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This Chicago Bank Stock Has 17% Upside, Says KBW

NEW YORK (TheStreet) -- Chicago is a cut-throat market for commercial banks scrounging for new loan business, and KBW analyst Christopher McGratty expects PrivateBancorp (PVTB - Get Report) "to outperform peers on loan growth this cycle."

Banks with a strong local presence have a major advantage over their largest competitors, since their commercial lending teams have deep ties to the community and customer relationships that can last for decades.  Specialized knowledge of borrowers' industries, not to mention friendships built up over the years, lead to enough loyalty among borrowers that these coveted relationships often follow commercial lenders as they move to different banks.

Bank of America (BAC - Get Report) purchased LaSalle Bank of Chicago in October 2007, picking up 400 branches in Illinois and Michigan.  Even though six years -- and a major banking crisis -- have passed, the aggressive poaching of former LaSalle commercial lenders by PrivateBancorp during 2008 and 2009 is now "starting to pay dividends," McGratty wrote in note to clients Thursday.

Commercial banking relationships can take years to develop, but they have a tendency to be quite lucrative, because they often include business checking deposits, as well as multiple loan relationships.  These relationships help banks grow their interest income, grow coveted non-interest bearing deposits, while also boosting fee revenue from new loan originations and the renewal of loans that mature relatively quickly.

PrivateBancorp had $13.9 billion in total assets as of Sept. 30, with 36 offices in 10 states.  The company reported third-quarter earnings of $33.1 million, or 42 cents a share, increasing from $28.9 million, or 37 cents a share, the previous quarter, and $19.6 million, or 27 cents a share, a year earlier.  The earnings improvement reflected a lower provision for loan losses, as well as lower loan servicing and collections expenses.

The bank grew its average loans -- excluding loans covered by Federal Deposit Insurance Corp. loss-sharing agreements -- by 7% year-over-year to $10.3 billion in the third quarter.  Average commercial loans were up 15% year-over-year to $6.8 billion in the third quarter.

The company's return on average tangible common equity for the first three quarters of 2013 was 10.19%, improving from 7.08% for all of 2012.

PrivateBancorp's shares closed at $27.31 Wednesday.  The has had a remarkable run, even in the current bull market, returning 78% this year.  The shares trade for 1.8 times their reported Sept. 30 tangible book value of $15.05, and for 16.6 times the consensus 2014 earnings estimate of $1.65 a share, among analysts polled by Thomson Reuters.  The 2015 EPS estimate is $1.84.

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