##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  Commission File Number: 001-13735 MIDWEST BANC HOLDINGS, INC. (Exact name of Registrant as specified in its charter.)
 Delaware(State or other jurisdiction of
incorporation or organization)
    
    36-3252484(I.R.S. Employer Identification Number)501 W. North Ave.
Melrose Park, Illinois(Address of principal executive offices)
    
    60160(Zip code)
   (708) 865-1053(Registrants telephone number, including area code) Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90
days. Yes þ No o Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practicable date. Class
    
    
    Outstanding at May 10, 2005Common, par value $.01
    
    
    18,241,151




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MIDWEST BANC HOLDINGS, INC. Form 10-Q Table of Contents  
 Page NumberPART IItem 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    34PART IIItem 1. Legal Proceedings
    
    
    38Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    38Item 3. Defaults upon Senior Securities
    
    
    38Item 4. Submission of Matters to a Vote of Security Holders
    
    
    38Item 5. Other Information
    
    
    38Item 6. Exhibits
    
    
    38Form 10-Q Signature Page
    
    
    40Rule 13a-14(a) Certification of Principal Executive OfficerRule 13a-14(a) Certification of Principal Financial OfficerCertification Pursuant to Section 906
  i




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands) (Unaudited)March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCash
    
    $
    50,405
    
    
    $
    55,737Federal funds sold and other short-term investments
    
    
    4,124
    
    
    
    187,694Securities available-for-sale
    
    
    731,405
    
    
    
    548,211Securities held-to-maturity (fair value: $82,145 at March
31, 2005 and $89,800 at December 31, 2004)
    
    
    83,261
    
    
    
    89,733Loans
    
    
    1,287,943
    
    
    
    1,230,400Allowance for loan losses
    
    
    (18,555
    )
    
    
    (17,961
    )Net loans
    
    
    1,269,388
    
    
    
    1,212,439Cash surrender value of life insurance
    
    
    49,922
    
    
    
    49,500Premises and equipment, net
    
    
    26,998
    
    
    
    27,521Other real estate
    
    
    8,818
    
    
    
    8,224Core deposit and other intangibles, net
    
    
    2,109
    
    
    
    2,217Goodwill
    
    
    4,360
    
    
    
    4,360Other assets
    
    
    56,963
    
    
    
    51,177Total assets
    
    $
    2,287,753
    
    
    $
    2,236,813LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesDepositsNon-interest-bearing
    
    $
    159,450
    
    
    $
    176,995Interest-bearing
    
    
    1,513,945
    
    
    
    1,505,426Total deposits
    
    
    1,673,395
    
    
    
    1,682,421Federal funds purchased
    
    
    22,250
    
    
    
    Securities sold under agreements to repurchase
    
    
    235,813
    
    
    
    198,401Advances from the Federal Home Loan Bank
    
    
    131,127
    
    
    
    133,628Junior subordinated debt owed to unconsolidated trusts
    
    
    55,672
    
    
    
    55,672Other liabilities
    
    
    33,704
    
    
    
    29,268Total liabilities
    
    
    2,151,961
    
    
    
    2,099,390Stockholders EquityPreferred stock, $.01 par value, 1,000,000 shares authorized;
none issued
    
    
    
    
    
    
    Common stock, $.01 par value, 24,000,000 shares authorized;
18,668,140 issued
    
    
    187
    
    
    
    187Additional paid-in capital
    
    
    65,746
    
    
    
    65,781Retained earnings
    
    
    97,722
    
    
    
    95,829Unearned stock-based compensation
    
    
    (2,476
    )
    
    
    (2,642
    )Accumulated other comprehensive loss
    
    
    (23,253
    )
    
    
    (16,457
    )Treasury stock, at cost (426,989 shares at March 31, 2005
and 586,413 shares at December 31, 2004)
    
    
    (2,134
    )
    
    
    (5,275
    )Total stockholders equity
    
    
    135,792
    
    
    
    137,423Total liabilities and stockholders equity
    
    $
    2,287,753
    
    
    $
    2,236,813
 See accompanying notes to unaudited consolidated financial statements. PAGE 1




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the three months ended March 31, 2005 and 2004
(In thousands, except per share data) 2005
    
    
    2004Interest IncomeLoans
    
    $
    19,314
    
    
    $
    16,518SecuritiesTaxable
    
    
    7,971
    
    
    
    8,816Exempt from federal income taxes
    
    
    122
    
    
    
    297Trading securities
    
    
    66
    
    
    
    Federal funds sold and other short-term investments
    
    
    253
    
    
    
    462Total interest income
    
    
    27,726
    
    
    
    26,093Interest ExpenseDeposits
    
    
    8,549
    
    
    
    7,157Federal funds purchased
    
    
    71
    
    
    
    2Securities sold under agreements to repurchase
    
    
    1,369
    
    
    
    1,400Advances from the Federal Home Loan Bank
    
    
    1,623
    
    
    
    2,494Junior subordinated debt owed to unconsolidated trusts
    
    
    985
    
    
    
    853Note payable
    
    
    9
    
    
    
    20Total interest expense
    
    
    12,606
    
    
    
    11,926Net interest income
    
    
    15,120
    
    
    
    14,167Provision for loan losses
    
    
    430
    
    
    
    756Net interest income after provision for loan losses
    
    
    14,690
    
    
    
    13,411Noninterest IncomeCustomer service fees
    
    
    1,359
    
    
    
    1,436Net gains on securities transactions
    
    
    112
    
    
    
    2,866Net trading gains (losses)
    
    
    45
    
    
    
    (1,832
    )Gains on sales of loans
    
    
    62
    
    
    
    161Insurance and brokerage commissions
    
    
    514
    
    
    
    485Trust
    
    
    140
    
    
    
    149Increase in cash surrender value of life insurance
    
    
    422
    
    
    
    463Other
    
    
    265
    
    
    
    215Total noninterest income
    
    
    2,919
    
    
    
    3,943Noninterest ExpensesSalaries and employee benefits
    
    
    7,405
    
    
    
    6,481Occupancy and equipment
    
    
    1,730
    
    
    
    1,692Professional services
    
    
    1,209
    
    
    
    881Other
    
    
    1,844
    
    
    
    1,987Total noninterest expenses
    
    
    12,188
    
    
    
    11,041Income before income taxes
    
    
    5,421
    
    
    
    6,313Provision for income taxes
    
    
    1,339
    
    
    
    1,488Net Income
    
    $
    4,082
    
    
    $
    4,825Basic earnings per share
    
    $
    0.22
    
    
    $
    0.27Diluted earnings per share
    
    $
    0.22
    
    
    $
    0.26Cash dividends declared per common share
    
    $
    0.12
    
    
    $
    0.12
 See accompanying notes to unaudited consolidated financial statements. PAGE 2




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (Unaudited)
For the three months ended March 31, 2005 and 2004
(In thousands, except share and per share data) AccumulatedUnearned
    
    
    Other
    
    
    
    
    
    
    TotalCommon
    
    
    
    
    
    
    Retained
    
    
    Stock-based
    
    
    Comprehensive
    
    
    Treasury
    
    
    StockholdersStock
    
    
    Surplus
    
    
    Earnings
    
    
    Compensation
    
    
    Loss
    
    
    Stock
    
    
    EquityBalance, January 1, 2004
    
    $
    187
    
    
    $
    64,330
    
    
    $
    102,041
    
    
    $
    
    
    
    $
    (15,824
    )
    
    $
    (7,653
    )
    
    $
    143,081Cash dividends declared ($0.12 per
share)
    
    
    
    
    
    
    
    
    
    
    (2,144
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,144
    )Issuance of common stock upon
exercise of 8,160 stock options,
inclusive of tax benefit
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79
    
    
    
    129Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    4,825
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,825Net decrease in fair value of
securities classified as available-
for-sale, net of income taxes and
reclassification adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,848
    )
    
    
    
    
    
    
    (2,848
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,977Balance, March 31, 2004
    
    $
    187
    
    
    $
    64,380
    
    
    $
    104,722
    
    
    $
    
    
    
    $
    (18,672
    )
    
    $
    (7,574
    )
    
    $
    143,043Balance, January 1, 2005
    
    $
    187
    
    
    $
    65,781
    
    
    $
    95,829
    
    
    $
    (2,642
    )
    
    $
    (16,457
    )
    
    $
    (5,275
    )
    
    $
    137,423Cash dividends declared ($0.12 per
share)
    
    
    
    
    
    
    
    
    
    
    (2,189
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,189
    )Issuance of common stock upon
exercise of 279,424 stock options,
inclusive of tax benefit
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,141
    
    
    
    3,106Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    166
    
    
    
    
    
    
    
    
    
    
    
    166Comprehensive lossNet income
    
    
    
    
    
    
    
    
    
    
    4,082
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,082Net decrease in fair value of
securities classified as available-
for-sale, net of income taxes and
reclassification adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,796
    )
    
    
    
    
    
    
    (6,796
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,714
    )Balance, March 31, 2005
    
    $
    187
    
    
    $
    65,746
    
    
    $
    97,722
    
    
    $
    (2,476
    )
    
    $
    (23,253
    )
    
    $
    (2,134
    )
    
    $
    135,792
 See accompanying notes to unaudited consolidated financial statements. PAGE 3




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the three Months Ended March 31, 2005 and 2004
(In thousands) 2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    4,082
    
    
    $
    4,825Adjustments to reconcile net income to net cash provided by
operating activitiesDepreciation
    
    
    719
    
    
    
    649Provision for loan losses
    
    
    430
    
    
    
    756Amortization of other intangibles
    
    
    108
    
    
    
    41Proceeds from sales (purchases) of trading securities, net
    
    
    72
    
    
    
    (3,557
    )Amortization of premiums and discounts on securities, net
    
    
    682
    
    
    
    1,000Realized gain on sale of available-for-sale securities,net
    
    
    (112
    )
    
    
    (2,866
    )Net (gain) loss on sales of trading securities, net
    
    
    (45
    )
    
    
    3,557Net gain on sales of mortgage loans
    
    
    (62
    )
    
    
    (161
    )Net change in real estate loans held for sale
    
    
    (107
    )
    
    
    (821
    )Increase in cash surrender value of life insurance
    
    
    (422
    )
    
    
    (463
    )Deferred income taxes
    
    
    (477
    )
    
    
    (122
    )Amortization of deferred stock based compensation
    
    
    166
    
    
    
    Change in other assets
    
    
    (2,406
    )
    
    
    1,565Change in other liabilities
    
    
    1,906
    
    
    
    1,104Net cash provided by operating activities
    
    
    4,534
    
    
    
    5,507Cash flows from investing activitiesSales of securities available-for-sale
    
    
    63,933
    
    
    
    130,795Maturities of securities available-for-sale
    
    
    345
    
    
    
    28,288Principal payments on securities
    
    
    10,408
    
    
    
    24,997Purchases of securities available-for-sale
    
    
    (262,417
    )
    
    
    (61,858
    )Purchases of securities held-to-maturity
    
    
    
    
    
    
    (51,453
    )Maturities of securities held-to-maturity
    
    
    710
    
    
    
    880Sale of futures contracts
    
    
    
    
    
    
    (14,141
    )Loan originations and principal collections, net
    
    
    (58,140
    )
    
    
    6,072Proceeds from sale of other real estate
    
    
    336
    
    
    
    51Additions to property and equipment
    
    
    (196
    )
    
    
    (752
    )Net cash provided by (used in) investing activities
    
    
    (245,021
    )
    
    
    62,879Cash flows from financing activitiesNet decrease in deposits
    
    
    (9,026
    )
    
    
    (12,491
    )Proceeds from borrowings
    
    
    2,000
    
    
    
    Repayments on borrowings
    
    
    (2,000
    )
    
    
    (2,000
    )Cash dividends paid
    
    
    (2,149
    )
    
    
    (2,143
    )Change in federal funds purchased and securities
sold under agreements to repurchase
    
    
    59,662
    
    
    
    445Proceeds from issuance of treasury stock under stock option plan
    
    
    3,098
    
    
    
    86Net cash provided by (used in) financing activities
    
    
    51,585
    
    
    
    (16,103
    )Increase (decrease) in cash and cash equivalents
    
    
    (188,902
    )
    
    
    52,283Cash and cash equivalents at beginning of period
    
    
    243,431
    
    
    
    196,157Cash and cash equivalents at end of period
    
    $
    54,529
    
    
    $
    248,440Supplemental disclosuresCash paid for:Interest
    
    $
    12,508
    
    
    $
    11,872Income Taxes
    
    
    758
    
    
    
    1,331
 See accompanying notes to unaudited consolidated financial statements. PAGE 4




