5 Banks Stocks Profiting on the Most Profitable Loans (Update 2)

Updated with market close and total return information.

NEW YORK ( TheStreet) -- Many banks are trying to grow their commercial and industrial loan books, which is of prime importance to investors as other loan balances continue to shrink.

"Banks covet C&I loans because it is the area showing the earliest growth as we emerge from the recession," says Jefferies analyst Ken Usdin, "and many banks that previously had commercial real estate loans concentration are looking to remix their loan portfolios.

Usdin says that non-real estate commercial and industrial loans are "generally more of a variable rate product, so a lot of banks are hoping that when rates eventually go up, they will benefit from expanded net interest margins, as the loans adjust to higher rates."

The net interest margin is the difference between a bank's average yield on loans and investments and its average cost for deposits and borrowings. While many banks are seeing solid growth in non-interest bearing checking account deposits, net interest margins are still being pressured by the prolonged low-rate environment. Growing C&I loan balances and building varied relationships with the borrowers -- including business checking accounts, for example -- is very important for banks preparing for the eventual rise in interest rates.

Usdin on Wednesday highlighted a number of community banks showing impressive C&I loan growth, although it is probable that "some was spurred by seasonality" and the expiration of capital expenditure tax credits. "As such, we would expect the pace of loan growth to be lower in 1Q," he said.

Among the largest banks in the Jefferies coverage universe growing commercial loans, Comerica ( CMA) of Dallas stood out, with C&I loan growth of 8% during the fourth quarter, to $25.0 billion as of Dec. 30, while total loans grew 3.5%, to $42.7 billion.

Usdin said that "growth in C&I led the way as CMA experienced a strong quarter in its dealer finance and mortgage banker businesses," but that Comerica's "forward guidance is fairly cautious given the company is only calling for 2%-5% average loan growth in 2012."

The analyst rates Comerica a "Hold," with a $28 price target, and estimates the company will earn $2.40 a share in 2012, followed by EPS of $2.50 in 2013.

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Comerica's shares closed at $29.47 Wednesday, returning 14% year-to-date, following a 38% decline in 2011.

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

Another large regional player showing strong fourth-quarter commercial loan growth was KeyCorp ( KEY) of Cleveland, with C&I loans increasing 7% during the fourth quarter, to $19.4 billion, as of Dec. 30.

Usdin said that the company's "loan growth continues to build, as strength in C&I has outpaced run-off from exit portfolios," and that although the company's wind-down of certain loan types "will likely a put a cap on overall growth potential," the company "has beaten most expectations for total loan growth to return to positive territory."

The analyst has a "Hold" rating on KeyCorp, with an $8 price target, and estimates the company will earn 70 cents a share in 2012, followed by EPS of 75 cents in 2013.

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KeyCorp's shares closed at $7.90 Wednesday, returning 3% year-to-date, following a decline of 12% in 2011.

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

The following are the five banks covered by Usdin showing the strongest fourth-quarter growth in commercial and industrial loans:

MB Financial ( MBFI) of Chicago grew its C&I loans by 9% during the fourth quarter, to $2.3 billion as of Dec. 30.

Usdin said that the company's loan "run-off appears to be slowing, with less re-mixing out of the commercial real estate portfolio, during the fourth quarter, and tht "commercial pipelines appear strong for 2012, and higher call volumes and strength in the leasing businesses should help contribute to positive core growth for the year."

Despite the strong C&I growth, Usdin said that "total growth is not likely to be robust, as covered asset, construction, and CRE portfolios are all likely to shrink."

Jefferies analyst Emlen Harmon rates MB Financial a "Hold," with a $19 price target, and estimates the company will earn $1.50 a share in 2012, followed by EPS of $1.70 in 2013.

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MBFI's shares were up 15% year-to-date, through Wednesday's close at $1973, following a 1% pullback in 2011.

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

Associated Banc-Corp ( ASBC) of Green Bay, Wis., grew its commercial and industrial loans by 11% to $3.7 billion, as of Dec. 30.

