Kevin Kabat got started as a banker in Michigan, and the state has been central to the renaissance of Stephen Steinour's career.

A big question in bank M&A at the moment: Is either veteran dealmaker ready to make his biggest bet yet in the Great Lakes State?

The answer should come sometime after Labor Day, when sources say the board of Citizens Republic Bancorp (CRBC) in Flint, Mich., will decide whether to sell the $9.6 billion-asset company or stay independent.

Kabat, the chief executive of Fifth Third Bancorp (FITB) in Cincinnati, and Steinour, the CEO of Huntington Bancshares (HBAN) in Columbus, are leading candidates among a handful of Midwestern players that have expressed interest in Citizens Republic, according to several investment and commercial bankers familiar with the sales process or the companies. The sources declined to be identified because the negotiations are private.

Huntington and Fifth Third have the density in the market, strong stocks and the finances to justify a takeover of the 219-branch Citizens Republic, the sources say. Citizens Republic has hired JPMorgan Chase (JPM) to solicit buyers, Bloomberg reported this month.

KeyCorp (KEY) in Cleveland and Comerica (CMA) in Dallas are interested suitors as well, though they may be hobbled by the relative softness of their shares and profits, sources say.

Representatives for Citizens Republic and the four possible suitors declined to comment or did not return calls seeking comment for this story.

A sale of Citizens Republic is not definite, sources say. It will depend on how bids are priced. The company has also been exploring raising capital to repay its $300 million in outstanding Troubled Asset Relief Program aid.

Citizens Republic is not desperate to sell. It decided to feel out buyers after the recognition of a $277 million deferred tax asset in the second quarter improved its book value, sources say. It also has a young CEO in Cathleen Nash, who is 49 and took over in 2009.

Citizens Republic is drawing broad — though not intense — takeover interest for a number of reasons, sources say. It is attractive because it is fairly large and well-positioned in Detroit and Flint. It is Michigan's No. 8 bank by deposit share, according to the Federal Deposit Insurance Corp.

The company has had its problems, though. It returned to profitability in 2011 after three-straight years of losses. In March it was released from an enforcement order from the Federal Reserve to lower bad assets and bolster capital.

Fifth Third and Huntington could reasonably pay a small premium for the company without heavy dilution to their own equity or shareholders. Their shares trade at roughly 120% of tangible book. Citizens Republic trades at roughly 113% of tangible book.

Fifth Third and Huntington have returns on assets of more than 1%, so they should be able recover capital spent in a deal in a reasonable amount of time. They could each potentially realize big savings from closing redundant branches as well. The$56 billion-asset Huntington has 312 offices in Michigan, while the $117 billion-asset Fifth Third has 251, according to the Federal Deposit Insurance Corp.

Citizens Republic would be a big investment for either. It had $723 million in tangible equity at the end of the most recent quarter. So a sale priced at or around tangible book would require doling out more than $1 billion to acquire its equity and to repay Tarp.

Kabat knows how brutal Michigan can be. He came to Fifth Third through Old Kent Financial, a Grand Rapids, Mich., bank that Fifth Third acquired in 2001. It proved to be a messy deal rife with integration, regulatory and financial headaches that took Fifth Third years to resolve. Since Kabat became CEO in 2007, Fifth Third has focused on doing deals in the Southeast.

A big deal in Michigan could hinder his ability to participate in Florida's ripening M&A scene, experts say.

Steinour knows Michigan. He is also adept at expanding into new markets via acquisitions, having led Citizens Financial Group's foray into Pennsylvania in the early 2000s.

Steinour left Citizens Financial as CEO in 2008 and was named Huntington's CEO in 2009. Since then, Huntington has acquired two failed banks in Michigan, launched a supermarket branch network there and opened new commercial banking operations in the state.

But those were safer bets. Steinour — who has assembled an in-house M&A team — is wary of threatening the turnaround momentum of his franchise, people close to the company say. He has proven he can grow the bank gradually, and would prefer small, low-risk deals for failed banks.

Yet there are fewer failed banks available, and Steinour is deeply committed to expanding in Michigan. The state has few other sizable independent takeover targets. The short list includes Flagstar Bancorp of Troy (FBC) and the Detroit-area operation of Citizens Financial. The latter would be a ripe takeover target if its owners were willing to sell investment bankers say.

Other potential suitors face more challenges.

KeyCorp has a lot of capital but it may have to improve its profitability before it can justify big strategic gambles. Comerica is still recovering from the financial sting from its takeover last year of Sterling Bancshares of Houston. Both KeyCorp and Comerica are trading at small discounts to their tangible book values. That restricts their buying power.

PNC Financial Services Group (PNC) has ruled out large acquisitions as it works through problems from its takeovers of National City in Cleveland and RBC Bank (USA) of Raleigh, N.C.

U.S. Bancorp is the dominant bank in Wisconsin. Whether it wants to branch into Michigan is an open question, given its preference to grow in California and other markets with better long-term demographics.

FirstMerit (FMER) of Akron, Ohio, meanwhile, has valuable currency. But a game-changing takeover of a bank like Citizens Republic would be out of character for risk-averse Chief Executive Paul Greig and his management team.

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