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1  BASIS OF PRESENTATION The consolidated financial statements of Midwest Banc Holdings, Inc. (the Company) included
herein are unaudited; however, such statements reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a fair presentation for
the interim periods. The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. The annualized results of operations for the three months ended March 31, 2005 are not
necessarily indicative of the results expected for the full year ending December 31, 2005. NOTE 2  NEW ACCOUNTING PRONOUNCEMENTS In December 2004, the
Financial Accounting Standards Board (FASB) published FASB Statement No. 123 (revised 2004), Share-Based
Payment (FAS 123(R)). FAS 123(R) requires that the compensation cost relating to share-based
payment transactions, including grants of employee stock options, be recognized in financial
statements. That cost will be measured based on the fair value of the equity or liability
instruments issued. FAS 123(R) permits entities to use any option-pricing model that meets the
fair value objective in the Statement. Modifications of share-based payments will be treated as
replacement awards with the cost of the incremental value recorded in the financial statements. FAS 123(R) is effective at the beginning of the first quarter of 2006. As of the date of this
filing, no decisions have been made as to whether the Company will apply the modified prospective
or retrospective transition method of application. On September 30, 2004, the FASB issued FASB Staff
Position (FSP) Emerging Issues Task Force (EITF) Issue No. 03-1-1 delaying the effective date
of paragraphs 10-20 of EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, which provides guidance for determining the meaning of
other-than-temporarily impaired and its application to certain debt and equity securities within
the scope of FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and
investments accounted for under the cost method. The guidance requires that investments which have
declined in value due to credit concerns or solely due to changes in interest rates must be
recorded as other-than-temporarily impaired unless the Company can assert and demonstrate its
intention to hold the security for a period of time sufficient to allow for a recovery of fair
value up to or beyond the cost of the investment, which might mean maturity. The delay of the
effective date of EITF 03-1 will be superseded concurrent with the final issuance of proposed FSP
Issue 03-1-a. Proposed FSP Issue 03-1-a is intended to provide implementation guidance with respect
to all securities analyzed for impairment under paragraphs 10-20 of EITF 03-1. Management continues
to closely monitor and evaluate how the provisions of EITF 03-1 and proposed FSP Issue 03-1-a will
affect the Company. PAGE 5




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) NOTE 3  SECURITIES The following tables set forth the composition of the Companys securities portfolio by major
category as of March 31, 2005. March 31, 2005Held-to-Maturity
    
    
    Available-for-Sale
    
    
    TotalAmortized
    
    
    Fair
    
    
    Amortized
    
    
    
    
    
    
    Amortized
    
    
    
    
    
    
    % ofCost
    
    
    Value
    
    
    Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    Portfolio(In thousands)U.S. Treasury and obligations of
U.S. government-sponsored agencies
    
    $
    
    
    
    $
    
    
    
    $
    361,361
    
    
    $
    328,606
    
    
    $
    361,361
    
    
    $
    328,606
    
    
    
    42.34
    %Obligations of states and
political subdivisions
    
    
    8,854
    
    
    
    9,029
    
    
    
    3,274
    
    
    
    3,312
    
    
    
    12,128
    
    
    
    12,341
    
    
    
    1.42Mortgage-backed securities
    
    
    74,407
    
    
    
    73,116
    
    
    
    308,292
    
    
    
    303,373
    
    
    
    382,699
    
    
    
    376,489
    
    
    
    44.83Equity securities
    
    
    
    
    
    
    
    
    
    
    86,286
    
    
    
    85,673
    
    
    
    86,286
    
    
    
    85,673
    
    
    
    10.11Other bonds
    
    
    
    
    
    
    
    
    
    
    11,069
    
    
    
    10,441
    
    
    
    11,069
    
    
    
    10,441
    
    
    
    1.30Total
    
    $
    83,261
    
    
    $
    82,145
    
    
    $
    770,282
    
    
    $
    731,405
    
    
    $
    853,543
    
    
    $
    813,550
    
    
    
    100.00
    %
 The following is a summary of the fair value of securities held-to-maturity and
available-for-sale with unrealized losses and an aging of those unrealized losses: March 31, 2005Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses(In thousands)Securities available-for-sale:Obligations of U.S. government-sponsored agencies (1)
    
    $
    9,497
    
    
    $
    (437
    )
    
    $
    319,109
    
    
    $
    (32,318
    )
    
    $
    328,606
    
    
    $
    (32,755
    )Obligations of states and political subdivisions
    
    
    156
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    156
    
    
    
    (3
    )Mortgage-backed securities:U.S. government agencies (2)
    
    
    634
    
    
    
    (3
    )
    
    
    665
    
    
    
    (6
    )
    
    
    1,299
    
    
    
    (9
    )U.S. government-sponsored agencies (1)
    
    
    266,610
    
    
    
    (3,622
    )
    
    
    33,530
    
    
    
    (1,325
    )
    
    
    300,140
    
    
    
    (4,947
    )Equity securities (3)
    
    
    65,727
    
    
    
    (562
    )
    
    
    3,027
    
    
    
    (56
    )
    
    
    68,754
    
    
    
    (618
    )Corporate and other debt securities
    
    
    
    
    
    
    
    
    
    
    10,441
    
    
    
    (628
    )
    
    
    10,441
    
    
    
    (628
    )Total available-for-sale
    
    $
    342,624
    
    
    $
    (4,627
    )
    
    $
    366,772
    
    
    $
    (34,333
    )
    
    $
    709,396
    
    
    $
    (38,960
    )Securities held-to-maturity:Mortgage-backed securities:U.S. government agencies (2)
    
    $
    13,999
    
    
    $
    (134
    )
    
    $
    
    
    
    $
    
    
    
    $
    13,999
    
    
    $
    (134
    )U.S. government-sponsored agencies (1)
    
    
    6,583
    
    
    
    (70
    )
    
    
    37,236
    
    
    
    (1,152
    )
    
    
    43,819
    
    
    
    (1,222
    )Total held-to-maturity
    
    $
    20,582
    
    
    $
    (204
    )
    
    $
    37,236
    
    
    $
    (1,152
    )
    
    $
    57,818
    
    
    $
    (1,356
    )Total temporarily impaired securities
    
    $
    363,206
    
    
    $
    (4,831
    )
    
    $
    404,008
    
    
    $
    (35,485
    )
    
    $
    767,214
    
    
    $
    (40,316
    )
  (1)
    Includes obligations of the Federal Home Loan Mortgage
Corporation (FHLMC) and Federal National
Mortgage Association (FNMA).(2)
    Includes obligations of the Government National Mortgage Association (GNMA).(3)
    Includes issues from government-sponsored agencies (FNMA and FHLMC). PAGE 6




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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Management does not believe any individual unrealized loss as of Marh 31, 2005 represents
other-than-temporary impairment.  
    The unrealized loss for U.S. government-sponsored agency and
mortgage-backed securities relate primarily to debt securities issued by FNMA
and FHLMC; each security has a stated maturity date. FNMA is rated Aa3, AA- and A+
by Moodys, S&P and Fitch, respectively. FHLMC is rated Aa3 and AA- by Moodys and
Fitch, respectively. The obligations of U.S. government-sponsored agencies are notes
with a weighted average maturity of approximately 8 years and a weighted average rate
of 4.18%; these notes are fixed rate obligations. The
mortgage-backed securities are notes with a weighted average maturity of approximately
28 years and a weighted average rate of 5.04%.
    The unrealized losses on corporate and other debt securities relate to
securities which were rated single A minus or better by a nationally recognized
rating agency. The unrealized losses in the previous table are primarily attributable to changes in interest
rates. The Company has both the intent and ability to hold
each of the securities shown in the previous table for a time necessary to
recover its amortized cost. The unrealized loss on the available-for-sale securities
is reflected net of tax in other
comprehensive loss, which does not impact regulatory capital. NOTE 4  LOANS The following table sets forth the composition of the Companys loan portfolio as of the
indicated dates. March 31,
    
    
    December 31,2005
    
    
    2004Loan
    
    
    
    
    
    
    LoanCategory
    
    
    
    
    
    
    Categoryto Gross
    
    
    
    
    
    
    to GrossAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans(Dollars in thousands)Commercial
    
    $
    212,498
    
    
    
    16.5
    %
    
    $
    211,278
    
    
    
    17.2
    %Commercial real estate
    
    
    824,669
    
    
    
    64.0
    
    
    
    781,547
    
    
    
    63.4Agricultural
    
    
    65,364
    
    
    
    5.1
    
    
    
    62,949
    
    
    
    5.1Consumer real estate
    
    
    175,333
    
    
    
    13.6
    
    
    
    164,455
    
    
    
    13.4Consumer installment
    
    
    10,533
    
    
    
    0.8
    
    
    
    10,665
    
    
    
    0.9Total loans, gross
    
    
    1,288,397
    
    
    
    100.0
    %
    
    
    1,230,894
    
    
    
    100.0
    %Net deferred fees
    
    
    (454
    )
    
    
    
    
    
    
    (494
    )Total loans
    
    $
    1,287,943
    
    
    
    
    
    
    $
    1,230,400
 Included in consumer real estate are $801,000 and $693,000 of loans held for sale at March 31,
2005 and December 31, 2004, respectively. PAGE 7




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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) NOTE 5  ALLOWANCE FOR LOAN LOSSES Following is a summary of changes in the allowance for loan losses for the three months ended
March 31: 2005
    
    
    2004(In thousands)Balance, January 1
    
    $
    17,961
    
    
    $
    15,714Provision charged to operations
    
    
    430
    
    
    
    756Loans charged off
    
    
    (238
    )
    
    
    (671
    )Recoveries
    
    
    402
    
    
    
    80Balance, March 31
    
    $
    18,555
    
    
    $
    15,879
 NOTE 6  GOODWILL AND INTANGIBLES The following table presents the amortization of intangible assets (in thousands): March 31, 2005
    
    
    December 31, 2004Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized intangible assets:Core deposit and other intangibles
    
    $
    3,130
    
    
    $
    (1,021
    )
    
    $
    3,130
    
    
    $
    (913
    )Aggregate intangible amortization
expense:For the three months ending March
31, 2005
    
    $
    108Estimated intangible amortization
expense:For the year ending December 31, 2005
    
    $
    429For the year ending December 31, 2006
    
    
    373For the year ending December 31, 2007
    
    
    354For the year ending December 31, 2008
    
    
    354For the year ending December 31, 2009
    
    
    354
 The following table presents the changes in the carrying amount of goodwill and other
intangibles during the three months ended March 31, 2005 (in thousands): March 31, 2005Core Depositand OtherGoodwill
    
    
    IntangiblesBalance at beginning of period
    
    $
    4,360
    
    
    $
    2,217Amortization
    
    
    
    
    
    
    (108
    )Balance at end of period
    
    $
    4,360
    
    
    $
    2,109
 PAGE 8




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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) NOTE 7  EARNINGS PER SHARE For purposes of per share calculations, the Company had 18,241,151 shares of common stock
outstanding at March 31, 2005, and 17,869,366 shares of common stock outstanding at March 31, 2004.
Basic earnings per share for the three months ended March 31, 2005 and 2004 were computed by
dividing net income by the weighted average number of shares outstanding during each period.
Diluted earnings per share for the three months ended March 31, 2005 and 2004 were computed by
dividing net income by the weighted average number of shares outstanding during each period,
adjusted for the dilutive effect of the outstanding stock options. Computations for basic and
diluted earnings per share are provided below. For the three monthsended March 31,2005
    
    
    2004(in thousands, except per share data)BasicNet income
    
    $
    4,082
    
    
    $
    4,825Weighted average common shares
outstanding
    
    
    18,147
    
    
    
    17,865Basic earnings per common share
    
    $
    0.22
    
    
    $
    0.27DilutedNet income
    
    $
    4,082
    
    
    $
    4,825Weighted average common shares
outstanding
    
    
    18,147
    
    
    
    17,865Dilutive effect of stock options
    
    
    292
    
    
    
    483Diluted average common shares
    
    
    18,439
    
    
    
    18,348Diluted earnings per common share
    
    $
    0.22
    
    
    $
    0.26
 Options to purchase 112,000 shares at $22.03 were not included in the computation of diluted
earnings per share for the three months ended March 31, 2005 because the options exercise price
was greater than the average market price of the common stock and were, therefore, antidilutive.
All outstanding options were included in the computation of diluted earnings per share for the
three months ended March 31, 2004. Restricted shares in the amount of 120,000 were not included in
the computation of diluted earnings per share for the three months ended March 31, 2005 because
these shares would have an antidilutive effect. PAGE 9




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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) NOTE 8  STOCK OPTIONS AND COMPENSATION During the first quarter of 2005, 279,424 options were exercised by individuals who are no
longer with the Company. The total stock options outstanding were 804,102 at March 31, 2005 with
exercise prices ranging between $5.42 and $22.03 and expiration dates between 2006 and 2014. No
stock options were granted in the three months ended March 31, 2005. Employee compensation expense under stock options is reported using the intrinsic value
method. No stock-based compensation cost is reflected in net income, as all options granted had an
exercise price equal to or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings per share if expense
was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation. For the three monthsended March 31,2005
    
    
    2004(in thousands, except per share data)Net income as reported
    
    $
    4,082
    
    
    $
    4,825Deduct: stock-based compensation expense
determined under fair value based method, net of tax
    
    
    94
    
    
    
    89Pro forma net income
    
    $
    3,988
    
    
    $
    4,736BASIC EARNINGS PER SHARE AS REPORTED
    
    $
    0.22
    
    
    $
    0.27Pro forma basic earnings per share
    
    
    0.22
    
    
    
    0.27DILUTED EARNINGS PER SHARE AS REPORTED
    
    $
    0.22
    
    
    $
    0.26Pro forma diluted earnings per share
    
    
    0.22
    
    
    
    0.26
 The impact of this statement on the Company in 2006 and beyond will depend upon various
factors, among them the Companys future compensation strategy. The pro forma compensation
costs presented in this and prior filings for the Company have been calculated using a
Black-Scholes option pricing model and may not be indicative of amounts which should be expected in
future periods. PAGE 10




