Midwest Banc Holdings Inc., which just a few months ago said it was on the prowl to buy ailing banks, is now concentrating on staying in the black.

"Over the next six months, my focus is on eking out as much profit as possible," said Jay Fritz, who was promoted to president and chief executive officer of the $3.6 billion-asset Melrose Park, Ill., company last week.

His predecessor, James J. Giancola, worked on nearly two dozen bank acquisitions over his career, including two while at the helm of Midwest. But Mr. Fritz said he is counting entirely on organic growth.

He hopes to recruit customers for Midwest's commercial and industrial, commercial real estate, and wealth management businesses through referrals from current customers.

"I think 2009 is going to be a year of building upon the strength of existing relationships and, in doing so, growing from our existing book of clients," Mr. Fritz said.

To realize those opportunities, analysts say, Midwest needs to get its house in order.

With a total risk-based capital ratio of 10.54%, the company's Midwest Bank and Trust Co. has little wiggle room above the regulatory threshold for being considered "well capitalized." Its credit quality is middle-of-the-road when compared with others in the Chicago area, but it is showing signs of weakness. And analysts said Midwest Banc Holdings needs to cut costs, but not so much that it would hinder growth.

"Every bank in the world is talking about C&I, and Midwest is in a position to do it," said Ben Crabtree, an analyst at Stifel, Nicolaus & Co. Inc. "Unfortunately, they need to be profitable to stay in business long enough for that to pay off."

Midwest's fourth-quarter earnings rose 5% from a year earlier, to $4.4 million. Excluding a $16.6 million tax benefit related to a new law that allows for different treatment of losses on Fannie Mae and Freddie Mac investments, the company would have lost $12.2 million.

Mr. Fritz said it has more than enough capital to weather this year, because of an $85.5 million infusion of Troubled Asset Relief Program funds from the Treasury Department in November. Midwest intends to build its capital position "slowly and patiently" as it increases profits.

Credit problems have risen, but the company is trying to sell credits that show signs of weakness, he said, and it took aggressive steps to reserve in the fourth quarter.

Its allowance for loan losses climbed 69 basis points, to 1.77% of loans.

"I think those steps have positioned us well for 2009," he said.

Midwest will not try to raise capital privately in the foreseeable future, Mr. Fritz said, citing the massive dilution such efforts would bring.

The company also has $40 million it can funnel down to the bank if necessary, he said.

Mr. Fritz also said he plans to increase interest income by adding rate floors to floating-rate loans, to ensure the company is "getting paid for the risk we take" on loans.

On the interest expense side, he called building core deposits "a top priority."

Loan officers are calling on borrowers not only to make sure their deposits are held at Midwest, but also to get business owners' personal deposits.

Midwest has launched a retail banking advertising campaign that touts the company's 50th anniversary.

Mr. Fritz said the Tarp infusion will produce a "halo effect" that will draw in depositors.

It also plans to open a downtown Chicago headquarters to gain visibility among business clients and wealthy individuals, he said.

The company is also reining in expenses.

JoAnn Sannasardo Lilek, Midwest's chief financial officer, said during its earnings conference call last week that its head count declined by 14 people during the quarter, to a total of 536, and that it shuttered two unprofitable branches.

Mr. Fritz said no further cuts are expected.

Instead, Midwest will "do more with the same resources," he said. "Sacrifices are going to have to be made." For example, he will not receive a bonus this year.

Observers have said commercial and industrial loans might be the next victim of the weakened economy. Mr. Fritz said that Midwest is being highly selective about the loans it makes, and that it would be willing to "give up rate to ensure higher-quality loans."

The company plans to build on its relationships in sectors that have not been hurt as much the recession, such as medical products and tool and dye manufactures, to find other quality clients, he said.

Mr. Fritz would not say how much Midwest plans to increase lending this quarter or this year. The loan portfolios was flat in the fourth quarter.

Mr. Crabtree wrote in a research note issued last week that he expects Midwest to lose money this quarter and next and post a full-year loss of 38 cents a share but return to profitability by the second half.

Daniel Cardenas, an analyst with Howe Barnes Hoefer & Arnett Inc. in Chicago, said Midwest needs to focus on profitability to increase its tangible equity ratio, which was at 2.6% at yearend, or about half of what he considers healthy. He hopes "that they do it the right way and not at the cost of proper provisioning."

Midwest's fourth-quarter provision rose more than fourteenfold from a year earlier, to $20 million. Nonperforming assets rose 65%, to $84.1 million at yearend. As a percentage of total assets, nonperformers rose 97 basis points, to 2.36%.

In the months following the Tarp infusion, Mr. Giancola said Midwest would likely pursue private capital at some point to finance acquisitions, particularly those assisted by the Federal Deposit Insurance Corp.

In September, after announcing that it was writing off its $64.5 million investment in Fannie and Freddie, Midwest unsuccessfully tried to raise $125 million of private capital.

At the time, investors and analysts speculated that the company was seeking a buyer or could fail if it did not find capital.

The hole left by GSE losses was plugged by the Treasury infusion, though Mr. Giancola said last month that news coverage of his company caused "reputational damage." Midwest's stock lost nearly 90% of its value over the last year.

During last week's conference call, a handful of investors called for Mr. Giancola to apologize for the weak fourth-quarter performance. One asked him, "Does the board intend to keep you on as CEO?"

Mr. Giancola resigned the next day. He did not respond to a message left at his home by press time.

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