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Stocks Under $10 with 50-100% upside potential - 14 days FREE!

5 'Best' Bank Stock Ideas from Sterne Agee

Stocks in this article: BAC C PNC TCB FMBI TFSL TBBK I:BKX

1. TFS Financial
Shares of TFS Financial (TFSL) of Cleveland closed at $8.94 Monday, for a flat year-to-date return, following a 1% decline during 2011.

The shares trade for 1.5 times tangible book value. The consensus Fiscal 2013 EPS estimate is 14 cents. The consensus EPS estimate for the 2012 Fiscal Year that ends Sept. 30 is four cents.

Sterne Agee's price target for TFS Financial is $11, implying 23% upside potential.

TFS Financial is part of a mutual holding company structure, with 73.5% of the company's common shares held by Third Federal Savings and Loan Association of Cleveland, MHC.

Main subsidiary Third Federal S&LA entered into an Office of Thrift Supervision Memorandum of Understanding, or MOU, in August of 2010. The OTS has now been folded into the Office of the Comptroller of the Currency. Under the MOU, Third Federal made a capital infusion of $150 million into the thrift subsidiary in October 2010, and was required by the regulators to submit a plan to reduce its concentration in home equity loans, which the company said it completed, by reducing these loans by reducing its home equity lending commitments, "$1.31 billion from June 30, 2010 levels, including $506.1 million in outstanding balances, to $3.83 billion" at the end of 2011, and further reducing its home equity lending commitments to $3.60 billion, as of June 30.

TFS Financial had $11.5 billion in total assets as of June 30.

The company said that it had met most of the terms of a subsequent MOU it entered in February 2011, addressing operations and risk management concerns, but would also need to improve its interest rate risk management.

Sterne Agee analyst Matthew Breese on Monday said that "we remain positive on TFSL given their progress in meeting MOU stipulations, improvement in the overall risk profile of the institution and overall valuation," and that "upon removal of the MOU we believe investors will turn their focus towards book value growth from share repurchases and potential for a second step conversion."

Breese said that "upon resolution of the MOU, we believe TFSL will return to repurchasing stock and possibly paying dividends," and noted that "since coming public in April 2007, the company has repurchased 24.1 million shares or 23% of the minority float.

A second-step conversion to full stock ownership could be a windfall for patient investors in TFS Financial, with Breese estimating that "fully converted tangible book value in current terms would equal $12.05-$12.91." TFSL Chart TFSL data by YCharts

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

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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