NEW YORK ( TheStreet) -- Five Chicago-area commercial lenders are positioned to continue taking business from Bank of America ( BAC) and JPMorgan Chase ( JPM), but face stiff competition from another out-of-town player.

"We're coming off a challenging quarter for Chicago banks," said analyst John Rodis of Howe Barnes Hoeffer & Arnett, adding that a majority of the five area banks that he covers reported increases in problem loans during the third quarter. Rodis believes we'll see "a choppy couple of quarters" but over the long haul, "there should be a lot of opportunity for growth" as the group resumes its pursuit of commercial clients from Bank of America and JPMorgan chase, which have dominated the Chicago market.

Locally-based institutions have a built-in advantage in their home markets, since their lending teams are more likely to know the local business climate and they have more flexibility to work with borrowers on unique deals.

Another bank that is growing its Chicago business is FirstMerit of Akron Ohio, which has purchased two failed Chicago-area banks from the Federal Deposit Insurance Corp. this year, including Midwest Bank & Trust in May, George Washington Savings Bank in February, when it also bought 24 Chicago-area branches from First Bank of Creve Coeur, Mo. First Merit has $14.4 billion in total assets as of September 30, increasing 36% from a year earlier, and CEO Paul Greig has 28 years experience in the Chicago market.

Out of the five Chicago banks he covers, Rodis only has one buy rating, although four out of the five are cheaply-priced relative to tangible book value, according to SNL Financial. The single buy rating is on First Midwest Bancorp ( FMBI) because of the company's strong capital position.

All five of the Chicago banks we're focusing on are still participating in the Troubled Assets Relief Program, or TARP. Because of the associated dilution risk and forward price-to-earnings multiples, based on consensus earnings estimates this group is only attractive when we go out to 2012 and are best considered by long-term investors with horizons of several years.

5. Taylor Capital

Company Profile

Taylor Capital Group ( TAYC) of Rosemont, Ill. has seen its shares nearly double over the past year, closing at $12.40 Thursday.

In late October, Taylor received regulatory approval to raise funds through offerings of convertible preferred stock and subordinate debt after a $75 million deal made with private investors during the second quarter. According to SNL Financial, the company has raised $43.1 million in preferred equity during 2010.

Income Statement

Third-quarter net income applicable to common shareholders was $30.7 million, of $1.57 a share, following a loss of $48.3 million, or $3.35 a share, the previous quarter and a net loss to common shareholders of $5.3 million, or 51 cents a share during the third quarter of 2009. Net income to common shareholders excludes dividends on preferred shares, including $104.8 million held by the U.S. Treasury Department for TARP assistance.

The third-quarter profit was driven by a $32.8 million in gains on securities sales and a decline in the provision for loan losses to $18.1 million, from $43.9 million the previous quarter. In the third quarter of 2009, the provision for loan losses was $15.5 million. Pre-provision earnings - which also excluded the securities gains and expenses from nonperforming assets - increased to $20.6 million during the third quarter from $17.3 million in the second quarter and $15.2 million in the third quarter of 2009.

Taylor Capital's net interest margin - essentially the difference between the average yield on loans and securities investments and the average cost of funds - was 3.25% for the third quarter, and had improved for eight straight quarters, according to the company.

Balance Sheet

Taylor Capital had $4.7 billion in total assets as of September 30. Nonperforming assets - including nonaccrual loans, a very small amount of accruing loans past due more than 90 days, and repossessed assets - totaled $157.5 million or 3.38% of total assets as of September 30, improving from 3.98% in June and 3.81% in September 2009.

Net charge-offs - loan losses less recoveries - totaled $24.5 million during the third quarter, meaning that the company "released" $6.4 million in loan loss reserves. The annualized ratio of net charge-offs to average loans for the third quarter was 3.25% and reserves covered 3.10% of total loans as of September 30.

Taylor Capital had a Tier 1 leverage ratio was 8.04% and its total risk-based capital ratio was 14.15%, exceeding the 5% and 10% required for most banks and thrifts to be considered well-capitalized by regulators. However, the tangible common equity ratio - which is of far-more interest to investors for a TARP bank - was 3.15% according to SNL Financial, indicating that a common equity raise will probably be needed for the company to be approved by regulators to repay TARP.

Stock Ratios

The shares trade for 1.5 times tangible book value according to SNL and 20.7 times the consensus earnings estimate of 60 cents a share for 2012, among analysts polled by Thomson Reuters.

Analyst Ratings

Out of the three analysts covering Taylor Capital, two have hold ratings and the remaining analyst recommends investors sell the shares.

In a report published after the company's third-quarter earnings announcement, Brian Martin of FIG Partners said Taylor remained "a work in progress with a possible significant upside if plans continue to go according to schedule." Martin has a "market perform" or hold rating on the shares, "given current capital levels and the precarious state of the economy."