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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) NOTE 9  TRUST PREFERRED SECURITIES In May 2000, the Company formed the MBHI Capital Trust I (Trust). The Trust is a statutory
business trust formed under the laws of the State of Delaware and is wholly owned by the Company.
In June 2000, the Trust issued 10.0% Company obligated mandatory redeemable trust preferred
securities with an aggregate liquidation amount of $20.0 million ($25 per preferred security) to
third-party investors in an underwritten public offering. The Company issued 10.0% junior
subordinated debentures aggregating $20.0 million to the Trust. The junior subordinated debentures
are the sole assets of the Trust. The Company obligated mandatory redeemable trust preferred
securities and the junior subordinated debentures pay distributions and dividends, respectively, on
a quarterly basis, which are included in interest expense. The Company obligated mandatory
redeemable trust preferred securities will mature on June 7, 2030, at which time the preferred
securities must be redeemed. The Company obligated mandatory redeemable trust preferred securities
and junior subordinated debentures can be redeemed contemporaneously, in whole or in part,
beginning June 7, 2005 at a redemption price of $25 per preferred security. The Company has
provided a full, irrevocable, and unconditional guarantee on a subordinated basis of the
obligations of the Trust under the preferred securities in the event of the occurrence of an event
of default, as defined in such guarantee. The Company has given notice to the trustee and the
trustee has given notice to the security holders that these securities will be redeemed on June 7,
2005. The Company intends to issue $20.0 million of trust preferred securities
in a private placement on or before June 7, 2005. The Company has formed three statutory trusts between October 2002 and December 2003 to issue
$34.0 million in floating rate trust preferred securities. The three floating rate offerings were
pooled private placements exempt from registration under the Securities Act pursuant to Section
4(2) thereunder. The Company has provided a full, irrevocable, and unconditional subordinated
guarantee of the obligations of these trusts under the preferred securities. The Company is
obligated to fund dividends on these securities before it can pay dividends on its shares of common
stock. The following table details the four trusts formed by the Company: Mandatory
    
    OptionalIssuer
    
    Issue Date
    
    Amount
    
    Rate
    
    Redemption Date
    
    Redemption DateMBHI Capital Trust I
    
    June 7, 2000
    
    $
    20,000,000
    
    
    10.0%
    
    June 7, 2030
    
    June 7, 2005MBHI Capital Trust II
    
    October 29, 2002
    
    $
    15,000,000
    
    
    LIBOR+3.45%
    
    November 7, 2032
    
    November 7, 2007MBHI Capital Trust III
    
    December 19, 2003
    
    $
    9,000,000
    
    
    LIBOR+3.00%
    
    December 30, 2033
    
    December 30, 2008MBHI Capital Trust IV
    
    December 19, 2003
    
    $
    10,000,000
    
    
    LIBOR+2.85%
    
    January 23, 2034
    
    January 23, 2008
 As of March 31, 2005, assuming the Company was not permitted to include the $54.0 million
in trust preferred securities issued by MBHI Capital Trust I, II, III, and IV in its Tier 1
capital, the Company would still exceed the regulatory required minimums for capital adequacy
purposes. If the trust preferred securities were no longer permitted to be included in Tier 1
capital, the Company would also be permitted to redeem the capital securities without penalty. PAGE 11




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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) NOTE 10  DERIVATIVE INSTRUMENTS The Company enters into interest rate swaps to reduce exposure to changes in interest rates.
As of March 31, 2005, the Company had various interest rate swap transactions, which result in the
Company synthetically converting $137.5 million of its FHLB advance fixed rate debt to floating
rate debt. The swap transactions require payment of interest by the Company at the one-month LIBOR
plus a spread and, in turn, the Company receives a fixed rate. The Company has documented these to
be fair value hedges that are carried at their estimated fair value with the changes in fair values
recorded as a basis adjustment to the hedged items. Summary information about interest rate swaps at March 31 is as follows: 2005
    
    
    2004(Dollars in thousands)Notional amounts
    
    $
    137,500
    
    
    $
    137,500Weighted average fixed rates received
    
    
    5.46
    %
    
    
    5.46
    %Weighted average variable rates paid
    
    
    4.85
    %
    
    
    3.26
    %Weighted average maturity
    
    
    5.36 years
    
    
    
    6.36 yearsFair value
    
    $
    (6,372
    )
    
    $
    968
 The Company has also bought and sold various put and call options with terms less than 90
days on U.S. Treasury and government-sponsored agency obligations, mortgage-backed securities, and
futures contracts. These are stand-alone derivatives that are carried at their estimated fair value
with the corresponding gain or loss recorded in net trading profits or losses. The Company did not
have any put or call options outstanding at March 31, 2005 and March 31, 2004. During the first quarter of 2004, the Company had 3,000 U.S. Treasury 10-year note futures
contracts with a notional value of $300.0 million and a delivery date of June 2004. The Company
sold these contracts in order to hedge certain U.S. government-sponsored agency notes held in its
available-for-sale portfolio. The Companys objective was to offset changes in the fair market
value of the U.S. government-sponsored agency notes with changes in the fair market value of the
futures contracts, thereby reducing interest rate risk. The Company has documented these futures
contracts as fair value hedges with the changes in market value of the futures contracts as well as
the changes in the market value of the hedged items charged or credited to earnings on a quarterly
basis in net gains on securities transactions. For the three months ending March 31, 2004, the
change in the market values resulted in a net loss of $1.7 million. Gains or losses for fair value
hedges occur when changes in the market value of the hedged items are not identical to changes in
the market value of hedge instruments during the reporting period. The Company de-designated this
hedge as of December 31, 2004 and the futures contracts were written down to their fair value.
These futures contracts, including an additional 300 contracts acquired during the third quarter of
2004, all which were stand-alone derivatives, were terminated in January 2005 at a gain of $393,000
above the year-end book value. In the fourth quarter of 2004, the Company entered into spread lock swap agreements with a
notional value of $280.0 million, determination date of March 31, 2005, and spread lock strike of
0.41%. The Company entered into these agreements in order to minimize earnings volatility associated
with spread widening of the hedged U.S. government-sponsored agency notes through the first quarter
of 2005. These are stand-alone derivatives that are carried at their estimated fair value with the
corresponding gain or loss recorded in net trading profits or losses. The Company terminated these
agreements in January 2005 at a loss of $449,000. PAGE 12




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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued) NOTE 11  OFF-BALANCE-SHEET RISK The Company is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet financing needs of customers. Since many commitments to extend credit
expire without being used, the amounts below do not necessarily represent future cash commitments.
These financial instruments include lines of credit, letters of credit, and commitments to extend
credit. These are summarized as follows: Amount of Commitment Expiration Per PeriodWithin
    
    
    
    
    
    
    
    
    
    
    After1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    5 Years
    
    
    Total(In thousands)Lines of Credit:Commercial real estate
    
    $
    115,509
    
    
    $
    43,335
    
    
    $
    14,507
    
    
    $
    1,709
    
    
    $
    175,060Consumer real estate
    
    
    17,646
    
    
    
    3,340
    
    
    
    9,178
    
    
    
    30,068
    
    
    
    60,232Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,497
    
    
    
    3,497Commercial
    
    
    83,291
    
    
    
    6,900
    
    
    
    1,316
    
    
    
    1,262
    
    
    
    92,769Letters of credit
    
    
    36,444
    
    
    
    1,316
    
    
    
    4,062
    
    
    
    
    
    
    
    41,822Commitments to extend credit
    
    
    217,297
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    217,297Total commercial commitments
    
    $
    447,686
    
    
    $
    54,891
    
    
    $
    29,063
    
    
    $
    36,536
    
    
    $
    590,677
 At March 31, 2005, commitments to extend credit included $27.8 million of fixed rate loan
commitments. These commitments are due to expire within 30 to 90 days of issuance and have rates
ranging from 4.88% to 7.75%. Substantially all of the unused lines of credit are at adjustable
rates of interest. Also included in commitments to extend credit were $194.8 million loan pipeline
commitments. The credit risk amounts represent the maximum accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as contracted and any collateral or
security proved to be of no value. The Company has experienced little difficulty in accessing
collateral when necessary. NOTE 12  REGULATORY MATTERS The Company and Midwest Bank and Trust Company (the Bank) entered into a written agreement
with the Federal Reserve Bank of Chicago and Illinois Department of Financial and Professional Regulation on March
11, 2004. Management believes compliance with the written agreement will not have a material effect
on the Companys financial position or results of operations. This agreement required the Company
and the Bank take corrective action, in the Companys overall risk management, lending, and credit
review practices, including the engagement of third party consultants. Management believes the
Company and the Bank are in compliance with this agreement. On April 16, 2004, the Company was informed by a letter from the Securities and Exchange
Commission that the Commission was conducting an inquiry in connection with the Companys
restatement of its September 30, 2002 financial statements. The Company is cooperating fully with
the Commission on this matter. PAGE 13




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##### Table of Contents



ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is intended as a review of significant factors affecting
the financial condition and results of operations of the Company for the periods indicated. The
discussion should be read in conjunction with the unaudited Consolidated Financial Statements and
the Notes thereto presented herein. In addition to historical information, the following
Managements Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements that involve risks and uncertainties. The Companys actual results
could differ significantly from those anticipated in these forward-looking statements as a result
of certain factors discussed in this report. Also, see Note 12
 Regulatory Matters to our
unaudited consolidated financial statements for a discussion of certain regulatory matters. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. By their nature, changes in these assumptions and estimates
could significantly affect the Companys financial position or results of operations. Actual
results could differ from those estimates. Discussed below are those critical accounting policies
that are of particular significance to the Company. Allowance for Loan Losses:The allowance for loan losses represents managements estimate of
probable credit losses inherent in the loan portfolio. Estimating the amount of the allowance for
loan losses requires significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans
based on historical loss experience, and consideration of current economic trends and conditions,
all of which may be susceptible to significant change. The loan portfolio also represents the
largest asset type on the consolidated balance sheet. Loan losses are charged off against the
allowance, while recoveries of amounts previously charged off are credited to the allowance. A
provision for loan losses is charged to operations based on managements periodic evaluation of the
factors previously mentioned, as well as other pertinent factors. The Companys methodology for determining the allowance for loan losses represents an
estimation pursuant to both Statement of Financial Accounting
Standards (SFAS)  No. 5, Accounting
for Contingencies, and SFAS 114, Accounting by Creditors for Impairment of a Loan. The allowance
reflects expected losses resulting from analyses developed through specific loss allocations for
individual loans and historical loss experience for each loan category. The specific loss
allocations are based on regular analyses of all commercial, commercial real estate, and
agricultural loans over $300,000 where the internal credit rating is assigned to the substandard,
doubtful, or loss classification. These analyses involve a high degree of judgment in estimating
the amount of loss associated with specific loans, including estimating the amount and timing of
future cash flows and collateral values. The Companys historical loss experience is updated
quarterly. The allowance for loan losses also includes consideration of concentrations and changes
in portfolio mix and volume, and other qualitative factors. PAGE 14




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There are many factors affecting the allowance for loan losses; some are quantitative while others require qualitative judgment. The process for determining the allowance (which
management believes adequately considers all of the potential factors which might possibly result
in credit losses) includes subjective elements and, therefore, may be susceptible to significant
change. To the extent actual outcomes differ from management estimates, additional provision for
credit losses could be required that could adversely affect earnings or financial position in
future periods. A loan is impaired when full payment under the loan terms is not expected. Impairment is
evaluated in total for smaller-balance loans of similar nature such as residential mortgage and
consumer loans, and on an individual basis for other loans. A portion of the allowance is allocated
to impaired loans. Evaluation of Securities for Impairment:Securities are classified as held-to-maturity when
the Company has the ability and management has the positive intent to hold those securities to
maturity. Accordingly, they are stated at cost, adjusted for amortization of premiums and accretion
of discounts. Securities are classified as available-for-sale when the Company may decide to sell
those securities due to changes in market interest rates, liquidity needs, changes in yields or
alternative investments, and for other reasons. They are carried at fair value with unrealized
gains and losses, net of taxes, reported in other comprehensive income (loss). Interest income is
reported net of amortization of premium and accretion of discount. Realized gains and losses on
disposition of securities available-for-sale are based on the net proceeds and the adjusted
carrying amounts of the securities sold, using the specific identification method. Declines in the
fair value of held-to-maturity and available-for-sale securities below their cost that are deemed
to be other-than-temporary are reflected in earnings as realized losses. In estimating
other-than-temporary losses, management considers (1) the length of time and extent to which the fair value
has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3)
the intent and ability of the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value. Strategy On September 28, 2004, the Board of Directors of the Company named James J. Giancola as
President and Chief Executive Officer of the Company. The Company has begun to implement its
turnaround strategy. As part of the 2005 corporate plan, the Company has adopted a number of short-term
and long-term strategies, including:  
    Recruitment of seasoned commercial lenders, credit analysts, and key risk
and operations managers.
    Diversification of the loan portfolio mix by reducing the concentration in
commercial real estate lending and expanding commercial, consumer real estate, and
consumer lending.
    Modifying the structure and mix of the securities portfolio.
The Companys focus on future investment security purchases is
to maintain an adequate level of liquidity and to shorten the duration of its securities portfolio.
    Expanding its focus on retail banking activities including traditional and
non-deposit investment products, and placing greater emphasis on transactional deposit
growth. The Company believes that its continued success is dependent on its ability to provide its
customers value-added retail and commercial banking programs and other financial products and
services which are delivered by experienced, committed banking professionals operating under the
highest standards of customer service and ethics. The growth strategy of the Company is to increase PAGE 15




