UBS Securities Corp. has initiated coverage of First of America with a buy recommendation, saying the aggressive acquisitions policy that sourced investors in the past is now paying off.

Analyst Michael L. Mayo said he thinks the management of First of America, based in Kalamazoo, Mich., "has matured in its approach to acquisitions and will structure new transactions to minimize dilution."

First of America's stock was up 75 cents, to $39.375 per share, in late afternoon trading Wednesday.

Mr. Mayo said he thinks the share price can reach $48 in 12 months, giving the stock upside potential of 22%.

The analyst said he recommended the bank as a high-quality institution with a strong consumer orientation. Among the banks followed by UBS, First of America is second only to Banc One Corp. in the percentage of loans to individuals.

In addition, the bank will benefit from past acquisitions, from niche businesses such as mutual funds - First of America ranks fourth among banks in mutual fund assets - and from technology investments for its branches.

First of America upset some investors by Making two large acquisitions in 1989 and 1992.

Tale of 2 Acquisitions

The company bought $2.3 billion-asset Midwest Financial Group In.c Poria, III., in November 1989, paying $238 million. The price equaled 148% of Midwest's book value and 13 times its earnings.

In May 1992, it bought Security Bancorp., Southfield, Mich., for $552 million, or 281% of that bank's book value and 18 times earnings. That purchase price surprised Wall Street. At the time, anylysts estimated the deal was 10% dilutive. First of America's stock price, which fell 15% after the announcement, underperformed for seven months.

Critics said the two deals would be permanently dilutive for First of America, and the Michigan bank's stock has tradd at a 10% discount to other regional banks on a price-to-earnings basis.

But Mr. Mayo said the Midwest Financial acquisition, after a slow start, is now adding to earnings. Cost savings were achieved, and loan growth is improving, he noted.

Favorable Thrift Deal

Moreover, that deal paved the way two years later for First of America's govenment-assisted acquisition of Champion Federal Savings and Loan Association, which added $2.1 billion to First of America'sk assets in Illinois.

The Midwest acquisition was 8% accretive when benefits are added from the Champion transaction, Mr. Mayo noted. The thrift deal helped double First of America's mortgage originations.

Mr. Mayo also said the Secrity transaction "is less dilutive than critics contend." He estimated the transaction is now only 2% dilutive.

Security doubled First of America's market share and offices in southeast Michigan and tripled its credit card outstandings, to more that $1 billion, he noted.

The analyst said he expected the bank's "poor acquisition reputation" to change "because management is sensitive to this concern." Investors who held the stock from the low point after the Security deal have enjoyed a 50% gain in value, he noted.

Future deals likely will be for consumer-oriented banks, thrifts, or nonbanks, he said Mr. Mayo said he expects First of America to acquire a $1 billion to $3 billion-assets institution in eithe Michigan or Illinois within a year.

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