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Bank stocks fell Friday afternoon along with the broader market as concerns over Europe's debt crisis returned. JPMorgan (JPM) stock dropped 1.5% even though the country's largest bank by assets reported $5.7 billion in third quarter profits, up 34% from a year ago. Shares of Wells Fargo (WFC) slipped 3.1% after it reported a 22% increase in earnings but revenues of $21.2 billion that were lower than revenues in the previous quarter.

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Chris Whalen, senior managing director of Tangent Capital Partners, tells The Daily Ticker that the decline in JPMorgan shares was "a sell-the-news reaction." JPMorgan did better on lending, he says, but "there's only so much of that left."

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Whalen says banks overall won't be able to maintain the volume of mortgages and refinancings that have been supporting earnings. He says the Federal Housing Administration (FHA) has been tightening requirements for the loans it guarantees and the majority of refinancings have already been done.

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"People know the banks are running out of the good customers," says Whalen. "All of the banks have been doing the easy business. Going forward where will the revenue growth come from? The Street is starting to look forward and react to that."

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New York Attorney General Eric Schneiderman is suing JPMorgan for fraud in mortgage bonds sales by Bear Stearns, which JPMorgan acquired during the financial crisis. Whalen says the New York AG is "playing softball" with the banks, but investor suits could have a bigger impact.

"Investors will win big in their lawsuits and JPMorgan may have to buy some of the bonds back," he notes. Plus more claims could be coming. Whalen wants JPMorgan to keep a larger reserve against potential losses from these suits.

The Manhattan U.S. Attorney Preet Bharara is suing Wells Fargo for failing to disclose to the government deficiencies in loans it had issued and the Federal Housing Administration subsequently insured.

Wells Fargo, the nation's largest mortgage lender, along with U.S. Bancorp (USB) remains Whalen's top banking stock picks.

"They don't have the Wall Street exposure" and "the value in the industry is in the smaller banks," says Whalen. U.S. Bancorp reports earnings on Wednesday, Oct. 17.

The question for investors now, says Whalen, is where the revenue from housing will come from given tougher regulations due to Dodd-Frank and Basel III.