##### 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
 For the Quarterly Period Ended September 30, 2007
 Commission File Number: 001-13735
 MIDWEST BANC HOLDINGS, INC.
 (Exact name of Registrant as specified in its charter.)
 Delaware
    
    36-3252484(State or other jurisdiction of
    
    (I.R.S. Employer Identification Number)incorporation or organization)501 W. North Ave.Melrose Park, Illinois
    
    60160(Address of principal executive offices)
    
    (Zip code)
 
 (708) 865-1053  (Registrants telephone number, including area code)
 þ o
  o þ o
 o þ
  Class
    
    Outstanding at November 8, 2007Common, par value $0.01
    
    27,867,794




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##### 



MIDWEST BANC HOLDINGS, INC.
 Form 10-Q
 Table of Contents
 Page NumberPART IItem 1. Financial Statements (Unaudited)
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    43Item 4. Controls and Procedures
    
    
    44PART IIItem 1. Legal Proceedings
    
    
    48Item 1A. Risk Factors
    
    
    48Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    48Item 3. Defaults upon Senior Securities
    
    
    48Item 4. Submission of Matters to a Vote of Security Holders
    
    
    48Item 5. Other Information
    
    
    49Item 6. Exhibits
    
    
    49Signature Page
    
    
    52Amended and Restated Certificate of IncorporationCertificationCertificationCertification




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
 September 30,
    
    
    December 31,2007
    
    
    2006ASSETSCash
    
    $
    46,963
    
    
    $
    91,630Federal funds sold and other short-term investments
    
    
    17,241
    
    
    
    8,902Total cash and cash equivalents
    
    
    64,204
    
    
    
    100,532Securities available-for-sale
    
    
    660,986
    
    
    
    589,981Securities held-to-maturity (fair value: $39,612 at September
30, 2007 and $44,687 at December 31, 2006)
    
    
    40,978
    
    
    
    45,931Total securities
    
    
    701,964
    
    
    
    635,912Federal Reserve and Federal Home Loan Bank stock, at cost
    
    
    23,683
    
    
    
    23,592Loans held for sale
    
    
    
    
    
    
    2,672Loans
    
    
    2,007,446
    
    
    
    1,946,816Allowance for loan losses
    
    
    (24,879
    )
    
    
    (23,229
    )Net loans
    
    
    1,982,567
    
    
    
    1,923,587Cash surrender value of life insurance
    
    
    67,412
    
    
    
    65,220Premises and equipment, net
    
    
    22,468
    
    
    
    21,960Foreclosed properties
    
    
    2,246
    
    
    
    2,640Core deposit and other intangibles, net
    
    
    9,586
    
    
    
    11,273Goodwill
    
    
    79,857
    
    
    
    79,488Other assets
    
    
    78,578
    
    
    
    75,170Total assets
    
    $
    3,032,565
    
    
    $
    2,942,046LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesDepositsNoninterest-bearing
    
    $
    246,153
    
    
    $
    276,381Interest-bearing
    
    
    1,748,774
    
    
    
    1,681,429Total deposits
    
    
    1,994,927
    
    
    
    1,957,810Federal funds purchased
    
    
    12,000
    
    
    
    66,000Securities sold under agreements to repurchase
    
    
    317,118
    
    
    
    201,079Advances from the Federal Home Loan Bank
    
    
    319,925
    
    
    
    319,883Junior subordinated debentures
    
    
    65,861
    
    
    
    65,812Note payable
    
    
    2,500
    
    
    
    Other liabilities
    
    
    35,001
    
    
    
    44,220Total liabilities
    
    
    2,747,332
    
    
    
    2,654,804Commitments and contingencies (see note 10)Stockholders EquityPreferred stock, $0.01 par value, 1,000,000 shares authorized;
none issued
    
    
    
    
    
    
    Common stock, $0.01 par value, 64,000,000 shares authorized;
25,527,962 shares issued and 24,405,971 outstanding at
September 30, 2007 and 25,504,095 shares issued and 24,663,417
outstanding at December 31, 2006
    
    
    255
    
    
    
    255Additional paid-in capital
    
    
    203,443
    
    
    
    200,797Retained earnings
    
    
    102,416
    
    
    
    97,807Accumulated other comprehensive loss
    
    
    (10,574
    )
    
    
    (6,273
    )Treasury stock, at cost (1,121,991 shares at September 30, 2007
and 840,678 shares at December 31, 2006)
    
    
    (10,307
    )
    
    
    (5,344
    )Total stockholders equity
    
    
    285,233
    
    
    
    287,242Total liabilities and stockholders equity
    
    $
    3,032,565
    
    
    $
    2,942,046
 See accompanying notes to unaudited consolidated financial statements.
 PAGE 1




