services and investment advisory services among others. The company therefore has a well-diversified range of services that it offers to clients in the US, and it has further diversified its operations by offering its services globally. The company revenue streams come from the mix of services it offers, with each of the operating segments contributing strongly to the company’s earnings (Mora, n. pag.). The earnings from mortgages fell substantially during the 2008 financial crisis, forcing some restructuring in the business, but have now recovered to contribute to the overall earnings growth. Due to its diversification, Wells Fargo is relatively well insulated against wild swings in earnings and profitability if any one of its operations performs below the expected levels (Berthelsen, n. pag.).

            TCF on the other hand, is relatively undiversified compared to Wells Fargo, making it susceptible to poor performance when its major operations perform below par. First, the company’s business is concentrated in a few states in the US and if the economy of these states is weak, its earnings are adversely affected. The company has negligible international diversification, and has concentrated in retail banking, focusing mostly on the no-frills clients. Its earnings are mostly dependant on the retail banking operations since the company has little presence in the mortgage industry, and has limited finance and commercial banking across the US and in a few foreign countries, notably Canada. It also operates a chain of stores, which target the low and middle-income earners in a few states in the US.

            Wells Fargo is therefore a better-diversified company, a fact that has helped the company to continue growing its revenue streams. In addition, the better diversification protects wells Fargo from sudden revenue losses (Hitt et al., 170). However, both companies are based mainly in the US and their earnings are largely dependent on the health of the US economy.

  • Markets

Both Wells Fargo and TCF operate in a fast cycle market, on in which competitiveness cannot be maintained only by the relative resource strength and core competencies (Hitt et al.,84). In fast cycle markets, time is the most important commodity, and one that if carefully utilized can offer a company competitive advantage (Bower and Hout, n. pag.). The financial services industry is one in which it is important for a company to efficiently make decisions in as short a time as possible to respond to the changing market dynamics. Companies that make decisions faster are able to develop new product earlier and that deliver customer orders faster than their competitors are the ones that can survive in a fast cycle market. Wells Fargo has been successful because it has been ruthlessly efficient in exploiting opportunities in the market and positioning itself as the premier banking organization.

            The company has a decentralized organizational structure in which local store managers have a leeway to make decisions. This is crucial since it helps the company to take advantage of any emerging situation and take quick corrective action should the need arise. Decentralization also helps to reduce the red tape that is common in centralized organizations, where decisions can take a long time to be made due to organizational bottle necks and inefficiencies.

            TCF on the other hand is a relatively centralized organization, where major decisions are mat headquarters. This has robbed the bank of the nimbleness and agility that are required to take advantage of emerging trends in a region. The bank does not introduce new products fast enough and is one of the few banks that are yet to recover fully from the 2008 crisis. The centralized decision making process gives the bank an institutional paralysis, where local managers have to wait for communication from the headquarters before they can act. In a fast cycle market, centralizing operations can lead to a competitive disadvantage since a considerable amount of time is lost in the vertical communication needed to transmit requests upwards and decisions downwards.

  • Structure

The banks’ capital structure can be analyzed through ratios derived from their annual reports. The important ratios are liquidity ratios that can be divided into current ratio and quick ratio, that give an idea about the short-term financial health of the company. Solvency ratios, which can be divided into debt to equity ratio and debt to total assets ratio give an idea about the company long-term prospects and should be ideally above one. Profitability ratios, which give an idea about the cost efficiency of the company, give an erroneous picture if taken in isolation. Profitability ratios are generally incomparable across industries due to different microeconomic conditions.

Wells Fargo Financial Ratios

Profitability ratio

Margins % of Sales 2011-12 2012-12 2013-12
Revenue 100.00 100.00 100.00
Gross Margin
SG&A 35.74 35.03 37.12
Other 25.28 23.51 21.18
Operating Margin 29.22 33.07 38.95
Net Int Inc & Other -9.76 -8.38 -2.76
EBT Margin 29.22 33.07 38.95
Profitability 2011-12 2012-12 2013-12 TTM
Tax Rate % 31.47 31.97 31.89 30.63
Net Margin % 18.56 20.91 24.93 26.22
Asset Turnover (Average) 0.06 0.06 0.06 0.05
Return on Assets % 1.17 1.32 1.42 1.43
Financial Leverage (Average) 10.20 9.84 9.92 9.86
Return on Equity % 12.19 13.16 13.99 13.99
Return on Invested Capital % 6.18 6.80 6.90 6.81
Interest Coverage