4. Wintrust

Company Profile

Shares of Wintrust Financial ( WTFC) of Lake Forest, Ill. closed at $31.66 Thursday, returning 15% over the previous year.

Income Statement

Wintrust reported third-quarter net income applicable to common shareholders of $15.2 million, or 47 cents a share, increasing from $8.1 million, or 25 cents a share during the second quarter, but falling from $27.3 million, or $1.07 a share during the third quarter of 2009, when the company booked $113.1 million in gains on bargain purchases of failed banks from the FDIC. Third-quarter 2010 earnings also received a $6.6 million boost from gains on bargain purchases.

The third-quarter provision for credit loan losses was $25.5 million, declining from $41.3 million the previous quarter and $91.2 million a year earlier. The provision in the third quarter exceeded net charge-offs of $21.4 million (excluding inherited balances from failed banks covered by FDIC loss-sharing agreements), so the bank was still building-up loan loss reserves.

Wintrust's net interest margin declined to 3.22% during the third quarter from 3.43% in the second quarter and 3.25% in the third quarter of 2009.

Following the earnings announcement, Peyton Green of Sterne Agee lowered his 2011 earnings estimate for Wintrust by 20 cents to $1.55 and his 2012 estimate by a quarter to $2.75, based on "a lower NIM assumption, more subdued balance sheet growth, and elevated credit costs."

Balance Sheet

Wintrust had $14.1 billion in total assets as of September 30, a 16% year-over-year increase reflecting the purchases of the failed Ravenswood Bank in August, Wheatland Bank and Lincoln Park Savings in April.

Nonperforming assets - nonaccrual loans (excluding loan balances covered by the FDIC) and repossessed real estate -- totaled $211 million, or 1.50% of total assets as of September 30. The third-quarter net charge-off ratio -- excluding covered loans -- was 0.86% and reserves covered 1.19% of total loans as of September 30.

Wintrust owes $250 million in TARP money. The company raised $221.8 million in common equity through a public offering completed in March. The Tier 1 leverage ratio was 10.0% and the total risk-based capital ratio was 14.1% as of September 30. Wintrust's tangible common equity ratio at the end of the third quarter was 5.94%, according to SNL Financial.

Stock Ratios

The stock trades for 1.2 times tangible book value according to SNL and 11.5 times the 2012 consensus earnings estimate of $2.76 a share.

Analyst Ratings

Two out of 11 analysts covering Wintrust rate the shares a buy, while the other nine - including Peyton Green - recommend investors hold the shares.

3. First Midwest Bancorp

Company Profile

Shares of First Midwest Bancorp of Itasca, Ill. closed at $10.78 Thursday, returning 12% over the previous year.

The company has acquired three failed Illinois banks during this credit cycle through government-assisted transactions, including Palos Bank and Trust in August, Peotone Bank & Trust in April and First DuPage Bank in October 2009.

Income Statement

First Midwest essentially broke even for the third quarter, with net income applicable to common shareholders of $11 thousand, following second-quarter net income to common shareholders of $5.2 million, or 7 cents a share, and $773 thousand, or 2 cents a share, in the third quarter of 2009.

The third-quarter loss sprang from an increase in the provision for loan and leases losses to $33.6 million from $21.5 million the previous quarter, although the provision declined from $38 million a year earlier.

John Rodis maintained his buy rating on First Midwest following the earnings release, despite calling the results disappointing as "credit costs came in higher than expected" and pointing out that nonperforming assets would have risen 17% from the previous quarter if the company hadn't sold $30 million in nonperforming loans. Rodis lowered his 2011 earnings estimate for the company to 36 cents a share from 86 cents a share, and said that while he previously thought the company might achieve normalized earnings "in the range of $1.20 - $130 a share" in 2012, the "event is now pushed back some."

Balance Sheet

First Midwest had $8.4 million in total assets as of September 30 and owes $193 million in TARP money. According to SNL Financial, the tangible common equity ratio as of September 30 was 8.37%, and while Rodis termed the company's capital ratios "solid," he also said that his firm doesn't "expect the company to repay its TARP proceeds in the foreseeable future."

First Midwest raised $207 million in common equity in January through a public offering.

The company reported nonperforming assets - including nonaccrual loans, loans past due more than 90 days and repossessed real estate and excluding assets covered by the FDIC - of $283.5 million, or 3.39% of total assets as of September 30, compared to 3.41% the previous quarter and 4.52% a year earlier.

Net charge-offs during the third quarter totaled $34 million, or 4.39% of total loans, and reserves covered 2.81% of total loans as of September 30.

Stock Ratios

Shares trade for 1.2 times tangible book value according to SNL Financial and 10.3 times the consensus earnings estimate of $1.04 a share for 2012.

Analyst Ratings

Out of 11 analysts covering First Midwest Bancorp, four rate the shares a buy and the other seven all recommend investors hold the shares.

