Changes Afoot at Midwest Banc Holdings, Inc.

In early December, Illinois-based Midwest Banc Holdings, Inc. got $84.8 million from the Treasury Department's Troubled Asset Relief Program in exchange for preferred stock and warrants.

When the government rolled out its $700 billion program to shore up capital levels at healthy banks, one point that many bankers grumbled about were the restrictions on executive compensation.  They argued that compensation limits might cause talented employees to flee for more lucrative jobs (although clearly those jobs wouldn't be at competitor banks that also took TARP money, since they would be subject to the same restrictions).

But some interesting changes were disclosed in an 8-K that Midwest Banc Holdings filed yesterday with the Securities and Exchange Commission.  First, we learned that three members of the board of directors resigned, reducing its size from 11 members to eight. No explanation was given for those resignations.

In the very next paragraph, we learned that on Tuesday of this week, the Company implemented a "cost reduction initiative."  The salaries for named executive officers will be reduced by 7 to 10 percent, effective August 3.  Of course, even after the reductions, they'll all still make between $205,046 and $450,000.  But the largest cut - the 10 percent reduction to President Robert Herencia's salary - was accepted by a man who just joined the company two months ago.

Midwest Banc Holdings is the parent of Midwest Bank and Trust Co., which operates 26 full-service community banks in the Chicago area and has $3.6 billion in assets.

Midwest Banc Holdings also amended its severance policy. It said in its annual report in March that it would make those changes once the final compensation rules for TARP recipient were issued.

In addition to reducing costs, the company is also trying to raise more capital.  This press release spells out some of those efforts, which include (among other things) restructuring debt, converting preferred stock into common stock, and - last but not least - seeking $138 million from the Treasury's Capital Assistance Program (CAP) that would be used to redeem the preferred shares given to the government in exchange for the original TARP aid.

The money in December came from another Treasury initiative called the Capital Purchase Program (CPP).

Midwest Banc Holdings reported a second-quarter loss of $76.5 million on Tuesday, an amount that was exacerbated by two "legacy issues"; one pertained to losses from investments in Fannie Mae and Freddie Mac, and the other related to a 2007 decision to finance an acquisition with debt and preferred securities (a decision the company said, in hindsight, "at the time seemed prudent").

While the results from the company's new plans will be seen in due time, the executives' decision to cut their own salaries signals that they're willing to sacrifice to improve the bank's financial condition.