By Becky Yerak | Midwest
Bank, a $3 billion-asset lender in danger of being seized soon by the
government, has mounted a long-shot effort to remain independent by
filing an application for “open-bank assistance” with U.S. banking
regulators, people familiar with the situation say.

Open-bank assistance hasn’t been used on a widespread basis since the
late 1980s by the Federal Deposit Insurance Corp., which in recent years
has built a large infrastructure to put banks into receiverships and
sell their assets to healthy banks. A major criticism of open-bank
assistance generally is that it benefits shareholders of failing banks.

Midwest, owned by Melrose Park-based Midwest Banc Holdings, has an interested investor lined up to inject capital on the condition that regulators approve its open-bank assistance effort, a source says.

The group is trying to convince the regulator that open-bank assistance would be a less-costly option — by at least a couple hundred million dollars — than shutting down the lender, putting it into receivership and selling its assets and deposits.

While the open-bank assistance push is likely to have only a small chance of succeeding, sources say, it shows that Roberto R. Herencia, who a year ago was recruited for the top Midwest job, has left no stone unturned in trying to save the bank. Midwest is trying to raise $125 million to $250 million in capital.

An FDIC seizure remains the likeliest outcome, and interest is intense. At least 10 parties — strategic and financial buyers — have submitted bids for Midwest to the FDIC, a person familiar with the process said. Midwest’s deposits, branch network and some of its employees are considered more desirable than those of many other shaky banks.

Financial investors that have at least looked at Midwest include Flexpoint, Lone Star, Starboard, the Pritzker family’s investment group and Madison Dearborn. Goldman Sachs also did due diligence on Midwest but is unlikely to pursue a bid, according to mergers and acquisitions trade magazine dealReporter.

Potential strategic buyers include First Merit, an Ohio-based bank that has been trying to crack the Chicago market, Wintrust, First Midwest, MB Financial, U.S. Bank and Harris.

While a deal brokered by the FDIC is by far the likeliest outcome, the request for open-bank assistance is pending.

With open-bank assistance, the FDIC provides financial assistance to a lender to keep it from failing. It can be structured in many ways, but generally the FDIC requires new management, which Midwest got about a year ago, and an assurance that past shareholders will not benefit.

Midwest recently got shareholders to approve a move to boost the number of common shares to 4 billion from 64 million, a process that greatly dilutes existing investors; that would blunt criticism that existing shareholders are being bailed out. In open-bank assistance agreements, the FDIC also might cover losses for a certain pool of assets for a certain time.

One of the last banks to receive anything like open-bank assistance was Citibank, whose potential failure would have posed a systemic risk to the financial system.

Likewise, ShoreBank, also put up for bid last Friday by the FDIC, has considered asking for open-bank assistance, a person familiar with its situation said. Bank industry observers wonder what its investors, which include Chase, Bank of America and Citibank, will do to try to protect their investment in the lender to lower-income urban neighborhoods. The FDIC is encouraging bidders of the more desirable Midwest to also consider bids for ShoreBank.

Midwest’s problems became evident in the fall of 2008.

That’s when Fannie Mae and Freddie Mac went belly up, and Midwest eventually suffered an $82 million loss on its preferred shares in the government-sponsored enterprises.

A few months later, Midwest became one of the first U.S. community banks to receive money in the Treasury’s Troubled Asset Relief Program. It received $85 million.

But with a downturn in the real estate market, the bank has continued to have problems with its heavy concentration of real estate loans. It has not been paying dividends to the government, so its failure, unlike that of many other banks, could cost the taxpayers’ money.

But local bank industry observers say Herencia has made the bank more attractive to potential buyers, which could help to limit the losses suffered by the FDIC’s insurance fund,  financed by premiums paid by banks.

Herencia has cut costs and staffing by more than 20 percent and is one of the few heads of smaller banks to persuade the U.S. Treasury to convert $85 million in preferred shares issued under TARP to a new series of preferred stock that could ultimately be converted to common equity, which is viewed more favorably by regulators. The bank has also attached a workout scenario to every troubled loan, which some believe will make those problem credits easier to deal with when a new owner steps in.

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