2. PrivateBancorp

Company Profile

Shares of PrivateBancorp ( PVTB) of Chicago closed at $12.49 Thursday, returning 23% over the previous year.

The company acquired the failed Founders Bank of Worth, Ill, in July 2009.

Income Statement

Net income available to common shareholders for the third quarter was $4.5 million, or 6 cents a share, following a loss of $818 thousand, or a penny a share, the previous quarter and a net loss to common shareholders of $31.2 million, or 68 cents a share, a year earlier.

The third-quarter provision for loan losses declined to $41.4 million from $45.4 million in the second quarter and $90 million during the third quarter of 2009. Third-quarter net charge-offs totaled $49.1 million, meaning the company released $7.7 million in loan loss reserves.

The net interest margin was 3.31% compared to 3.41% in the second quarter and 3.09% a year earlier.

Following the company's third-quarter earnings release, John Rodis lowed his rating on PrivateBancorp's shares to neutral, saying that loan quality remained "challenging and total NPAs (including restructured loans) increased 18%," adding that while his firm remains "constructive on the shares and think they still have some room to the upside our revised price target no longer warrants a buy rating."

Balance Sheet

Total assets were $12.6 billion as of September 30 and the nonperforming 3.67% of total assets, rising from 3.48% the previous quarter and 3.29% a year earlier. The third-quarter net charge-off ratio was 2.17% and reserves covered 2.48% of total loans.

PrivateBancorp owes $243.8 million in TARP money. The company reported a Tier 1 leverage ratio of 10.71%, a total risk-based capital ratio of 14.40% and a tangible common equity ratio of 7.17% as of September 30. Rodis said capital levels were solid, also saying "it does not appear the Company is in a hurry to repay TARP proceeds at this time."

Stock Ratios

The shares trade just below tangible book value according to SNL Financial and for 10.6 times the consensus earnings estimate of $1.14 for 2012.

Analyst Ratings

Out of 16 analysts covering PrivateBancorp, five rate the shares a buy, while the other 11 all recommend investors hold the shares. Based on the consensus target of $14.80 among analysts polled by Thomson Reuters, the shares have 16% upside potential.

1. MB Financial

Company Profile

Shares of MB Financial ( MBFI) of Chicago closed at $16.01 Thursday, down 10% over the previous year.

The company has acquired six failed institutions from the FDIC over the past two years, including New Century Bank and Broadway Bank - two of the seven Illinois banks closed by regulators on April 23. MB Financial also acquired $3 billion in deposits when Corus Bank failed in September 2009, with the FDIC disposing of the failed condominium lender's assets separately.

Income Statement

For the third quarter, MB Financial reported a net loss to common shareholders of $5.4 million, or 10 cents a share, following net income to common shareholders of $16.6 million, or 31 cents a share, during the second quarter, when the company booked acquisition-related gains of $62.6 million. A year earlier, net income to common shareholders was $4.9 million, or 12 cents a share, reflecting acquisition-related gains of $10.2 million.

The third-quarter provision for loan losses was $65 million declining from $85 million in the second quarter, but rising from $45 million a year earlier.

Brian Martin of FIG Partners maintained his "market perform" or neutral rating on the shares, saying after the earnings release that "unlike earlier quarters weakness in CRE took center stage with a significant increase in nonperforming loans," but added that "core earnings power continued to expand" and that his firm expected the company to "return to profitability without the aid of any FDIC gains."

Balance Sheet

MB Financial had total assets of $10.6 billion as of September 30 and a nonperforming assets ratio of 4.26%, rising from 3.65% the previous quarter and 2.19% a year earlier. Third-quarter net charge-offs totaled $65 million, or an annualized 3.81% of average loans and loan loss reserves covered 2.83% of total loans at the end of the quarter.

Martin quoted the company's CEO Mitchell Feiger as being "more optimistic now about credit performance in the coming quarters" because all loan portfolios except commercial real estate were "stable or behaving as expected," and that there would be "considerably less CRE renewals coming due in 2011 vs. 2010," with the company having already addressed 16% of the renewals.

Renewals of commercial real estate loans in a market with declining property prices can be a major headache because the renewal balance may no longer be supported by the property value and the borrowers are often very short of cash or other additional collateral.

The company reported a Tier 1 leverage ratio of 10.38%, and total risk-based capital ratio of 17.14% and a tangible common equity ratio of 9.07%.

MB Financial owes $196 million in TARP money and Martin said his firm continues "to model TARP repayment in late 2012."

Stock Ratios

The shares trade for 1.2 times tangible book value and 9.2 times the $1.75 consensus earnings estimate for 2012.

Analyst Ratings

Out of 13 analysts covering MB Financial, five rate the shares buy, seven have hold ratings and one analyst recommends investors sell the shares.

Based on the mean price target of $19.65 among analysts polled by Thomson Reuters, the shares have 19% upside potential.

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

To contact Philip van Doorn, 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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