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its core banking business, develop its insurance and retail brokerage activities, and expand
into new markets as well as to diversify the financial services it offers. The Companys strategy
includes the following objectives:  
    Reducing earnings volatility and the risk in the securities portfolio
by exiting hedge accounting on futures contracts, terminating certain
stand-alone derivatives positions, and instituting a pre-purchase
pricing discipline.
    Implementing ongoing risk and credit management processes that provide
strong levels of control, minimize risk, and anticipate potential problems.
    Developing a growing, well diversified, well priced, and fundamentally
sound loan portfolio.
    Focusing deposit efforts on transaction account growth, especially
demand deposit growth.
    Developing additional sources of fee income. The Company plans to continue to implement its growth strategy through selected acquisitions
and by adding de novo banking centers in nearby communities where management believes customers
would be attracted to a community-banking alternative. Any acquisition the Company pursues will
ideally be accretive to net income and diluted earnings per share within the first full year
following consolidation, with cost savings targeted to be realized in the first phase of
integration post closing. The Companys growth strategy of establishing de novo banking centers and
selected acquisitions is dependent on many factors, including regulatory approval that may limit
or prohibit such expansion plans. PAGE 16




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##### Table of Contents



Results of Operations  Three Months Ended
March 31, 2005 and 2004 Set forth below are some highlights of first quarter 2005 results compared to the first
quarter of 2004.  
    Earnings per share:  
    Basic earnings per share for the three months ended March 31, 2005 were $0.22,
18.5% lower than for the comparable period in 2004.
    Diluted earnings per share for the three months ended March 31, 2005 were $0.22,
15.4%, lower than for the comparable period in 2004.  
    Consolidated net income for the first quarter of 2005 was $4.1 million, a 15.4%
decrease when compared to $4.8 million for the first quarter of 2004. This decrease is
mainly attributed to the $877,000 decrease in net gains on securities transactions and
trading activity and the $924,000 increase in salaries and benefits expense.
    The return on average assets for the three months ended March 31, 2005 was 0.74%
compared to 0.85% for the similar period in 2004.
    The return on average equity for the three months ended March 31, 2005 was 11.71%
compared to 13.45% for the similar period in 2004.
    Net interest income increased 6.7% to $15.1 million in the first quarter of 2005
compared to $14.2 million in the first quarter of 2004 as a result of loan growth.
    Interest income on loans increased 16.9% to $19.3 million in the first quarter of
2005 compared to $16.5 million for the comparable period in 2004.
    Core deposit pricing was reduced at the end of the quarter while still maintaining
competitive rates.
    The provision for loan losses decreased by 43.1% to $430,000 for the first quarter
of 2004 compared to $756,000 for the comparable period in 2004, reflecting the
improvement in asset quality.
    Excluding gains on securities, noninterest income increased 160.6% to $2.8 million
in the first quarter of 2005 compared to $1.1 million in the first quarter of 2004.
    Noninterest expenses increased 10.4% to $12.2 million in the first quarter of 2005
compared to $11.0 million in the first quarter of 2004. PAGE 17




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##### Table of Contents



Set forth below are some highlights of first quarter 2005 results compared to the fourth
quarter of 2004.  
    Basic and diluted earnings per share for the three months ended March 31, 2005 were
$0.22, 171.0% higher than for the quarter ended December 31, 2004.
    Consolidated net income for the first quarter of 2005 was $4.1 million, a 172.9%
improvement when compared to the $5.6 million loss for the fourth quarter of 2004. The
fourth quarter results reflect a $10.1 million impairment charge on equity securities.
    The provision for loan losses decreased by 80.1% to $430,000 for the first quarter
of 2004 compared to $2.2 million for the fourth in 2004, reflecting the improvement in
asset quality.
    The return on average assets for the three months ended March 31, 2005 was 0.74%
compared to (0.96%) for the fourth quarter of 2004.
    The return on average equity for the three months ended March 31, 2005 was 11.71%
compared to (16.01%) for the fourth quarter of 2004.
    Net interest income decreased 6.4% to $15.1 million in the first quarter of 2005
compared to $16.2 million in the fourth quarter of 2004 as a result of a purchase
accounting adjustment related to prepaid FHLB advances.
    Interest income on loans increased 7.2% to $19.3 million in the first quarter of
2005 compared to $18.0 million for the comparable period in 2004.
    Excluding gains on securities, noninterest income decreased 10.6% to $2.8 million in
the first quarter of 2005 compared to $3.1 million in the fourth quarter of 2004.
    Noninterest expenses decreased 27.5% to $12.2 million in the first quarter of 2005
compared to $16.8 million in the fourth quarter of 2004. The fourth quarter reflects
the retirement benefit obligation of $1.5 million and $4.2 million in prepayment
penalties associated with the prepaid FHLB advances. Net Interest Income Net interest income is the difference between interest income and fees on earning assets and
interest expense on deposits and borrowings. Net interest margin represents net interest income on
a tax equivalent basis as a percentage of average earning assets during the period. Net interest
margin reflects the spread between average yields earned on interest earning assets and the average
rates paid on interest bearing deposits and borrowings. PAGE 18




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##### Table of Contents



The following table sets forth the average balances, net interest income and expense and
average yields and rates for the Companys interest-earning assets and interest-bearing liabilities
for the indicated periods on a tax-equivalent basis assuming a 35.0% tax rate for 2005 and 2004. For the Three Months EndedMarch 31, 2005
    
    
    March 31, 2004
    
    
    December 31, 2004Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Interest-EarningAssets:Federal funds sold and
other short term investments
    
    $
    48,321
    
    
    $
    253
    
    
    
    2.09
    %
    
    $
    196,977
    
    
    $
    462
    
    
    
    0.94
    %
    
    $
    62,533
    
    
    $
    316
    
    
    
    2.02
    %Securities:Taxable(1)
    
    
    760,541
    
    
    
    8,470
    
    
    
    4.45
    
    
    
    785,766
    
    
    
    9,069
    
    
    
    4.62
    
    
    
    889,309
    
    
    
    9,225
    
    
    
    4.15Exempt from federal income
Taxes(1)
    
    
    10,784
    
    
    
    188
    
    
    
    6.97
    
    
    
    63,048
    
    
    
    830
    
    
    
    5.27
    
    
    
    13,424
    
    
    
    233
    
    
    
    6.94Total securities
    
    
    771,325
    
    
    
    8,658
    
    
    
    4.48
    
    
    
    848,814
    
    
    
    9,899
    
    
    
    4.68
    
    
    
    902,733
    
    
    
    9,458
    
    
    
    4.20Loans:Commercial loans(1)(3)(4)
    
    
    212,209
    
    
    
    3,107
    
    
    
    5.86
    
    
    
    199,805
    
    
    
    2,701
    
    
    
    5.41
    
    
    
    201,023
    
    
    
    2,914
    
    
    
    5.80Commercial real estate
Loans(1)(3)(4)
    
    
    801,512
    
    
    
    12,740
    
    
    
    6.36
    
    
    
    706,909
    
    
    
    11,350
    
    
    
    6.42
    
    
    
    761,090
    
    
    
    11,930
    
    
    
    6.27Agricultural loans(1)(3)(4)
    
    
    63,063
    
    
    
    959
    
    
    
    6.08
    
    
    
    62,684
    
    
    
    947
    
    
    
    6.04
    
    
    
    63,327
    
    
    
    980
    
    
    
    6.19Consumer real estate
Loans(3)(4)
    
    
    169,952
    
    
    
    2,422
    
    
    
    5.70
    
    
    
    96,991
    
    
    
    1,422
    
    
    
    5.86
    
    
    
    145,010
    
    
    
    2,113
    
    
    
    5.83Consumer installment
Loans(3)(4)
    
    
    10,404
    
    
    
    189
    
    
    
    7.27
    
    
    
    11,678
    
    
    
    217
    
    
    
    7.43
    
    
    
    10,832
    
    
    
    197
    
    
    
    7.27Total loans
    
    
    1,257,140
    
    
    
    19,417
    
    
    
    6.16
    
    
    
    1,078,067
    
    
    
    16,637
    
    
    
    6.16
    
    
    
    1,181,282
    
    
    
    18,134
    
    
    
    6.16Total interest-earning
Assets
    
    $
    2,076,786
    
    
    $
    28,328
    
    
    
    5.44
    %
    
    $
    2,123,858
    
    
    $
    26,998
    
    
    
    5.08
    %
    
    $
    2,146,548
    
    
    $
    27,908
    
    
    
    5.20
    %Interest-BearingLiabilities:Deposits:Interest-bearing demand
deposits
    
    $
    237,081
    
    
    $
    829
    
    
    
    1.40
    %
    
    $
    218,048
    
    
    $
    639
    
    
    
    1.17
    %
    
    $
    237,555
    
    
    $
    808
    
    
    
    1.36
    %Money-market demand accounts
and savings accounts
    
    
    391,048
    
    
    
    1,661
    
    
    
    1.70
    
    
    
    348,088
    
    
    
    1,075
    
    
    
    1.24
    
    
    
    366,664
    
    
    
    1,464
    
    
    
    1.60Time deposits less than
$100,000
    
    
    759,044
    
    
    
    5,334
    
    
    
    2.81
    
    
    
    752,471
    
    
    
    4,818
    
    
    
    2.56
    
    
    
    779,302
    
    
    
    5,459
    
    
    
    2.80Time deposits of $100,000 or
More
    
    
    98,565
    
    
    
    587
    
    
    
    2.38
    
    
    
    83,544
    
    
    
    458
    
    
    
    2.19
    
    
    
    94,939
    
    
    
    542
    
    
    
    2.28Public funds
    
    
    23,840
    
    
    
    138
    
    
    
    2.32
    
    
    
    42,601
    
    
    
    167
    
    
    
    1.57
    
    
    
    25,141
    
    
    
    143
    
    
    
    2.28Total interest-bearing
deposits
    
    
    1,509,578
    
    
    
    8,549
    
    
    
    2.28
    
    
    
    1,444,752
    
    
    
    7,157
    
    
    
    2.00
    
    
    
    1,503,601
    
    
    
    8,416
    
    
    
    2.24Borrowings:Federal funds purchased and
repurchase agreements
    
    
    222,044
    
    
    
    1,440
    
    
    
    2.59
    
    
    
    203,697
    
    
    
    1,402
    
    
    
    2.75
    
    
    
    227,091
    
    
    
    1,451
    
    
    
    2.56FHLB
advances(6)
    
    
    133,601
    
    
    
    1,623
    
    
    
    4.86
    
    
    
    253,378
    
    
    
    2,494
    
    
    
    3.94
    
    
    
    207,487
    
    
    
    268
    
    
    
    0.52Notes payable and other
borrowings
    
    
    56,494
    
    
    
    994
    
    
    
    7.04
    
    
    
    57,144
    
    
    
    873
    
    
    
    6.11
    
    
    
    55,672
    
    
    
    938
    
    
    
    6.74Total borrowings
    
    
    412,139
    
    
    
    4,057
    
    
    
    3.92
    
    
    
    514,219
    
    
    
    4,769
    
    
    
    3.72
    
    
    
    490,250
    
    
    
    2,657
    
    
    
    2.16Total interest-bearing
liabilities
    
    $
    1,921,717
    
    
    $
    12,606
    
    
    
    2.64
    %
    
    $
    1,958,971
    
    
    $
    11,926
    
    
    
    2.44
    %
    
    $
    1,993,851
    
    
    $
    11,073
    
    
    
    2.24
    %Net interest income (tax
equivalent)(1) (5)
    
    
    
    
    
    $
    15,722
    
    
    
    2.80
    %
    
    
    
    
    
    $
    15,072
    
    
    
    2.64
    %
    
    
    
    
    
    $
    16,835
    
    
    
    2.96
    %Net interest margin (tax
equivalent)(1) (6)
    
    
    
    
    
    
    
    
    
    
    3.03
    %
    
    
    
    
    
    
    
    
    
    
    2.84
    %
    
    
    
    
    
    
    
    
    
    
    3.14
    %Net interest income(2)(5)
    
    
    
    
    
    $
    15,120
    
    
    
    
    
    
    
    
    
    
    $
    14,167
    
    
    
    
    
    
    
    
    
    
    $
    16,160Net interest margin(2)
    
    
    
    
    
    
    
    
    
    
    2.91
    %
    
    
    
    
    
    
    
    
    
    
    2.67
    %
    
    
    
    
    
    
    
    
    
    
    3.01
    %
   (1)
    
    Adjusted for 35% tax rate in 2005 and 2004 and adjusted for the dividends-received
deduction where applicable.(2)
    
    Not adjusted for 35% tax rate in 2005 and 2004 or for the dividends-received deduction.(3)
    
    Nonaccrual loans are included in the average balance; however, these loans are not earning
any interest.(4)
    
    Includes loan fees which are immaterial.(5)
    
    The following table reconciles reported net interest income on a tax equivalent basis for the
periods presented: 1Q05
    
    
    1Q04
    
    
    4Q04Net interest income
    
    $
    15,120
    
    
    $
    14,167
    
    
    $
    16,160Tax equivalent adjustment to net interest income
    
    
    602
    
    
    
    905
    
    
    
    675Net interest income, tax equivalent basis
    
    $
    15,722
    
    
    $
    15,072
    
    
    $
    16,835
  (6)
    
