The three main players in the Chicago area all bought the bulk of their market share, according to KBW. JPMorgan Chase ( JPM) has the top market share in the region, with 22.5% of deposits as of June 30, having acquired Bank One (along with its CEO, James Dimon) in 2004. Bank of Montreal ( BMO) is in second place, with 11.6% of deposits, having acquired Harris Bank in 1984, Amcore in 2010 and Marshall & Ilsley in 2011. Bank of America is in third, with 7.3% of deposits, after acquiring LaSalle in 2007. Northern Trust of Chicago has the fourth-place share in the local market, at 7.1%.

McGratty also pointed out that "50% of the companies with a top-10 deposit market share in 2000 and 30% in 2007 are no longer independent."

All these statistics underscore just how ripe Chicago is for consolidation. McGratty also said that after the top four players in the region, "there is a fairly sizeable drop-off ... which we see as an opportunity for other banks."

When considering who the area buyers might be, McGratty said "we do not see either JPMorgan or Bank of America as active consolidators this time around," but Bank of Montreal's management "has indicated interest in continuing to add distribution channels to drive more market-share gains in downtown Chicago via organic or acquired growth, as well as filling in its suburban Chicago footprint." The analyst also listed PNC Financial Services Group ( PNC) and Fifth Third Bancorp ( FITB) among "the most likely buyers in Chicago."

According to KBW, "scarcity value is particularly high for the most liquid, locally based," small and mid-cap Chicago banks:
  • Wintrust Financial (WTFC) of Rosemont, Ill., with $17.6 billion in total assets as of Dec. 31, and a 4% Chicago-area deposit market share as of June 30.
  • PrivateBancorp (PVTB) of Chicago, with $14.1 billion in assets and a 2.9% deposit market share.
  • MB Financial (MBFI) of Chicago, with $9.6 billion in assets and a 2.4% deposit market share.
  • First Midwest Bancorp (FMBI) of Itasca, Ill., with $8.1 billion in assets and a 1.9% deposit market share.
  • Taylor Capital Group (TAYC) of Rosemont, Ill., with $5.8 billion in assets and a 1% deposit market share.

MB Financial

Shares of MB Financial closed at $23.78 Friday, returning 20% this year, following a 16% gain in 2012. The shares trade for 1.6 times tangible book value, and for 13.1 times the consensus 2014 earnings estimate of $1.82 a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $1.75.

Based on a quarterly payout of $0.10, the shares have a dividend yield of 1.68%.

The company earned $90.4 million, or $1.60 a share, in 2012, improving from $33.7 million, or 52 cents, in 2011. The main factor in the earnings increase was lower credit costs. During 2011, MB Financial's provision for credit losses totaled $120.8 million. During 2012, the company actually transferred $8.9 million from loan loss reserves.

The company reported a 2012 ROA of 0.95% and a return on average common equity of 7.05%. The return on average tangible common equity was 10.87%.

McGratty said that "for investors looking to play an M&A rebound in Chicago, outperform-rated MBFI is our preferred vehicle."

After purchasing six failed institutions from the FDIC in 2009 and 2010, "more recently MBFI has taken a pause from bank M&A and recent management commentary suggests that incremental assisted transactions are less likely," McGratty wrote. "In fact, the company switched gears in the fourth quarter of 2012 when it acquired Celtic Leasing in a transaction that is expected to augment its fee-income platform going forward."

With the company getting close to the $10 billion asset threshold, after which it will face a greater regulatory burden, "there has been considerable speculation about independence at MBFI," according to McGratty. "Management is fairly vocal about its fiduciary responsibility to shareholders and we believe there would be considerable interest in the bank should the board elect to pursue a sale," he wrote.

KBW's price target for MB Financial's shares is $26. McGratty said "we could certainly envision a takeout value above these levels should a partnership with a larger regional bank occur."

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

>Contact by Email.

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 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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