Financial health ratios

Balance Sheet Items (in %) 2011-12 2012-12 2013-12
Cash & Short-Term Investments 1.48 1.54 2.11
Accounts Receivable 2.39 2.17 1.73
Other Current Assets
Total Current Assets
Net PP&E 0.73 0.66 0.60
Intangibles 3.66 3.20 3.16
Other Long-Term Assets
Total Assets 100.00 100.00 100.00
Accounts Payable 0.02
Short-Term Debt 3.74 4.02 3.53
Taxes Payable
Accrued Liabilities
Other Short-Term Liabilities
Total Current Liabilities
Long-Term Debt 9.54 8.95 10.02
Other Long-Term Liabilities
Total Liabilities 89.33 88.93 88.86
Total Stockholders’ Equity 10.67 11.07 11.14
Total Liabilities & Equity 100.00 100.00 100.00
Liquidity/Financial Health 2011-12 2012-12 2013-12
Current Ratio
Quick Ratio
Financial Leverage 10.20 9.84 9.92
Debt/Equity 0.97 0.88 0.99

            Wells Fargo financials show that the company has a healthy financial structure. Its earnings have increased generally year on year. The company’s debt/equity ratio is below one meaning that it is not indebted to creditors and in case of liquidation, it can fulfill its financial obligations.

TFC financial ratios

Profitability ratio

Margins % of Sales 2011-12 2012-12 2013-12 TTM
Revenue 100.00 100.00 100.00 100.00
Gross Margin
SG&A 33.88 34.70 40.55 41.00
Other 32.94 72.55 29.50 29.29
Operating Margin 15.63 -26.73 20.14 23.87
Net Int Inc & Other -17.55 -19.48 -9.81 -5.85
EBT Margin 15.63 -26.73 20.14 23.87
Profitability 2011-12 2012-12 2013-12 TTM
Tax Rate % 36.04 34.70 35.94
Net Margin % 9.56 -17.20 10.99 13.14
Asset Turnover (Average) 0.06 0.07 0.07 0.07
Return on Assets % 0.58 -1.17 0.72 0.87
Financial Leverage (Average) 10.16 11.39 10.88 10.51
Return on Equity % 6.55 -12.60 8.06 9.44
Return on Invested Capital % 4.12 -3.16 5.16 6.15
Interest Coverage

Financial health ratios

Balance Sheet Items (in %) 2011-12 2012-12 2013-12
Cash & Short-Term Investments 7.32 6.04 4.98
Accounts Receivable
Other Current Assets
Total Current Assets
Net PP&E 2.30 2.42 2.38
Intangibles 1.19 1.24 1.26
Other Long-Term Assets
Total Assets 100.00 100.00 100.00
Accounts Payable
Short-Term Debt 0.03 0.01 0.03
Taxes Payable
Accrued Liabilities 2.69 2.00 2.69
Other Short-Term Liabilities
Total Current Liabilities
Long-Term Debt 23.09 10.60 8.07
Other Long-Term Liabilities
Total Liabilities 90.16 89.78 89.37
Total Stockholders’ Equity 9.84 10.22 10.63
Total Liabilities & Equity 100.00 100.00 100.00
Liquidity/Financial Health 2010-12 2011-12 2012-12 2013-12
Current Ratio
Quick Ratio
Financial Leverage 12.55 10.16 11.39 10.88
Debt/Equity 3.30 2.35 1.21 0.88

            TCF financial health has improved in the recent past and earnings per share have risen. The company has a healthy equity/debt ratio and its leverage is relatively low hence insulating it from major loses in case of an economic slowdown. The capital structure of the company can enable the company to continue growing profitably.


Acquisition – is the buying of one company by another, giving the buying company complete control over the entity bought.

Competitive advantage – circumstance(s) or condition(s) that give a company a superior or favorable business position relative to its peers.

Debt/equity ratio – a financial ratio indicating the proportion of shareholders’ equity to debt used in financing company assets.

Decentralization – an organizational structure that allows for decisions to be made at the branch or store level as opposed to making them at the headquarters.

Due diligence – is the process of intensively evaluating a company before acquisition or of evaluating a deal before signing.

Fast-cycle market – are usually markets that are highly dynamic and prone to quick and fundamental changes in customer preferences.

Financial leverage – is the magnitude to which a company uses fixed income securities, which include debt and or preferred securities. A high financial leverage means that a company will be encumbered with increased interest payments.

Merger – is the combination of two companies, usually of equal relative strength to form a single bigger entity.

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