    For the three months ended December 31, 2004,
$2.1 million of accelerated accretion for a purchase accounting adjustment is reflected in interest and average rate. Net interest margin (tax equivalent)
excluding the adjustment would have been 2.74% PAGE 19




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##### Table of Contents



Net interest income was $15.1 million and $14.2 million during the three months ended
March 31, 2005 and 2004, respectively, an increase of 6.7%. Net interest income increased as a
result of the increase in the yields on earning assets being greater than the increase in average
rates paid on deposits and borrowings. Evidence of this is the increase in the Companys net
interest margin (tax equivalent net interest income as a percentage of earning assets) to 3.03% for
the three months ended March 31, 2005 compared to 2.84% for the comparable period in 2004. The net
interest margin increased 29 basis points compared to the adjusted fourth quarter of 2004 net
interest margin of 2.74% (that is, excluding the $2.1 million purchase accounting adjustment associated with the
acquisition of Big Foot Financial Corp. on the prepaid FHLB advances). Trends in average earning assets include:  
    Yields on average earning assets increased 36 basis points in the first
quarter of 2005 compared to the first quarter of 2004, while average balances
decreased by $47.1 million.
    Yields on average earning assets increased by 24 basis points compared
to the fourth quarter of 2004.
    Average cash equivalents decreased by $148.7 million compared to March
31, 2004 and by $14.2 million compared to the fourth quarter of 2004, due to more
proactive funds management.
    Yields on average loans remained constant while average loans increased
by $179.1 million in the quarter ended March 31, 2005 compared to the same period in 2004 and by
$75.9 million compared to the fourth quarter of 2004.
    Yields on average securities decreased 20 basis points and balances
decreased by $77.5 million in the first quarter of 2005 compared to the similar
period in 2004. Yields on average securities increased by 28 basis points compared
to the fourth quarter of 2004.  
    Consistent with its strategy, the Company has changed the mix
of its securities portfolio through the sale of U.S. government-sponsored
agency notes in the fourth quarter of 2004 and the first quarter of 2005
and the investment in mortgage-backed securities described below.
    During the first quarter, the Company invested $226.9 million
in hybrid adjustable rate mortgage-backed securities with a weighted
average yield of 4.85% as well as $35.1 million in 15-year fixed
mortgage-backed securities with a weighted average yield of 4.72%. The
Company expects these securities to provide added liquidity to fund future
loan growth. Trends in interest-bearing liabilities include:  
    Yields on interest-bearing liabilities increased by 20 basis points and
the average balances decreased $37.3 million in the first quarter of 2005 compared
to the similar period in 2004.
    Average interest-bearing deposits increased by $64.8 million while
yields increased 28 PAGE 20




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##### Table of Contents



basis points compared to the similar period of 2004. Most of this increase was in
money market and savings accounts. The Company lowered the interest rates paid on
its NOW, money market, and savings accounts at the end of the first quarter of 2005.
    Average interest-bearing deposits increased by $6.0 million compared to
the prior quarter, but yields increased by only 4 basis points.
    Total average borrowings decreased by $102.1 million while yields
increased by 20 basis points. This significant decrease is a result of the
prepayment of $115.0 million in FHLB advances in the fourth quarter of 2004.
    Compared to the fourth quarter of 2004, total average borrowings
decreased by $78.1 million while yields increased by 4 basis points, excluding the
purchase accounting adjustment mentioned above. Noninterest Income Noninterest income, excluding net gains on securities transactions, was $2.8 million for the
three months ended March 31, 2005, an increase of $1.7 million, or 160.6%, over the comparable
period in 2004. The noninterest income, excluding net gains on securities transactions, to average
assets ratio was 0.51% for the three months ended March 31, 2005 compared to 0.19% for the same
period in 2004. The increase in noninterest income was due to primarily to the following factors:  
    Net trading profits were $45,000 in the first quarter of 2005 compared
to trading losses of $1.8 million in the first quarter of 2004. Option income,
included in net trading profits, decreased by $1.6 million in the same period.
This decrease reflects managements decision to reduce the level of trading
activities and to re-focus the securities portfolio to provide liquidity for loan
growth.
    Insurance and brokerage commissions increased by $29,000 in the three
months ended March 31, 2005 compared to the similar period in 2004.
    Customer service fees decreased by 5.4% in the first
quarter of 2005.
    Gains on sales of loans decreased during the first quarter of 2005
by 61.5% or $99,000 compared to the first quarter of 2004 due to a lower level of
mortgage refinancing volume and more variable rate mortgages which were retained in
the portfolio rather than sold.
    Increase in the cash surrender value of life insurance decreased by
$41,000 to $422,000 during the three months ended March 31, 2005 compared to the
similar period in 2004.
    Trust income decreased by 6.0% to $140,000 compared to the three months
ended March 31, 2004.
    Net gains on securities transactions decreased by $2.8 million to
$112,000 during the first quarter of 2005 compared to the similar period in 2004 as
the Company deemphasized securities activities as a source of income. PAGE 21




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##### Table of Contents



Noninterest Expenses Total noninterest expenses increased 10.4%, or $1.1 million, to $12.2 million during the first
quarter of 2005 compared to $11.0 million for the comparable period in 2004. The noninterest
expenses to average assets ratio was 2.20% for the three months ended March 31, 2005 compared to
1.95% for the same period in 2004. The efficiency ratio was 64.81% for the three months ended
March 31, 2005 compared to 66.97% for the same period in 2004. The efficiency ratio is equal to
noninterest expenses less amortization and other real estate expense divided by the sum of net
interest income on a fully tax-equivalent basis plus noninterest income excluding security gains.
The decrease in the efficiency ratio was due primarily to the increase in net interest income on a
fully tax-equivalent basis and in noninterest income during the quarter. Total other expenses increased due to the following factors:  
    Salaries and benefits expense increased by $924,000 or 14.3% during the
first quarter of 2005 compared to the first quarter of 2004 reflecting 15 additions
to management.
    Occupancy expense increased by $38,000 or 2.2% during the first quarter
of 2005 compared to the similar period in 2004.
    Professional services expense rose $328,000 or 37.2% to $1.2 million in
the first quarter of 2005 compared to the first quarter of 2004 reflecting
increases in internal and external audit expense, some of it relating to
Sarbanes-Oxley compliance.
    Marketing expenses were $237,000 higher than in the first quarter of 2004
as a result of increased marketing efforts. Income Taxes The Company recorded income tax expense of $1.3 million, or 24.7% of income, and $1.5 million,
or 23.6% of income, for the quarters ended March 31, 2005 and 2004, respectively. This increase in
the tax rate was due to the reduction in U.S. government and government-sponsored agencies
securities resulting in a smaller net operating loss for state income taxes. Financial Condition Set forth below are some balance sheet highlights at March 31, 2005 compared to December 31,
2004 and March 31, 2004.  
    Total assets increased 2.3% to $2.3 billion at March 31, 2005 compared to year end.
    In line with the Companys objectives, total loans increased 4.7% to $1.3 billion at
March 31, 2005 compared to year end 2004 and increased 19.8% from a year ago.
    Loan to deposit ratio rose to 76.97% from 73.13% at December 31, 2004 and 68.33% at
March 31, 2004.
    Deposits decreased modestly by 0.5% to $1.7 billion in the first quarter of 2005
compared to year end but increased by 6.3% compared to March 31, 2004. PAGE 22




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Set forth below are some asset quality highlights at March 31, 2005 compared to December 31,
2004 and March 31, 2004.  
    Net recoveries of charge-offs returned $164,000 to the allowance for loan losses
at March 31, 2005.
    The allowance for loan losses was 1.44% of total loans, versus 1.46% at year end and
1.48% at March 31, 2004.
    The allowance for loan losses increased to 2.08 times nonperforming loans from 1.82
times at year end and 1.08 times at March 31, 2004.
    Nonperforming loans were reduced to 0.69% of total loans from 0.80% at year end and
1.37% at March 31, 2004.
    Nonperforming assets declined to 0.78% of total assets from 0.81% at year end and 0.96%
at March 31, 2004. Loans The following table sets forth the composition of the Companys loan portfolio as of the
indicated dates. March 31,
    
    
    December 31,2005
    
    
    2004Loan
    
    
    
    
    
    
    LoanCategory
    
    
    
    
    
    
    Categoryto Gross
    
    
    
    
    
    
    to GrossAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans(Dollars in thousands)Commercial
    
    $
    212,498
    
    
    
    16.5
    %
    
    $
    211,278
    
    
    
    17.2
    %Commercial real estate
    
    
    824,669
    
    
    
    64.0
    
    
    
    781,547
    
    
    
    63.4Agricultural
    
    
    65,364
    
    
    
    5.1
    
    
    
    62,949
    
    
    
    5.1Consumer real estate
    
    
    175,333
    
    
    
    13.6
    
    
    
    164,455
    
    
    
    13.4Consumer installment
    
    
    10,533
    
    
    
    0.8
    
    
    
    10,665
    
    
    
    0.9Total loans, gross
    
    
    1,288,397
    
    
    
    100.0
    %
    
    
    1,230,894
    
    
    
    100.0
    %Net deferred fees
    
    
    (454
    )
    
    
    
    
    
    
    (494
    )Total loans
    
    $
    1,287,943
    
    
    
    
    
    
    $
    1,230,400
 Included in consumer real estate are $801,000 and $693,000 of loans held for sale at March 31,
2005 and December 31, 2004, respectively. Total loans increased $57.5 million, or 4.7%, to $1.3 billion at March 31, 2005 from December
31, 2004. Set forth below are other highlights of the loan portfolio.  
    Commercial loans increased $1.2 million to $212.5 million as of March 31, 2005 from
$211.3 million as of December 31, 2004.
    Commercial real estate loans rose to $824.7 million at March 31, 2005, an increase of
5.5% from December 31, 2004 reflecting the addition of lending personnel to assist in the growth
in this primary area of focus. PAGE 23




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##### Table of Contents




    Agricultural loans increased $2.4 million, or 3.8%, as of March 31, 2005 compared to
December 31, 2004.
    Consumer real estate loans increased $10.9 million, or 6.6%, as of March 31, 2005
compared to December 31, 2004. Many consumer residential mortgage loans the Company originates are sold in the secondary
market. At any point in time, loans will be at various stages of the mortgage banking process.
Included as part of consumer real estate loans are loans held for sale. The carrying value of these
loans approximated their market value at that time. The Company attempts to balance the types of loans in its portfolio with the objective of
reducing risk. Some of the risks the Company attempts to reduce include:  
    The primary risks associated with commercial loans are the quality of the borrowers
management, financial strength and cash flow resources, and the impact of local economic
factors.
    Risks associated with real estate loans include concentrations of loans in a certain
loan type, such as commercial or residential, and fluctuating land and property values.
    Consumer loans also have risks associated with concentrations of loans in a single type
of loan, as well as the risk a borrower may become unemployed as a result of deteriorating
economic conditions. Allowance for Loan Losses The allowance for loan losses has been established to provide for those loans that may not be
repaid in their entirety for a variety of reasons. The allowance is maintained at a level
considered by management to be adequate to provide for probable incurred losses. The allowance is
increased by provisions charged to earnings and is reduced by chargeoffs, net of recoveries. The
provision for loan losses is based upon past loan loss experience and managements evaluation of
the loan portfolio under current economic conditions. Loans are charged to the allowance for loan
losses when, and to the extent, they are deemed by management to be uncollectible. The allowance
for loan losses is composed of allocations for specific loans and a historical portion for all
other loans. Following is a summary of changes in the allowance for loan losses for the three months ended
March 31: 2005
    
    
    2004(In thousands)Balance, January 1
    
    $
    17,961
    
    
    $
    15,714Provision charged to operations
    
    
    430
    
    
    
    756Loans charged off
    
    
    (238
    )
    
    
    (671
    )Recoveries
    
    
    402
    
    
    
    80Balance, March 31
    
    $
    18,555
    
    
    $
    15,879
 PAGE 24




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The Company recognizes that credit losses will be experienced and the risk of loss will
vary with, among other things, general economic conditions; the type of loan being made; the
creditworthiness of the borrower over the term of the loan; and in the case of a collateralized
loan, the quality of the collateral for such loan. The allowance for loan losses represents the
Companys estimate of the amount deemed necessary to provide for probable incurred losses in the
portfolio. In making this determination, the Company analyzes the ultimate collectibility of the
loans in its portfolio by incorporating feedback provided by internal loan staff and information
provided by examinations performed by regulatory agencies. The Company makes an ongoing evaluation
as to the adequacy of the allowance for loan losses. On a quarterly basis, management of the Banks meets to review the adequacy of the allowance
for loan losses. Each loan officer grades his or her individual commercial credits and the
Companys independent loan review personnel then review the officers grades. In the event that the
loan is downgraded during this review, the loan is included in the allowance analysis at the
downgraded level. The grading system is in compliance with the regulatory classifications, and the
allowance is allocated to the loans based on the regulatory grading, except in instances where
there are known differences (e.g., collateral value is nominal). The
allowance for loan losses represents managements estimate of
probable credit losses inherent in
the loan portfolio. Estimating the amount of the allowance for loan losses requires significant
judgment and the use of estimates related to the amount and timing of expected future cash flows on
impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience,
and consideration of current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type on the consolidated
balance sheet. Loan losses are charged off against the allowance, while recoveries of amounts
previously charged off are credited to the allowance. A provision for loan losses is charged to
operations based on managements periodic evaluation of the factors previously mentioned, as well
as other pertinent factors. The Companys methodology for determining the allowance for loan losses represents an
estimation done pursuant to either Statement of Financial Accounting
Standards (SFAS)  No. 5,
Accounting for Contingencies, and SFAS 114, Accounting by Creditors for Impairment of a Loan. The
allowance reflects expected losses resulting from analyses developed through specific loss
allocations for individual loans and historical loss experience for each loan category. The
specific loss allocations are based on regular analyses of all commercial, commercial real estate
and agricultural loans over $300,000 where the internal credit rating is assigned to the
substandard, doubtful, or loss classification. These analyses involve a high degree of judgment in
estimating the amount of loss associated with specific loans, including estimating the amount and
timing of future cash flows and collateral values. The Companys historical loss experience is
updated quarterly. The allowance for loan losses also includes consideration of concentrations and
changes in portfolio mix and volume, and other qualitative factors. There are many factors affecting the allowance for loan losses; some are quantitative while
others require qualitative judgment. The process for determining the allowance (which management
believes adequately considers all of the potential factors which
might possibly result in credit
losses) includes subjective elements and, therefore, may be susceptible to significant change. To
the extent actual outcomes differ from management estimates, additional provision for credit losses
could be required that could adversely affect earnings or financial position in future periods. The Companys provision for loan losses was $430,000 for the first quarter of 2005 compared to
$756,000 for the similar period in 2004. The Company had net recoveries of charged-off PAGE 25




