Bankers usually tout loan growth, but not Jay Fritz.

In a conference call this week, the president and chief executive officer of Midwest Banc Holdings Inc. repeatedly downplayed a first-quarter loan jump of 3.2%.

"We do not anticipate that's going to continue," he said.

Analysts said the $3.7 billion-asset Melrose Park, Ill., company has good reason to pull back: a capital cushion so thin it calls into question whether Midwest can continue making dividend payments on its government capital.

"The next few quarters are going to be critical for them in every regard," said Ben Crabtree, an analyst at Stifel, Nicolaus & Co.

Midwest — which posted a first-quarter loss of $7.4 million after paying preferred dividends — must focus squarely on improving profitability and its capital ratios, Crabtree said.

Its tangible common equity ratio is well below the 5% level that analysts view as a minimum standard. That ratio shrank 23 basis points during the quarter, to 2.35%. And though the bank unit remained well capitalized, the company's total risk-based capital ratio slipped to 9.16%, a level regulators consider only adequate.

Fritz said on the call that Midwest hired Fox-Pitt Kelton Cochran Caronia Waller LLC to review its capital alternatives. He also said Midwest would consider converting the government's preferred shares to common stock to help boost the tangible common equity ratio.

But he sidestepped a question about whether regulators were open to that option. "We communicate with them often, and certainly their input will be considered in what we do in that regard," Fritz said. "But nothing more to report."

In December Midwest received $85.5 million through the Treasury Department's Troubled Asset Relief Program, but much of the money went toward plugging a $64.5 million capital hole it had after writing down its investment in Fannie Mae and Freddie Mac preferred stock.

Before the Tarp infusion, Midwest unsuccessfully tried to raise $125 million in the fourth quarter.

Fritz, who was promoted to the top job in January, stressed on the call that Midwest had shifted from its previous emphasis on growth to a more conservative approach.

"Back to basics demands slower loan growth," he said.

He chalked up the $81.3 million of loans the company added since yearend partly to its hiring last year of a senior manager in the commercial real estate area, who brought sizable customers along with him.

Fritz said Midwest has removed loan growth from the objectives for its executives and has toughened its credit standards. "Any new transactions we do will be top-notch from a credit standpoint, and that of course is going to limit future growth."

Daniel Cardenas, an analyst at Howe Barnes Hoefer & Arnett Inc. in Chicago, said shrinking might be Midwest's best course of action.

"It is one way to improve ratios if you can't do it through earnings," Cardenas said. "You contract. Get a little bit smaller and maybe a little bit stronger."

Midwest lost 27 cents a share in the quarter, or 3 cents more than the average estimate of analysts. The company lost $6.3 million, or 22 cents a share, in the first quarter of last year, but made $3.2 million, or 12 cents a share, in the fourth quarter.

Analysts attributed the first-quarter miss mostly to a $13 million loan-loss provision, which exceeded its $4.4 million of chargeoffs and boosted reserves by 28 basis points from a quarter earlier, to 2.05% of loans.

Fritz called the provision "sizable" but said the amount continued to shrink from its peak in the third quarter. "Let's face it. Even severe recessions have to eventually run out of steam. At least we're hoping that."

Nonperforming assets increased 31% from a quarter earlier, to $110 million, or 4.21% of loans and other real estate owned. Most of the increase came from commercial and industrial loans. The chargeoff rate fell 170 basis points, to 0.7% of average loans.

"The underlying fundamentals are getting better, but the problem is they are still in the red and their capital keeps eroding. They need to get in the black and maintain it," Crabtree said.

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