No banking company was hit harder by the government takeover of Fannie Mae and Freddie Mac than Midwest Banc Holdings Inc. in Melrose Park, Ill., and now the Treasury Department is coming to its aid.
The $3.6 billion-asset company said Monday that it is set to receive an $85.5 million capital infusion through the Treasury's Capital Purchase Program in early December. The bulk of the funds would go toward replenishing capital depleted by writedowns on Fannie Mae and Freddie Mac investments that lost much of their value when the government-sponsored enterprises went into conservatorship Sept. 7.
"We were put into a hole" by the takeover of the Fannie and Freddie, James Giancola, Midwest's chief executive, told analysts and investors on a conference call Monday. "In arrived Treasury to the rescue."
Bradley Vander Ploeg, an analyst with Raymond James & Associates in Chicago, agreed the agency may have made the offer to Midwest because its dire situation was not entirely of its making.
"They were dealt this killing blow from the GSEs. I definitely think that factored into them getting the [Treasury] money," Mr. Vander Ploeg said. "They do have a good rapport with the regulators and were likely all over it as details came out about the program."
The investment is nothing short of a lifeline for Midwest, which had hit a wall in its efforts to raise up to $125 million of capital on its own, fueling speculation that it might be forced to sell itself.
The Treasury program is designed primarily to encourage healthy banks to increase their lending, but in investing in Midwest, the government is showing a willingness to prop up banks hobbled by impairment charges on their investments in Fannie and Freddie.
To date, roughly three dozen banking companies have at least been preliminarily approved to participate in the Treasury program.
The $64.5 million impairment charge on the preferred Fannie and Freddie shares was a major driver in Midwest's $159.7 million loss in the third quarter. Also contributing were an $80 million goodwill impairment charge for the decline in its market capitalization and a $42 million provision for loan losses, an increase of 2,230% from the third quarter of 2007.
Nonperforming assets increased 46% from a year earlier, to $68.5 million.
Still, the company would have remained well capitalized if not for its Fannie and Freddie holdings; before the GSEs were seized, the holdings made up nearly one-third of its tangible capital, according to a report from KBW Inc.'s Keefe, Bruyette & Woods Inc.
Only one other company, Gateway Financial Holdings Inc. of Virginia Beach, had a similar amount of exposure to the GSEs. In September, Gateway announced it was selling itself to a rival, Hampton Roads Bankshares Inc.
Midwest ended the third quarter with a total risk-based capital ratio of 8.04%.
The $85.5 million it is getting from the Treasury — the maximum amount for which it was eligible — is expected to boost the company's ratio to 11.13% of assets. Midwest Bank and Trust Co., its banking subsidiary, remained well capitalized at 10.27% in the quarter.
Midwest originally planned to patch itself. On Sept. 16 it announced it was raising up to $125 million through a convertible preferred stock offering. It was expected to close by the end of the third quarter, but that never happened.
Mr. Giancola said in the conference call that while Midwest had some commitments, "the pricing was terrible" and it did not have an anchor order. So, the company "went to the sidelines," to wait and see what kind of relief would be available under the bailout plan.
Mr. Giancola said in a conference call and a follow-up interview that he is counting on the Treasury infusion to spur additional interest from investors in helping it raise another $40 million it says it needs to accelerate its growth. "We look at it as the anchor order that we needed," he said on the call. "It gives us a negotiating position."
With the Treasury money improving Midwest's capital position, investors will likely view Midwest as "not quite as desperate," Mr. Vander Ploeg said.
"Hopefully the capital puts them in a position of strength," he said. "I think it should restore confidence that this is an institution that is going to remain solvent and survive and it's going to be an attractive investment opportunity."