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##### Table of Contents



loans of $164,000 for the first three months of 2005 compared to net charge-offs of $591,000 for
the same period in 2004. Asset quality has improved, which is evidenced by the decrease in
charged-off, nonperforming, and classified loans. The following quarter-to-date table, as well as the
discussions below, reflects this improvement. March 31,
    
    
    December 31,2005
    
    
    2004Net loans charged off to average loans
    
    
    -0.05
    %
    
    
    0.19
    %Provision for loan losses to total loans
    
    
    0.14
    %
    
    
    0.70
    %Allowance for loan losses to total loans
    
    
    1.44
    %
    
    
    1.46
    %Allowance to nonperforming loans
    
    
    2.08
    x
    
    
    1.82
    x
 Nonaccrual and Nonperforming Loans Nonaccrual loans decreased $942,000 to $8.9 million at March 31, 2005 from $9.9 million at
December 31, 2004. Nonperforming loans include
nonaccrual loans and accruing loans that are 90 days or more
delinquent. Typically, these loans have adequate collateral protection or personal guaranties to
provide a source of repayment to the bank. Nonperforming loans were $8.9 million at March 31, 2005
compared to $9.9 million at December 31, 2004. The following table sets forth information on the Companys nonperforming loans and other
nonperforming assets as of the indicated dates. March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Nonaccrual and impaired loans not
accruing
    
    $
    8,923
    
    
    $
    9,865Impaired and other loans 90 days past
due and accruing
    
    
    4
    
    
    
    29Total nonperforming loans
    
    
    8,927
    
    
    
    9,894Other real estate
    
    
    8,818
    
    
    
    8,224Total nonperforming assets
    
    $
    17,745
    
    
    $
    18,118Total nonperforming loans to total
loans
    
    
    0.69
    %
    
    
    0.80
    %Total nonperforming assets to total
loans and other real estate
    
    
    1.37
    
    
    
    1.46Total nonperforming assets to total
assets
    
    
    0.78
    
    
    
    0.81
 The Company utilizes an internal asset classification system as a means of reporting
problem and potential problem assets. At each scheduled Bank Board of Directors meeting, a watch
list is presented, showing significant loan relationships listed as Special Mention, Substandard,
and Doubtful. An asset is classified Substandard if it is inadequately protected by the current
net worth and paying capacity of the obligor or the collateral pledged, if any. Assets
classified as Doubtful have all the weaknesses inherent in those classified Substandard with the
added characteristic that the weaknesses present make collection or liquidation in full, on the
basis of currently existing facts, conditions and values, highly questionable and improbable.
Assets classified as Loss are those PAGE 26




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##### Table of Contents



considered uncollectible and viewed as non-bankable assets and have been charged off. Assets that
do not currently expose the Company to sufficient risk to warrant classification in one of the
aforementioned categories, but possess weaknesses that may or may not be within the control of the
customer, are deemed to be Special Mention. The Companys determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the Banks primary regulators in the course of their
regulatory examinations, which can order the establishment of additional general or specific loss
allowances. Although management believes that adequate specific and general loan loss allowances
have been established, actual losses are dependent upon future events and, as such, further
additions to the level of specific and general loan loss allowances may become necessary. Potential problem loans are loans included on the watch list presented to the Board of
Directors that do not meet the definition of a nonperforming loan, but where known information
about possible credit problems of borrowers causes management to have serious doubts as to the
ability of such borrowers to comply with present loan repayment terms. Total classifications
include those loans that have been adversely classified by bank examiners and the Companys
internal loan review department. The Companys allowance for loan losses is considered by management to be adequate at March
31, 2005. The following table sets forth information on the Companys classified loans as of the
indicated dates. March 31,
    
    
    December 31,2005
    
    
    2004(In thousands)Special mention
    
    $
    26,304
    
    
    $
    30,666Substandard
    
    $
    36,204
    
    
    $
    38,107Doubtful
    
    
    2,950
    
    
    
    1,849Total classified
    
    
    39,154
    
    
    
    39,956Total special mention and classified
    
    $
    65,458
    
    
    $
    70,622
 Total special mention and classified loans decreased by $5.2 million or 7.3% during the first
quarter of 2005. The Companys credit risk administration process has focused on enhanced
underwriting standards and proactive resolutions for loan workouts. Other real estate owned was $8.8 million at March 31, 2005, an increase of $594,000 compared
to $8.2 million at December 31, 2004. A 103-unit townhome project represents $8.7 million of the
total other real estate owned. Title to the townhome project was acquired in September 2003. The 104
units consisted of 3 finished units and 101 lots to be developed. Midwest Bank and Trust Company
has engaged an established builder to further develop this project. The builder has upgraded units
adding more square footage and amenities to the units being offered for development. At March 31,
2005, 13 units were partially constructed and 3 have been completed with initial marketing efforts
established. At March 31, 2005, the property is recorded at its net realizable value and management
will continue to evaluate the property quarterly for impairment and take valuation adjustments as
deemed necessary. PAGE 27




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##### Table of Contents



Securities The Company manages, via a centralized portfolio management department, its securities
portfolio to provide a source of both liquidity and earnings. Each Bank has its own asset/liability
committee, which develops current investment policies based upon its operating needs and market
circumstances. The investment policy of each Bank is reviewed by senior financial management of the
Company in terms of its objectives, investment guidelines and consistency with overall Company
performance and risk management goals. Each Banks investment policy is formally reviewed and
approved annually by its board of directors. The asset/liability committee of each Bank is
responsible for reporting and monitoring compliance with the investment policy. Reports are
provided to each Banks board of directors and the board of directors of the Company on a regular
basis. The following tables set forth the composition of the Companys securities portfolio by major
category as of March 31, 2005. March 31, 2005Held-to-Maturity
    
    
    Available-for-Sale
    
    
    TotalAmortized
    
    
    Fair
    
    
    Amortized
    
    
    
    
    
    
    Amortized
    
    
    
    
    
    
    % ofCost
    
    
    Value
    
    
    Cost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair Value
    
    
    Portfolio(In thousands)U.S. Treasury and obligations of
U.S. government-sponsored agencies
    
    $
    
    
    
    $
    
    
    
    $
    361,361
    
    
    $
    328,606
    
    
    $
    361,361
    
    
    $
    328,606
    
    
    
    42.34
    %Obligations of states and
political subdivisions
    
    
    8,854
    
    
    
    9,029
    
    
    
    3,274
    
    
    
    3,312
    
    
    
    12,128
    
    
    
    12,341
    
    
    
    1.42Mortgage-backed securities
    
    
    74,407
    
    
    
    73,116
    
    
    
    308,292
    
    
    
    303,373
    
    
    
    382,699
    
    
    
    376,489
    
    
    
    44.83Equity securities
    
    
    
    
    
    
    
    
    
    
    86,286
    
    
    
    85,673
    
    
    
    86,286
    
    
    
    85,673
    
    
    
    10.11Other bonds
    
    
    
    
    
    
    
    
    
    
    11,069
    
    
    
    10,441
    
    
    
    11,069
    
    
    
    10,441
    
    
    
    1.30Total
    
    $
    83,261
    
    
    $
    82,145
    
    
    $
    770,282
    
    
    $
    731,405
    
    
    $
    853,543
    
    
    $
    813,550
    
    
    
    100.00
    %
 Securities available-for-sale are carried at fair value, with related unrealized net
gains or losses, net of deferred income taxes, recorded as an adjustment to equity capital. At
March 31, 2005, unrealized losses, net of taxes on securities available-for-sale, were $23.3
million compared to $16.5 million at December 31, 2004. The increase in net unrealized losses on
securities available-for-sale resulted in a $6.8 million decrease in book equity. Securities available-for-sale increased to $731.4 million at March 31, 2005 from $548.2
million at December 31, 2004:  
    The Company has changed the mix of its securities portfolio through the sale of U.S.
government-sponsored agency notes in the fourth quarter of 2004 and the first quarter of 2005
and the investment in mortgage-backed securities to increase liquidity to fund loans as
described below. The Company has established a limit on the duration of all purchases to a
maximum of 9 years and on the premium paid to a maximum of 1% of the underlying principal
(price of $101) for mortgage-backed securities. These limits were set to reduce the
prepayment risk in a declining interest rate environment.
    During the first quarter, the Company invested $226.9 million in 5/1, 7/1, and 10/1
hybrid adjustable rate mortgage-backed securities with a weighted average yield of 4.85% as
well as $35.1 million in 15-year fixed mortgage-backed securities with a weighted average
yield of 4.72%. The Company expects these securities to provide added liquidity to fund
future loan growth. Accordingly, U.S. government and government-sponsored agency
mortgage-backed securities increased 503.7%, or $253.1 million, from $50.3 million at
December 31, 2004 to $303.4 million at March 31, 2005. PAGE 28




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##### Table of Contents




    Equity securities decreased $28.8 million, following the sale of the FNMA Series F
perpetual preferred equity securities, from
$114.5 million at December 31, 2004 to
$85.7 million at March 31, 2005. Equity securities included capital securities of U.S.
government-sponsored agencies and the Federal Home Loan Bank as well as Federal Reserve
Bank stock.
    Obligations of state and political subdivisions increased $1.3 million to $3.3 million
at March 31, 2005 from $2.0 million at December 31, 2004.
    Other bonds decreased $212,000 to $10.4 million at March 31, 2005 compared to $10.7
million at December 31, 2004. Other bonds include high grade corporate bonds primarily
issued by financial institutions. Securities held-to-maturity decreased $6.5 million, or 7.2%, from $89.7 million at December
31, 2004 to $83.3 million at March 31, 2005. There were no trading account securities held at March 31, 2005 or December 31, 2004. When
acquired, the Company holds trading account securities and derivatives on a short-term basis based on
market and liquidity conditions. The Company intends to implement strategies to reduce its securities as a percentage of
earning assets and provide funding for higher yielding loans. The Companys focus on future
investment securities purchases is to maintain an adequate level of liquidity and to shorten the duration of
its securities portfolio. Other Assets The Companys
holdings in bank-owned life insurance (BOLI) increased by $422,000 due to
the increase in the cash surrender value of the insurance. The BOLI is intended to provide funding
for future employee benefit expense. Deposits and Borrowed Funds Total deposits of $1.7 billion at March 31, 2005 represented a decrease of $9.0 million, or
0.5%, from December 31, 2004. Changes in the Companys deposit mix are noted below.  
    Non-interest-bearing deposits were $159.5 million at March 31, 2005,
approximately $17.5 million lower than the $177.0 million level at December 31,
2004.
    Over the same period, interest-bearing deposits increased 0.6%, or $8.5
million to $1.5 billion at March 31, 2005 compared to December 31, 2004.
    Core deposits, which include demand, NOW, money market, and savings,
decreased $12.1 million to $785.2 million at March 31, 2005 from $797.3 million at
December 31, 2004.
    Certificates of deposit under $100,000 increased $13.7 million from
December 31, 2004 to $777.8 million at March 31, 2005. PAGE 29




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##### Table of Contents




    Certificates of deposit over $100,000 and public funds decreased $10.6
million from December 31, 2004 to $110.4 million at March 31, 2005. The majority
of the decrease was a result of maturities of brokered certificates of deposit and
public funds, which were not core deposits and were allowed to mature without being
renewed. The Companys marketing efforts focus on core deposit account growth in its retail markets,
reducing the need to rely on public funds and brokered certificates of deposit. Aggressive
marketing of free checking and NOW accounts continues. Deposit growth is expected in the future as
new customers are added due to new commercial and industrial loans and a commitment to relationship
banking. Federal Home Loan Bank advances, at their fair value, were $131.1 million at March 31, 2005
and $133.6 million at December 31, 2004. The Company has synthetically converted a notional amount
of $137.5 million of its FHLB advances from fixed rate debt to floating rate through interest rate
swap transactions during 2003. The swap transactions require payment of interest by the Company at
the one-month LIBOR rate plus a spread and, in turn, the Company receives an interest payment based
on a fixed rate. These swap transactions resulted in a $256,000 and $762,000 decrease in interest
expense for the three months ended March 31, 2005 and 2004, respectively. As LIBOR increases, the
level of reduced interest expense on these advances decreases, that is, the benefit from the swap
transactions decreases. The weighted average rate for FHLB advances was 4.86% at March 31, 2005,
with average maturities on such advances of 5.4 years. Borrowed funds at March 31, 2005 and December 31, 2004 are listed below: 2005
    
