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National City Buys MidAmerican Bank
May 2, 2007

National City Buys Mid American Bank

News that the $140 billion asset National City Corp (NYSE:NCC) is acquiring $11 billion asset MAF Bancorp Inc. (Nasdaq: MAFB) caused us to pause. Cleveland-based NCC has been showing signs of life after dropping below peer in terms of asset returns during 2005 and 2006. Despite continuing pain from unwinding its subprime mortgage portfolio, with an ROA of 1.4% and ROE of 15% for 2006, NCC ended the year half a standard deviation above peer and hopefully headed for the 2+ SDs above peer performance seen prior to 2005.

NCC sported a gross loan yield of 733bp at the end of 2006 and a WAM of just 3.9 years, making it a favorite among higher-risk regional banks. The "BB" default experience on NCC's loan book is almost a full SD above peer, as is the 69% Loss Given Default calculated by the IRA Bank Monitor, using bank unit data from the FDIC. The announcement by NCC of a 14% chargeoff in subprime in Q1 is not welcome, but it shows that NCC is dealing with the problem.

But now comes MAFB, a federally chartered savings bank with a poor record of financial performance. As one of the smaller thrift holding companies in the above $10 billion mega group, MAFB seemingly has made an art form out of mediocrity, at least looking at the bank's financial statements to federal regulators. The ROA of 0.85% and ROE of 8.18% for 2006 are both below peer and have been so for many years. The gross loan yield of 632bp is above peer, but somehow MAFB has not been able to translate that fact into stronger profitability.

With an efficiency ratio of 55% and a ratio of net interest income to gross non-interest income of 3.8:1, MAFB has grown increasingly dependent on shrinking interest rate spreads for its revenue. The Mid American Bank, FSB, unit of MAFB has delivered at or below peer ROA and ROE since 2000, albeit with a default rate also well below peer at just 6.9bp in 2006 vs. 16bp for the peer group. Perhaps too little risk taken?

The task for NCC is going to be to implement change quickly at the 82 MAFB branches in Milwaukee and Chicago, the ostensive reason for this deal. With only 64% core deposit funding and more than 20% of liabilities funded off the FHLB of Chicago and paired against a large, low-yielding MBS portfolio, NCC could cut the bank's assets down sharply. Along with cost savings in the back office, by shedding low yielding assets, NCC may possibly turn this acquisition into a winner. But in the near term, the risk is that the pedestrian performance of MAFB's lead unit will slow down NCC.

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