Usdin called the company "one of the better regional loan growth stories of late, on the back of both commercial and residential mortgage growth, and said "commercial growth should remain strong, as the bank picks up market share off of the Bank of Montreal and Marshall & Ilsley merger, continues to expand national specialty lending relationships, and gains share in commercial real estate lending in new urban markets."

Jefferies analyst Emlen Harmon rates Associated Banc-Corp a "Buy," with a $14 price target, estimating the company will earn 95 cents a share in 2012, followed by EPS of $1.10 in 2013.

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Associated Banc-Corp's shares closed at $12.91 Wednesday, returning 16% year-to-date, following a decline of 26% in 2011.

Interested in more on Associated Banc-Corp? See TheStreet Ratings' report card for this stock.

SVB Financial Group ( SIVB) of Santa Clara, Calif., grew its commercial and industrial loans by 12% during the fourth quarter, to $2.0 billion, as of Dec 30.

Usdin said that the company's overall 22% loan growth in 2011 was "the fastest pace within our coverage universe," led "primarily by C&I, which makes up roughly 85% of total loans. The analyst added that "SIVB's corporate finance client base and buyout finance lending practice has been responsible for much of the growth," and expects the trend to continue in 2012, "given strong client acquisition trends within the corporate finance channel and robust M&A activity in the tech sector."

Jefferies analyst Casey Haire has a "Hold" rating on SVB Financial Group, with a $57 price target, and estimates the company will earn $3.15 a share in 2012, followed by EPS of $3.50 in 2013.

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SVB Financial Group's shares returned 24% year-to-date, through Wednesday's close at $59.16, following a 10% pullback in 2012.

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

First Republic Bank ( FRC) of San Francisco grew its commercial and industrial loan portfolio by 12.5% during the fourth quarter, to $1.7 billion.

First Republic was acquired by Bank of America ( BAC) as part of the purchase of Merrill Lynch in January 2009, and then sold in July 2010 to an investor group that included Colony Financial ( CLNY) and General Atlantic LLC and was led by First Republic's original management team. First Republic completed a public offering in December of 2010.

Usdin said that the bank "continues to generate impressive overall loan growth (up 22% in 2011) led by jumbo mortgages; a trend we expect to continue into 2012," and that "commercial loan growth has also been a strong contributor, as FRC continues to make inroads with private banking clients' employers (law firms, schools, etc.)."

Since the "first quarter is typically FRC's weakest of the year," Usdin expects "a slower growth rate near-term," but also expects "loan growth in the mid-teens in 2012 as the company continues to take share."

Jefferies analyst Casey Haire has a "Hold" rating on First Republic, with a price target of $32, and estimates the bank will earn $2.75 a share in 2012 and again in 2013.

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First Republic Bank's shares returned 5% year-to-date through Wednesday's close at $32.03, following a 5% return in 2011.

Interested in more on First Republic Bank? See TheStreet Ratings' report card for this stock.

Western Alliance Bancorporation ( WAL) of Phoenix grew its commercial and industrial loan portfolio by 18% during the fourth quarter, to $1.3 billion as of Dec. 30.

Usdin said that "C&I and non-owner occupied commercial real estate lending led the way for WAL over the past year, as the company continued to take advantage of a weakened competitive landscape." The analyst expects WesternAlliance's loan growth to slow, but still expects low double-digit growth in 2012 as the company remixes the loan portfolio out of Nevada into relatively stronger CA and AZ footprints."

Jefferies analyst Casey Haire rates Western Alliance a "Buy," with a $9.50 price target, estimating the company will earn 60 cents a share in 2012, followed by EPS of 90 cents in 2013.

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Western Alliance's shares returned 28% year-to-date through Wednesday's close at $7.97, following a 15% decline in 2011.

Interested in more on Western Alliance Bancorp.? See TheStreet Ratings' report card for this stock.

>>To see these stocks in action, visit the 5 Banks Stocks Profiting on the Most Profitable Loans portfolio on Stockpickr.

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

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn
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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