    
    2004(In thousands)Federal funds purchased
    
    $
    22,250
    
    
    $
    Securities sold under agreements to repurchase
    
    
    235,813
    
    
    
    198,401Federal Home Loan Bank advances to bank subsidiaries
    
    
    131,127
    
    
    
    133,628Junior subordinated debt owed to unconsolidated
trusts
    
    
    55,672
    
    
    
    55,672Total
    
    $
    444,862
    
    
    $
    387,701
 The Company has a credit agreement with a correspondent bank, which provides the Company with
a revolving line of credit with a maximum availability of $25.0 million. This revolving line of
credit matures on April 30, 2006. The Company also utilizes securities sold under repurchase agreements as a source of funds.
Most local municipalities and some other organizations must have funds insured or collateralized as
a matter of their own policies. Repurchase agreements provide a source of funds and do not
increase the Companys reserve requirement. Although the balance of repurchase agreements is
subject to variation, particularly seasonal variation, the account relationships represented by
these balances are principally local and have been maintained for relatively long periods of time.
The Company had $235.8 million in securities sold under repurchase agreements at March 31, 2005
compared to $198.4 million at December 31, 2004. The vast majority of the repurchase agreements
are with primary dealers and have maturities of two to three years. PAGE 30




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Capital Resources Stockholders equity decreased $1.6 million from December 31, 2004 to $135.8 million at March
31, 2005. Total capital to average risk-weighted assets decreased to 14.3% on March 31, 2005 from
14.7% on December 31, 2004. The Company and its two subsidiary banks are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet
items calculated under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk weightings and other
factors, and the regulators can lower classifications in certain areas. Failure to meet various
capital requirements can initiate regulatory action that could have a direct material effect on the
financial statements. The prompt corrective action regulations provide five classifications, including well
capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized, although these terms are not used to represent overall financial
condition. If adequately capitalized, regulatory approval is required to accept brokered deposits.
If undercapitalized, capital distributions are limited, as is asset growth and expansion, and
plans for capital restoration are required. Each of the Banks was categorized as well capitalized as of March 31, 2005. Management is
not aware of any conditions or events since the most recent regulatory notification that would
change the Companys or the Banks categories. Capital levels and minimum required levels (dollars in thousands): At March 31, 2005Minimum Required
    
    
    Minimum RequiredActual
    
    
    for Capital Adequacy
    
    
    to be Well CapitalizedAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(In thousands)Total capital to risk-weighted assetsCompany
    
    $
    224,517
    
    
    
    14.3
    %
    
    $
    125,867
    
    
    
    8.0
    %
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    192,247
    
    
    
    13.8
    
    
    
    111,361
    
    
    
    8.0
    
    
    $
    139,201
    
    
    
    10.0
    %Midwest Bank of Western Illinois
    
    
    25,492
    
    
    
    14.2
    
    
    
    14,315
    
    
    
    8.0
    
    
    
    17,894
    
    
    
    10.0Tier I capital to risk-weighted assetsCompany
    
    
    204,773
    
    
    
    13.0
    
    
    
    62,933
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    175,244
    
    
    
    12.6
    
    
    
    55,681
    
    
    
    4.0
    
    
    
    83,521
    
    
    
    6.0Midwest Bank of Western Illinois
    
    
    23,939
    
    
    
    13.4
    
    
    
    7,157
    
    
    
    4.0
    
    
    
    10,736
    
    
    
    6.0Tier I capital to average assetsCompany
    
    
    204,773
    
    
    
    9.1
    
    
    
    89,997
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    175,244
    
    
    
    8.9
    
    
    
    78,622
    
    
    
    4.0
    
    
    
    98,278
    
    
    
    5.0Midwest Bank of Western Illinois
    
    
    23,939
    
    
    
    8.7
    
    
    
    10,949
    
    
    
    4.0
    
    
    
    13,686
    
    
    
    5.0
 PAGE 31




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##### Table of Contents



At December 31, 2004Minimum Required
    
    
    Minimum RequiredActual
    
    
    for Capital Adequacy
    
    
    to be Well CapitalizedAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(In thousands)Total capital to risk-weighted assetsCompany
    
    $
    219,343
    
    
    
    14.7
    %
    
    $
    119,758
    
    
    
    8.0
    %
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    189,276
    
    
    
    14.3
    
    
    
    105,724
    
    
    
    8.0
    
    
    $
    132,155
    
    
    
    10.0
    %Midwest Bank of Western Illinois
    
    
    23,685
    
    
    
    13.7
    
    
    
    13,822
    
    
    
    8.0
    
    
    
    17,278
    
    
    
    10.0Tier I capital to risk-weighted assetsCompany
    
    
    198,597
    
    
    
    13.3
    
    
    
    59,879
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    172,985
    
    
    
    13.1
    
    
    
    52,862
    
    
    
    4.0
    
    
    
    79,293
    
    
    
    6.0Midwest Bank of Western Illinois
    
    
    21,936
    
    
    
    12.7
    
    
    
    6,911
    
    
    
    4.0
    
    
    
    10,367
    
    
    
    6.0Tier I capital to average assetsCompany
    
    
    198,597
    
    
    
    8.5
    
    
    
    93,225
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    172,985
    
    
    
    8.5
    
    
    
    80,991
    
    
    
    4.0
    
    
    
    101,239
    
    
    
    5.0Midwest Bank of Western Illinois
    
    
    21,936
    
    
    
    7.4
    
    
    
    11,816
    
    
    
    4.0
    
    
    
    14,770
    
    
    
    5.0
 The trust preferred securities issued by MBHI Capital Trust I, II, III, and IV are
currently included in the Tier 1 capital of the Company for regulatory capital purposes. The
Federal Reserve Board may in the future disallow inclusion of the trust preferred securities in
Tier 1 capital for regulatory capital purposes. As of March 31, 2005, assuming the Company was not
permitted to include the $54.0 million in trust preferred securities issued by MBHI Capital Trust
I, II, III, and IV in its Tier I capital, the Company would still exceed the regulatory required
minimums for capital adequacy purposes. If the trust preferred securities were no longer permitted
to be included in Tier 1 capital, the Company would also be permitted to redeem the capital
securities without penalty. See Note 9 to the notes to the unaudited consolidated financial
statements. Liquidity Liquidity measures the ability of the Company to meet maturing obligations and its existing
commitments, to withstand fluctuations in deposit levels, to fund its operations, and to provide
for customers credit needs. The liquidity of the Company principally depends on cash flows from
operating activities, investment in and maturity of assets, changes in balances of deposits and
borrowings, and its ability to borrow funds in the money or capital markets. Net cash inflows provided by operations were $4.5 million for the three months ended March 31,
2005 compared to inflows of $5.5 million for the comparable period in 2004. Net cash outflows used
in investing activities were $245.0 million in the first three months of 2005 compared to net cash
inflows of $62.9 million for the comparable period in 2004. Cash inflows from financing activities
for the three months ended March 31, 2005 were $51.6 million compared to a net outflow of $16.1
million in the comparable period during 2004. In the event of short-term liquidity needs, the Banks may purchase federal funds from
correspondent banks. In addition, the Company has established repurchase agreements and brokered
certificates of deposit arrangements with various financial sources. The Banks membership in the
Federal Home Loan Bank System gives it the ability to borrow funds from the Federal Home Loan Bank
of Chicago for short- or long-term purposes under a variety of programs. Interest received net of interest paid was a principal source of operating cash inflows for
the three months ended March 31, 2005 and March 31, 2004, respectively. Management of investing
and financing activities and market conditions determines the level and the stability of net
interest cash PAGE 32




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##### Table of Contents



flows. Managements policy is to mitigate the impact of changes in market interest rates to the
extent possible so that balance sheet growth is the principal determinant of growth in net interest
cash flows. 
 ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK Interest Rate Sensitivity Analysis The Companys overall interest rate sensitivity is demonstrated by net interest income
analysis. Net interest income analysis measures the change in net interest income in the event of
hypothetical changes in interest rates. This analysis assesses the risk of change in net interest
income in the event of sudden and sustained 1.0% to 2.0% increases and decreases in market interest
rates. The table below presents the Companys projected changes in net interest income for the
various rate shock levels at March 31, 2005 and December 31, 2004. Change in Net Interest Income Over One Year HorizonAt March 31, 2005
    
    
    At December 31, 2004
    
    
    GuidelinesChange in
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    MaximumLevels of
    
    Dollar
    
    
    Percentage
    
    
    Dollar
    
    
    Percentage
    
    
    PercentageInterest Rates
    
    Change
    
    
    Change
    
    
    Change
    
    
    Change
    
    
    Change+200 bp
    
    $
    501
    
    
    
    0.77
    %
    
    $
    251
    
    
    
    0.43
    %
    
    
    -15.0
    %+100 bp
    
    
    609
    
    
    
    0.93
    
    
    
    29
    
    
    
    0.05
    
    
    
    -15.0-100 bp
    
    
    3,038
    
    
    
    4.65
    
    
    
    329
    
    
    
    0.56
    
    
    
    -15.0
 As shown above, at March 31, 2005, the effect of an immediate 200 basis point increase in
interest rates would increase the Companys net interest income by 0.77%, or $501,000. The effect
of an immediate 100 basis point reduction in rates would increase the Companys net interest income
by 4.65%, or $3.0 million. The change in net interest income over the one year horizon from March 31, 2005 compared to
December 31, 2004 can be attributed to changes in core deposit pricing disciplines at our flagship
bank at the end of the first quarter of 2005. These changes more accurately reflect our current
pricing strategy for core deposits and our planned actions in an environment of sharply changing
rates. Changes in the mix of earning assets and interest-bearing liabilities increased the Companys
liability sensitivity during the past twelve months. Computations of the prospective effects of hypothetical interest rate changes are based on
numerous assumptions, including relative levels of market interest rates, loan prepayments, and
deposit decay rates, and should not be relied upon as indicative of actual results. Actual values
may differ from those projections set forth above, should market conditions vary from assumptions
used in preparing the analyses. Further, the computations do not contemplate any actions the
Company may undertake in response to changes in interest rates. PAGE 33




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##### Table of Contents



ITEM 4  CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, an evaluation was performed under the
supervision and with the participation of the Companys Chief Executive Officer and Chief Financial
Officer of the effectiveness of the Companys disclosure controls and procedures (as defined in
Exchange Act Rule 240.13a-15(e)). Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer have concluded that the Companys disclosure controls and
procedures were effective as of March 31, 2005 to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and Exchange
Commissions rules and forms. Elimination of Previously Reported Material Weakness As
reported in Item 9A. Controls and Procedures in the Companys Form 10-K
for the year ended December 31, 2004 filed on March 11, 2005, management determined that there was a
material weakness in the Companys system of internal controls over the determination of whether
its available-for-sale floating rate perpetual preferred equity securities were
other-than-temporarily impaired, pursuant to Statement of Financial Accounting Standard No. 115
(Statement 115) and SEC Staff Accounting Bulletin No. 59 (SAB 59). Management of
the Company has taken the following steps to eliminate this material
weakness:  
    Replaced and hired a new Chief Investment Officer.  
    Revised its Investment Policy and Procedures.
    Sold the floating rate FNMA Series F perpetual preferred equity securities in February
2005 that management failed to adequately demonstrate as being temporarily impaired in a
suitable reliable evidential manner acceptable to the Companys independent accounting firm.
    Expanded its documentation and process for evaluating securities that may be or
subsequently become other-than-temporarily impaired for 2005. Management is of the opinion that the material weakness discussed above has been fully
remediated and no longer exists. Changes in internal controls over financial reporting Except
for the changes noted above, there were no changes in the
Companys internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting. PAGE 34




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##### Table of Contents



SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 This report contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Statement under the Safe Harbor Provisions of the Private Securities Litigation Reform Act
of 1995. The Company and its representatives may, from time to time, make written or oral
statements that are forward-looking and provide information other than historical information,
including statements contained in the Form 10-K, the Companys other filings with the Securities
and Exchange Commission or in communications to its stockholders. These statements involve known
and unknown risks, uncertainties and other factors that may cause actual results to be materially
different from any results, levels of activity, performance or achievements expressed or implied by
any forward-looking statement. These factors include, among other things, the factors listed below. In some cases, the Company has identified forward-looking statements by such words or phrases
as will likely result, is confident that, expects, should, could, may, will continue
to, believes, anticipates, predicts, forecasts, estimates, projects, potential,
intends, or similar expressions identifying forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, including the negative of those words and
phrases. These forward-looking statements are based on managements current views and assumptions
regarding future events, future business conditions, and the outlook for the Company based on
currently available information. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those expressed in, or
implied by, these statements. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. In connection with the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995, the Company is hereby identifying important factors that could affect the Companys
financial performance and could cause the Companys actual results for future periods to differ
materially from any opinions or statements expressed with respect to future periods in any
forward-looking statements. Among the factors that could have an impact on the Companys ability to achieve operating
results, growth plan goals, and the beliefs expressed or implied in forward-looking statements are:  
    Managements ability to reduce and effectively manage interest rate risk and the impact
of interest rates in general on the volatility of the Companys net interest income;
    Fluctuations in the value of the Companys investment securities;
    The ability to attract and retain senior management experienced in banking and
financial services;
    The sufficiency of allowances for loan losses to absorb the amount of actual losses
inherent in the existing portfolio of loans;
    The Companys ability to adapt successfully to technological changes to compete
effectively in the marketplace;
    Credit risks and risks from concentrations (by geographic area and by industry) within
the PAGE 35




