A year after getting a lifeline from the Treasury Department, Midwest Banc Holdings Inc. once again finds itself in a precarious capital position.

Credit quality at the Melrose Park, Ill., company took such a sharp nosedive in the third quarter that analysts said it is technically insolvent, with a negative tangible common equity ratio. The $3.5 billion-asset company is also undercapitalized by regulatory standards.

Though Midwest has sought additional government help — it is one of the few companies pursuing the Capital Assistance Program — the company has yet to report any headway. Now it plans to try a stock offering, but observers said it needs to hurry.

"I think they are just trying to pull all the levers that they can to stay in business," said Daniel Cardenas, an analyst at Howe Barnes Hoefer & Arnett Inc., who dropped coverage of Midwest this summer. "They are definitely going to need to execute on one of those pretty quickly."

The company's bank unit remained well capitalized at the end of the quarter, but could be required to maintain higher capital ratios soon. Midwest said it is expecting a supervisory agreement after a recent exam.

To deal with its capital hole, the company is asking shareholders to convert preferred shares into common equity. It is also asking the Treasury to allow it to convert the $84.8 million it received from the Troubled Asset Relief Program to common equity through CAP.

In a proxy statement filed with the Securities and Exchange Commission this week, the company moved toward a stock offering by asking its shareholders to approve a reverse stock split and to allow it to increase the number of common shares to 4 billion, from 64 million.

The frenzy to find capital is a familiar feeling to Midwest. In September of last year, after a $64.5 million writedown on Fannie Mae and Freddie Mac securities, the company launched an unsuccessful effort to raise $125 million in capital — at the height of the market gridlock. In November, the company was among the first to receive a Tarp infusion.

The money was enough to plug the capital hole created by the writedowns, but left little to spare as a buffer for credit costs, which have been a doozy this year.

In the third quarter Midwest's nonperforming assets jumped threefold from a year earlier and 71% from the end of the second quarter, to $214.9 million, or 6.06% of total assets. This ratio was 3.52% at the end of June.

Its loan-loss provision of $36.7 million was down 12% from a year earlier, but up 83% from the second quarter.

All told, the company lost $41.3 million for the quarter, compared with a loss of $159.7 million a year earlier.

Midwest declined to comment for this article.

Its executives said in a conference call Wednesday that an aggressive stance on credit quality, including two independent loan reviews, caused the spike in reported nonperformers.

"We understood well that the way forward to building a new foundation was to get in front of issues, to stop ducking and weaving and to act urgently," said Roberto R. Herencia, Midwest's president and chief executive, who joined the company in May.

But for a company angling for a capital raise, those figures are headed in the wrong direction, said Eliot Stark, a managing director at Capital Insight Partners, a Chicago investment bank.

"The doors have opened for community banks, but more than anything investors are looking for some clear signs that the bottom has been hit," Stark said. "If your numbers show the opposite of that, it is going to be dicey."

More government help also seems unlikely, observers said, given the impending regulatory action and Midwest's negative 0.01% tangible common equity ratio.

Rob Klingler, an associate in the Atlanta office of the law firm Bryan Cave LLP, said regulators have begun over the past year to give some weight to tangible common equity ratios, though they previously focused just on the regulatory capital ratios.

"The analysts for the last year or so have been saying the key characteristic is tangible common equity, and the banking regulators essentially acknowledged the importance of that when they ran the stress tests, because those are tied to tangible common equity ratios," Klingler said.

The stress tests of the 19 largest banking companies, whose results were released in May, suggested regulators want common equity to account for two-thirds of overall Tier 1 capital, Klingler said. They also implied a regulatory comfort zone with a 4% tangible common equity ratio.

Several observers said CAP is widely seen as unnecessary because companies have begun raising capital on their own in common stock offerings.

"The capital markets have returned. They're not going gangbusters, but they're back," Klingler said. As a result, "the program has just gone completely dormant."

A Treasury spokeswoman said Thursday that no investments have been made so far under CAP, which was introduced in February, and that all the capital programs would be wound down for large banks at the end of year.

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