CHICAGO - The merger and acquisition wave has conspicuously missed America's Second City, but that could soon change.

Most industry observers agree that the Chicago area, by far the nation's most fragmented banking market, is poised for consolidation.

"As soon as stock prices show a slight improvement, there's going to be formidable competition to buy banks in this area," said Ken Skopec, president of $1.8 billion-asset Midcity Financial Corp. in Chicago.

There should be no shortage of available sellers. Illinois has more banks and thrifts than any state: 846, or 8.3% of the 10,151 U.S. banks and thrifts, according to the Federal Deposit Insurance Corp. And Chicago alone has 84. New York City- which is almost three times larger - has 93.

Chicago is so fragmented partly because of state laws that encouraged unit banking until the mid-1980s. Not until 1993 were Illinois banks permitted to open branches statewide.

That has not hindered consolidation elsewhere in urban Illinois, said Don McKay, an attorney at Vedder Price, a Chicago law firm that specializes in mergers and acquisitions. For instance, the top five banks in Illinois' second-largest city - Rockford - control 68% of the area's deposits, compared with 50% controlled by Chicago's top five, Mr. McKay said. Most of the state's remaining community banks, therefore, are spread throughout the Chicago metropolitan area or in rural towns - where mergers and acquisitions have been rare.

"Most Illinois markets have the same level of concentration as the rest of the country," Mr. McKay said.

There's another reason Chicago appears ripe for consolidation. It is one of the few major U.S. metropolitan areas not dominated by a handful of players, according to research by the New York investment bank Keefe Bruyette & Woods. The company found that the five leading banks in the top 40 metropolitan areas on average control 73.2% of their cities' deposits.

Chicago community bankers, meanwhile, say they stand to gain whether they sell out or stay independent in the next consolidation wave. Labe Bank said it has nearly tripled its assets in seven years, thanks largely to sales of Chicago banks.

"Every time there's another merger or acquisition, it brings a smile to our face," said Frank Kross, president of $221 million-asset Labe. "We know we'll pick up a lot more business and a lot more customers."

Mr. Kross could soon be smiling for a different reason.

A few regional banks such as Old Kent Financial Corp. of Grand Rapids, Mich., have bought their way into Chicago in the last two years, paying as much as 2.5 times book value. Others, including Fifth Third Bancorp of Cincinnati and Cleveland-based National City Corp., also have expressed interest in the Windy City.

In addition, local players such as Midcity have announced plans to do some shopping. Midcity, which was involved in one of the region's few in-market deals of late when it bought Damon Financial Inc. in Schaumburg, Ill., said it considered selling itself this year but decided, after doing some market research, that it could improve its stock faster by purchasing rather than being purchased.

"If it's not a good time for us to sell, maybe it will be a good time for us to buy," Mr. Skopec said.

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