Should I Do It? Banking on TCF Financial

The Minnesota bank features an attractive valuation, dividend and buyback plan.
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It's shaping up to be another record year for mergers and acquisition activity. So far this year, there has been $1.08 trillion worth of deals announced in the U.S., up 19% from the first nine months of 2005, according to Bloomberg.

Of the M&A activity, financial services and banks are the first and fourth most active sectors, respectively, and I believe we'll see more consolidation over the coming quarters as overall economic growth continues to slow.

That said, I was intrigued when I came across Minnesota-based commercial lender

TCF Financial

(TCB)

. Shares of the Minnesota-based bank are down 3.1% year to date at Tuesday's closing price of $26.30, compared with an 8% gain in the Philadelphia/KBW Banks Index over the same period.

TCF Financial has 450 branches across six Northwestern states, with $14.5 billion of assets at the end of the second quarter. The bank's customer service focus, with its branches open seven days a week, helped management deliver 5.8% "same-store" annual deposit growth in 2005. Sporting a $3.4 billion market cap, TCF Financial is small enough that it could be a potential takeover target. In the meantime, the bank offers a 3.5% dividend yield that appears secure.

With that in mind, I'm here to answer investors' questions: Should I do it? Is TCF Financial a stock worth banking on, or will the stock be a value trap as the inverted yield curve and a slowing economy cut its earnings?

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At just 12.7 times the consensus 2006 analyst earnings estimate of $1.98 a share, the company trades at a discount both to its peers and its historical average valuation. This estimate represents a 1% profit decline from the previous year, which would be TCF Financial's first annual drop in earnings since 1998.

The company's profit should be more stable than some other financial firms if housing values continue to fall, because less than 1% of its 2005 revenue came from mortgages. On the other hand, TCF Financial receives about 4% of its revenue from fee-based items, and its second-quarter net interest margin of 4.22% was about 75 basis points greater than the industry average.

TCF Financial also offers investors a solid 23-cent quarterly dividend, which can be covered 2.2 times with expected full-year earnings. The 3.5% yield is also around the high end of the industry range, and should help place a floor under the stock. Management also bought back 2.9 million shares in the first half of 2006, and has another 3.8 million shares under its repurchase authorization.

With that in mind, I believe that TCF Financial could be attractive to purchase at current levels. The company has above-average operating metrics across the board, yet the stock trades at a discount to its peers and the overall market. TCF Financial could prove to be a takeover target if another wave of consolidation hits the banks. In the meantime, I believe the stock can trade up toward $30 by the end of the year.

Interested in more value stock picks? Check out David Peltier's TheStreet.com Value Investor.

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David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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