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##### Table of Contents



Banks loan portfolio and individual large loans;
    The effects of competition from other commercial banks, thrifts, mortgage banking
firms, consumer finance companies, credit unions, securities brokerage firms, insurance
companies, money market and other mutual funds, and other financial institutions operating
in the Companys market or elsewhere or providing similar services;
    The failure of assumptions underlying the establishment of allowances for loan losses
and estimation of values of collateral and various financial assets and liabilities;
    Volatility of rate sensitive deposits;
    Operational risks, including data processing system failures or fraud;
    Asset/liability matching risks and liquidity risks;
    Changes in the economic environment, competition, or other factors that may influence
the anticipated growth rate of loans and deposits, the quality of the loan portfolio and
loan and deposit pricing, and the Companys ability to successfully pursue acquisition and
expansion strategies and integrate any acquired companies;
    The impact from liabilities arising from legal or administrative proceedings on the
financial condition of the Company;
    Possible administrative or enforcement actions of banking regulators in connection with
any material failure of the Banks to comply with banking laws, rules or regulations,
including the failure of the Company and Midwest Bank and Trust Company to comply with the
written agreement it entered into with the Federal Reserve Board and Illinois Department of
Financial and Professional Regulation;
    Possible administrative or enforcement actions of the Securities and Exchange
Commission (the SEC) in connection with the SEC inquiry of the restatement of the
Companys September 30, 2002 financial statements;
    Governmental monetary and fiscal policies, as well as legislative and regulatory
changes, that may result in the imposition of costs and constraints on the Company through
higher FDIC insurance premiums, significant fluctuations in market interest rates,
increases in capital requirements, and operational limitations;
    Changes in general economic or industry conditions, nationally or in the communities in
which the Company conducts business;
    Changes in accounting principles, policies, or guidelines affecting the businesses
conducted by the Company;
    Acts of war or terrorism; and
    Other economic, competitive, governmental, regulatory, and technical factors affecting
the Companys operations, products, services, and prices. PAGE 36




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##### Table of Contents



The Company wishes to caution that the foregoing list of important factors may not be
all-inclusive and specifically declines to undertake any obligation to publicly revise any
forward-looking statements that have been made to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated events. With respect to forward-looking statements set forth in the notes to consolidated financial
statements, including those relating to contingent liabilities and legal proceedings, some of the
factors that could affect the ultimate disposition of those contingencies are changes in applicable
laws, the development of facts in individual cases, settlement opportunities, and the actions of
plaintiffs, judges, and juries. PAGE 37




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##### Table of Contents



PART II 
 Item 1. Legal Proceedings There are no material pending legal proceedings to which the Company or its subsidiaries are a
party other than ordinary routine litigation incidental to their respective businesses. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information None 
 Item 6. Exhibits The following exhibits are either filed as part of this report or are incorporated herein by
reference: 3.1
    
    Restated Certificate of Incorporation, as amended (incorporated
by reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).3.2
    
    Amended and Restated By-laws, filed February 28, 2005
(incorporated by reference to Registrants Report on Form 8-K
filed February 28, 2005, File No. 001-13735).3.11
    
    Certificate of Amendment of Restated Certificate of
Incorporation (incorporated by reference to Registrants Form
10-Q for quarter ended June 30, 2002, File No. 001-13735).4.1
    
    Specimen Common Stock Certificate (incorporated by reference to
Registrants Registration Statement on Form S-1, Registration
No. 333-42827).4.2
    
    Certain instruments defining the rights of the holders of
long-term debt of the Company and certain of its subsidiaries,
none of which authorize a total amount of indebtedness in excess
of 10% of the total assets of the Company and its subsidiaries
on a consolidated basis, have not been filed as Exhibits. The
Company hereby agrees to furnish a copy of any of these
agreements to the SEC upon request.*10.3
    
    Midwest Banc Holdings, Inc. 1996 Stock Option Plan (incorporated
by reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).*10.3a
    
    Amendment to the Midwest Banc Holdings, Inc. 1996 Stock Option
Plan (incorporated by reference to Registrants Annual Report on
Form 10-K for the year ended December 31, 1998, File No.
0-29652).*10.4
    
    Form of Transitional Employment Agreements (incorporated by
reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).10.5
    
    Lease dated as of December 24, 1958, between Western National
Bank of Cicero and Midwest Bank and Trust Company, as amended
(incorporated by reference to Registrants Registration
Statement on Form S-1, Registration No. 333-42827).
 PAGE 38




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##### Table of Contents



10.6
    
    Britannica Centre Lease, dated as of May 1, 1994, between
Chicago Title and Trust Company, as Trustee under Trust
Agreement dated November 2, 1977 and known as Trust No. 1070932
and Midwest Bank & Trust Company (incorporated by reference to
Registrants Registration Statement on Form S-1, Registration
No. 333-42827).10.7
    
    Lease dated as of March 20, 1996 between Grove Lodge No. 824
Ancient Free and Accepted Masons and Midwest Bank of Hinsdale
(incorporated by reference to Registrants Registration
Statement on Form S-1, Registration No. 333-42827).10.8
    
    Office Lease, undated, between Grove Lodge No. 824 Ancient Free
and Accepted Masons and Midwest Bank of Hinsdale (incorporated
by reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).*10.15
    
    Form of Supplemental Executive Retirement Agreement
(incorporated by reference to Registrants Form 10-Q for the
quarter ended September 30, 2001, File No. 001-13735).*10.16
    
    Form of Transitional Employment Agreement (Executive Officer
Group) (incorporated by reference to Registrants Form 10-Q for
the quarter ended September 30, 2001, File No. 001-13735).10.19
    
    Agreement and Plan of Reorganization between the Company and Big
Foot Financial Corp. dated as of July 19, 2002 (incorporated by
reference to Annex A of the Registrants Proxy
Statement/Prospectus dated October 23, 2002, Registration
Statement No. 333- 100090).10.21
    
    Lease dated as of April 29, 1976, between Sanfilippo, Joseph C.
and Grace Ann and Fairfield Savings and Loan Association, as
amended (incorporated by reference to Registrants Form 10-K for
the year ended December 31, 2003, File No. 001-13735).10.22
    
    Lease dated as of August 28, 2002 between Glen Oak Plaza and
Midwest Bank and Trust Company (incorporated by reference to
Registrants Form 10-K for the year ended December 31, 2003,
File No. 001-13735).10.24
    
    Loan Agreement as of April 8, 2004, between the Company and
LaSalle Bank National Association (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30, 2004,
File No. 001-13735).10.25
    
    Employment Agreement as of September 28, 2004 between the
Company and the Chief Executive Officer (incorporated by
reference to Registrants Form 10-Q for the quarter ended September
30, 2004, File No. 001-13735).10.26
    
    Retirement Agreement as of September 28, 2004 between the
Company and retiring Chief Executive Officer (incorporated by
reference to Registrants Form 10-Q for the quarter ended September
30, 2004, File No. 001-13735).10.27
    
    Midwest Banc Holdings, Inc. Severance Policy as of December 20,
2004 (incorporated by reference to Registrants Form 8-K dated
November 22, 2004, File No. 001-13735).10.28
    
    First amendment to Loan Agreement as of April 8, 2004, between
the Company and LaSalle Bank National Association, filed April
28, 2005 (incorporated by reference to Registrants Report on
Form 8-K filed April 28, 2005, File No. 001-13735).31.1
    
    Rule 13a-14(a) Certification of Principal Executive Officer.31.2
    
    Rule 13a-14(a) Certification of Principal Financial Officer.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from
the Companys Chief Executive Officer and Chief Financial
Officer.
   *
    
    Indicates management contracts or compensatory plans or arrangements required to be filed as
an exhibit. PAGE 39




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 10, 2005 MIDWEST BANC HOLDINGS, INC.
(Registrant)By:
    /s/ James J. GiancolaJames J. Giancola,President and Chief Executive OfficerBy:
    /s/ Daniel R. KadolphDaniel R. Kadolph,Senior Vice President and
Chief Financial Officer PAGE 40




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##### Table of Contents



Exhibit Index 3.1
    
    Restated Certificate of Incorporation, as amended (incorporated
by reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).3.2
    
    Amended and Restated By-laws, filed February 28, 2005
(incorporated by reference to Registrants Report on Form 8-K
filed February 28, 2005, File No. 001-13735).3.11
    
    Certificate of Amendment of Restated Certificate of
Incorporation (incorporated by reference to Registrants Form
10-Q for quarter ended June 30, 2002, File No. 001-13735).4.1
    
    Specimen Common Stock Certificate (incorporated by reference to
Registrants Registration Statement on Form S-1, Registration
No. 333-42827).4.2
    
    Certain instruments defining the rights of the holders of
long-term debt of the Company and certain of its subsidiaries,
none of which authorize a total amount of indebtedness in excess
of 10% of the total assets of the Company and its subsidiaries
on a consolidated basis, have not been filed as Exhibits. The
Company hereby agrees to furnish a copy of any of these
agreements to the SEC upon request.*10.3
    
    Midwest Banc Holdings, Inc. 1996 Stock Option Plan (incorporated
by reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).*10.3a
    
    Amendment to the Midwest Banc Holdings, Inc. 1996 Stock Option
Plan (incorporated by reference to Registrants Annual Report on
Form 10-K for the year ended December 31, 1998, File No.
0-29652).*10.4
    
    Form of Transitional Employment Agreements (incorporated by
reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).10.5
    
    Lease dated as of December 24, 1958, between Western National
Bank of Cicero and Midwest Bank and Trust Company, as amended
(incorporated by reference to Registrants Registration
Statement on Form S-1, Registration No. 333-42827).10.6
    
    Britannica Centre Lease, dated as of May 1, 1994, between
Chicago Title and Trust Company, as Trustee under Trust
Agreement dated November 2, 1977 and known as Trust No. 1070932
and Midwest Bank & Trust Company (incorporated by reference to
Registrants Registration Statement on Form S-1, Registration
No. 333-42827).10.7
    
    Lease dated as of March 20, 1996 between Grove Lodge No. 824
Ancient Free and Accepted Masons and Midwest Bank of Hinsdale
(incorporated by reference to Registrants Registration
Statement on Form S-1, Registration No. 333-42827).10.8
    
    Office Lease, undated, between Grove Lodge No. 824 Ancient Free
and Accepted Masons and Midwest Bank of Hinsdale (incorporated
by reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).*10.15
    
    Form of Supplemental Executive Retirement Agreement
(incorporated by reference to Registrants Form 10-Q for the
quarter ended September 30, 2001, File No. 001-13735).*10.16
    
    Form of Transitional Employment Agreement (Executive Officer
Group) (incorporated by reference to Registrants Form 10-Q for
the quarter ended September 30, 2001, File No. 001-13735).10.19
    
    Agreement and Plan of Reorganization between the Company and Big
Foot Financial Corp. dated as of July 19, 2002 (incorporated by
reference to Annex A of the Registrants Proxy
Statement/Prospectus dated October 23, 2002, Registration
Statement No. 333- 100090).10.21
    
    Lease dated as of April 29, 1976, between Sanfilippo, Joseph C.
and Grace Ann and Fairfield Savings and Loan Association, as
amended (incorporated by reference to Registrants Form 10-K for
the year ended December 31, 2003, File No. 001-13735).




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##### Table of Contents



10.22
    
    Lease dated as of August 28, 2002 between Glen Oak Plaza and
Midwest Bank and Trust Company (incorporated by reference to
Registrants Form 10-K for the year ended December 31, 2003,
File No. 001-13735).10.24
    
    Loan Agreement as of April 8, 2004, between the Company and
LaSalle Bank National Association (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30, 2004,
File No. 001-13735).10.25
    
    Employment Agreement as of September 28, 2004 between the
Company and the Chief Executive Officer (incorporated by
reference to Registrants Form 10-Q for the quarter ended September
30, 2004, File No. 001-13735).10.26
    
    Retirement Agreement as of September 28, 2004 between the
Company and retiring Chief Executive Officer (incorporated by
reference to Registrants Form 10-Q for the quarter ended September
30, 2004, File No. 001-13735).10.27
    
    Midwest Banc Holdings, Inc. Severance Policy as of December 20,
2004 (incorporated by reference to Registrants Form 8-K dated
November 22, 2004, File No. 001-13735).10.28
    
    First amendment to Loan Agreement as of April 8, 2004, between
the Company and LaSalle Bank National Association, filed April
28, 2005 (incorporated by reference to Registrants Report on
Form 8-K filed April 28, 2005, File No. 001-13735).31.1
    
    Rule 13a-14(a) Certification of Principal Executive Officer.31.2
    
    Rule 13a-14(a) Certification of Principal Financial Officer.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from
the Companys Chief Executive Officer and Chief Financial
Officer.
   *
    
    Indicates management contracts or compensatory plans or arrangements required to be filed as
an exhibit.