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5 'Best' Bank Stock Ideas from Sterne Agee

2. TCF Financial
Shares of TCF Financial (TCB - Get Report) of Wayzata, Minn., closed at $11.44 Monday, returning 12% year-to-date, following a 29% decline during 2011.

The shares trade for 1.4 times tangible book value, and for 11 times the consensus 2013 EPS estimate of $1.03. The consensus 2012 EPS estimate is a loss of $1.19, factoring-in TCF's balance sheet restructuring in March, which led to a first-quarter net loss of $282.9 million, or $1.78 a share.

During the first quarter, the company prepaid $3.6 billion in wholesale borrowings and sold $1.9 billion in mortgage-backed securities, as part of its strategy of moving away from longer-term residential and commercial real estate loans and MBS investments, to a focus on "originating high-yielding, low-risk, secured loans and leases funded by a low-cost, core deposit base," according to CEO William Cooper.

Based on Sterne Agee's price target of $14, TCF Financial's shares have 22% upside potential.

As one of the banks most affected by the Durbin Amendment, as well as the rules requiring banks only to provide overdraft coverage for debit card and ATM transactions for customers who previously opted-in for the service were implemented in July 2010, TCF Financial has been seeking to rebuild its revenue model by focusing on specialty lending, including equipment leasing, inventory finance and auto lending, which together made up 32% of the company's total loans and leases as of June 30, increasing from 27% a year earlier. During the second quarter, TCF grew these loans and leases 23% year over year, to $4.9 billion.

The company's net interest margin expanded to a very strong 4.86%, from 4.14% the previous quarter, and 4.02% a year earlier, reflecting the reduced interest expense and more profitable loan mix. Cooper said in July that "with rates low and even lower, we'll probably see some reduction in that very high net interest margin... somewhere around 4.6%, 4.65%," which is still a very high margin in the current rate environment.

Green said on Monday that "our recent meeting with management confirmed our belief that TCB's prospects remain brighter than the valuation suggests. We believe that improved credit quality, coupled with revenue growth, will lift TCB's ROA to 1.0% by 4Q13E and 1.2% in 2014E."

Sterne Agee estimates that TCF Financial will earn $1.05 a share during 2013.

TCB Chart TCB data by YCharts

Interested in more on TCF Financial? See TheStreet Ratings' report card for this stock.

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