Bullish Analyst Unrattled By Surprise Mid Am Loss

Such is the state of banking that even unexpected losses don't always alter a bullish assessment of a banking company.

Though Mid Am Inc. announced an anticipated $3 million third-quarter loss last Wednesday -- triggering a two-day, 16% drop in its share price, from $18.75 to $15.75 -- analyst Chris Caton of the Ohio Co. reiterated his buy recommendation.

"This is the first big hit they've had," he said. "Other banks have had their losses earlier." Mid Am's stock was trading Monday at about $17 a share.

No Further Woes Foreseen

Mr. Caton said he believes the loss will end the company's loan problems. Mid Am's management has always been quick to confront problems, he said, and given that approach, the bank is unlikely to see significant loan problems in the fourth quarter.

The loss will wipe out about six months of earnings, said Edward J. Reiter, the company's chairman.

Moreover, it comes when other Ohio banks are either thriving -- in the case of Banc One Corp., Columbus, and Fifth Third Corp., Cincinnati -- or at least improving on last year's results.

Mid Am, a Bowling Green, Ohio-based, four-bank holding company with $1.2 billion in assets, is smaller than most of its regional rivals. Its third-quarter loss can be traced to several big loans gone bad, but with only $850 million in loans outstanding, a few bad credits can wreck performance. While the bank has been acquiring thrifts in the region, its loan problems came chiefly from the lead bank.

Loss Not Foreseen

Observers did not expect the loss. Indeed, the company, which focuses on the retail and middle markets in Toledo, Ohio, has traditionally been a conservative and successful lender.

In the year's first half, for example, the Bowling Green bank had a better performing-loan portfolio than most of its better known peers, including Banc One and Ameritrust Corp., Cleveland. But that record of soundness ended last week.

The loss stemmed from a small number of sizable commercial loans, said Mr. Reiter, the chairman. Rather than waiting another quarter to see whether the borrowers could pay, he announced the potential losses as soon as they came to light. Analysts said the bad loans are most likely to be in real estate.

Mr. Reiter said he does not anticipate a fourth-quarter loss. But if the Toledo economy took a turn for the worse, more borrowers might default.

Toledo Economy Blamed

"The community has some serious economic problems," he said. "It's a tough time for small businesses."

Toledo's unemployment rate is about 13%, far above the national average. But other banks that lend in the area have reported no significant loss.

Society Bank, which acquired Trust Corp., the dominant Toledo banking company two years ago, has cleaned up its troubled-loan portfolio. Analysts said the Toledo market has not prompted Society to increase loan-loss reserves recently.

Even before its announced loss, Mid Am showed some signs of portfolio weakness.

1st-Period Loss Provision

In the first quarter, for example, its provision for loan losses grew 140% from the previous quarter, reflecting more nonperforming loans. Nonperformers ballooned by 17.2%, to 1.85% of total loans and leases. Mr. Caton, the Ohio Co. analyst, noted in a report that the loan-loss reserve was slim.

Nor is the loss' timing peculiar, said analysts. Mid Am lends to small and middle-market companies. In many cases, these businesses are just squeaking by during the recession. A small downturn can lead to failures.

Mr. Reiter dismissed the notion that his company is in trouble. Regulators, who finished their exam March 31, have not reacted to the loan loss, he noted, nor has he had feelers from other banks that might see the lower stock price as an invitation to bid for Mid Am.

The bank's capital ratio remains strong, at 9.5%, and Mr. Reiter said he plans to acquire banks or thrifts in Ohio and Indiana.

The losses, however, have forced Mid Am to change the way it evaluates loan applications. From now on, Mr. Reiter said, the key to making a loan will be the borrower's cash flow. That may leave some borrowers, such as doctors who wish to set up a practice, unable to obtain loans. Often, these people have negative net worth and no cash flow.

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