In two months Midwest Banc Holdings Inc. in Melrose Park, Ill., has gone from a company with big growth plans to one that may not be able to survive on its own.

The $3.7 billion-asset Midwest is facing a potentially damaging capital hit relating to its investments in Fannie Mae and Freddie Mac preferred stock, and its efforts to raise up to $125 million of fresh capital appear to have stalled.

Observers said that regulators could give Midwest more time to raise funds, but they also acknowledged that investors — who are very selective these days — might be turned off by Midwest's lackluster earnings, rising levels of troubled loans, and plummeting stock price. If Midwest fails to reach its capital targets, its only option might be to sell itself, said Brad Milsaps, an analyst at Sandler O'Neill & Partners LP.

Midwest was not the only bank or thrift company whose investments in Fannie and Freddie preferred shares were nearly wiped out when the government seized the mortgage giants last month, but it was among the hardest hit. The one other publicly traded bank company, Gateway Financial Holdings Inc. in Virginia Beach, that had more exposure to the shares agreed two weeks ago to sell itself to a rival bank.

On Sept. 16, Midwest said that it would write off $67 million of its Fannie and Freddie holdings. Though the charge would eat into its capital, the company intended to replenish it through a stock offering that it expected would close by the end of the third quarter.

Now, nine days into the fourth quarter, there is no indication that the stock sale has been completed.

It is unclear what Midwest's capital ratios would look like if the stock sale fails, though Mr. Milsaps said they are likely to fall below regulatory minimums. The tax benefit included in the Treasury's bailout deal that lets banks holding Fannie and Freddie preferred shares record ordinary losses will help Midwest but not enough to keep it in good capital standing, he said.

The tax break "is not a panacea to plug the loss," he said.

Mr. Milsaps said the silence coming from Midwest since mid-September could be an indication that it is seeking a buyer.

"I think they have to be considering it, given that it has been three weeks with no new news coming from the company," he said. "It is probably a part of what they are exploring right now."

However, Mr. Milsaps said, finding a good match is a challenge. None of its Chicago-area peers is sitting on a "war chest of excess capital," he said, and though a foreign company could snap it up, the buyer would probably have to infuse it with cash.

"It's an awfully tough market," Mr. Milsaps said.

Midwest's president and chief executive, James J. Giancola, did not return calls from American Banker, but when the offering was announced, he said that funds from it would not only shore up capital but also help fuel an effort, unveiled in August, to boost commercial and industrial lending and beef up wealth management capabilities.

"There is so much opportunity in the Chicago area right now," Mr. Giancola said in his Sept. 16 press release. "With the completion of this offering, we will have greater financial resources to capitalize on these market opportunities."

Michael Iannaccone, a managing director at Performance Trust Capital Partners, a Chicago investment firm, said the fact that it has begun a stock offering could be enough to quell the regulators for now.

"I know from our exposure to other clients that, as long as they have a plan in place, the regulators can give them an extension before they take action," Mr. Iannaccone said. "They might give them a month or maybe longer."

Regulators might be lenient because Midwest would probably not be in such dire need of capital if Fannie and Freddie had not faltered, he added.

"They know it's not [Midwest's] fault," Mr. Iannaccone said.

Still, the offering's structure could work against Midwest, he said. The company is offering convertible preferred shares that require common shareholder approval to convert. Given Midwest's trading price — at $3.58 late Wednesday it is down 76% in the last year — and the $110 million to $125 million it is hoping to raise, the holders of its 27.8 million common shares would face severe dilution if they approved a conversion.

"Investors aren't interested in something that could potentially convert," Mr. Iannaccone said. "The question is, why would you take that risk?"

Both Mr. Milsaps and Mr. Iannaccone also pointed to Midwest's lack of earnings power. Midwest Bank and Trust Co., its banking subsidiary, had a net interest margin of 3.02% in the first six months of 2008, compared to an average of 3.18% among Illinois banks with $1 billion to $10 billion of assets, according to Federal Deposit Insurance Corp. data. Its return on assets was 0.08%, compared to peers' 0.43%.

Also last month, Midwest said that it expected to increase its allowance for loan losses in the third quarter to 1.6% of total loans, from 0.9% three months earlier. Investors "are asking themselves, 'Do I really want to invest $110 million into this company?' " Mr. Iannaccone said. "Wouldn't they rather invest $110 million in a bigger or more solid company?"

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