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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Interest IncomeLoans
    
    $
    37,566
    
    
    $
    36,874
    
    
    $
    110,447
    
    
    $
    87,884Loans held for sale
    
    
    11
    
    
    
    44
    
    
    
    89
    
    
    
    84SecuritiesTaxable
    
    
    8,609
    
    
    
    7,484
    
    
    
    24,901
    
    
    
    22,875Exempt from federal income taxes
    
    
    462
    
    
    
    956
    
    
    
    1,624
    
    
    
    2,608Trading securities
    
    
    2
    
    
    
    189
    
    
    
    2
    
    
    
    189Dividends from Federal Reserve and Federal Home Loan Bank stock
    
    
    227
    
    
    
    199
    
    
    
    681
    
    
    
    475Federal funds sold and other short-term investments
    
    
    297
    
    
    
    157
    
    
    
    688
    
    
    
    437Total interest income
    
    
    47,174
    
    
    
    45,903
    
    
    
    138,432
    
    
    
    114,552Interest ExpenseDeposits
    
    
    18,634
    
    
    
    16,963
    
    
    
    55,115
    
    
    
    40,023Federal funds purchased
    
    
    64
    
    
    
    352
    
    
    
    1,156
    
    
    
    750Securities sold under agreements to repurchase
    
    
    3,137
    
    
    
    2,857
    
    
    
    7,859
    
    
    
    7,736Advances from the Federal Home Loan Bank
    
    
    3,640
    
    
    
    3,001
    
    
    
    10,958
    
    
    
    6,522Junior subordinated debentures
    
    
    1,334
    
    
    
    1,337
    
    
    
    3,950
    
    
    
    3,414Note payable
    
    
    18
    
    
    
    
    
    
    
    18
    
    
    
    Total interest expense
    
    
    26,827
    
    
    
    24,510
    
    
    
    79,056
    
    
    
    58,445Net interest income
    
    
    20,347
    
    
    
    21,393
    
    
    
    59,376
    
    
    
    56,107Provision for loan losses
    
    
    1,800
    
    
    
    1,550
    
    
    
    3,481
    
    
    
    6,550Net interest income after provision for loan losses
    
    
    18,547
    
    
    
    19,843
    
    
    
    55,895
    
    
    
    49,557Noninterest IncomeCustomer service fees
    
    
    1,535
    
    
    
    1,543
    
    
    
    4,744
    
    
    
    4,161Net gains (losses) on securities transactions
    
    
    6
    
    
    
    
    
    
    
    23
    
    
    
    (195
    )Net trading profits
    
    
    
    
    
    
    624
    
    
    
    
    
    
    
    624Gains on sales of loans
    
    
    41
    
    
    
    194
    
    
    
    441
    
    
    
    490Insurance and brokerage commissions
    
    
    685
    
    
    
    478
    
    
    
    1,799
    
    
    
    1,476Trust
    
    
    453
    
    
    
    357
    
    
    
    1,349
    
    
    
    520Increase in cash surrender value of life insurance
    
    
    736
    
    
    
    676
    
    
    
    2,192
    
    
    
    1,700Gain on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,250Other
    
    
    244
    
    
    
    275
    
    
    
    768
    
    
    
    735Total noninterest income
    
    
    3,700
    
    
    
    4,147
    
    
    
    11,316
    
    
    
    10,761Noninterest ExpenseSalaries and employee benefits
    
    
    9,740
    
    
    
    9,318
    
    
    
    30,550
    
    
    
    24,418Occupancy and equipment
    
    
    2,362
    
    
    
    1,885
    
    
    
    6,741
    
    
    
    4,988Professional services
    
    
    1,297
    
    
    
    1,452
    
    
    
    3,591
    
    
    
    3,799Marketing
    
    
    538
    
    
    
    418
    
    
    
    1,696
    
    
    
    1,459Foreclosed properties
    
    
    4
    
    
    
    47
    
    
    
    36
    
    
    
    237Amortization of intangible assets
    
    
    409
    
    
    
    461
    
    
    
    1,273
    
    
    
    762Merger-related charges
    
    
    
    
    
    
    1,595
    
    
    
    
    
    
    
    1,595Other
    
    
    1,895
    
    
    
    2,018
    
    
    
    6,083
    
    
    
    4,862Total noninterest expense
    
    
    16,245
    
    
    
    17,194
    
    
    
    49,970
    
    
    
    42,120Income before income taxes
    
    
    6,002
    
    
    
    6,796
    
    
    
    17,241
    
    
    
    18,198Provision for income taxes
    
    
    1,166
    
    
    
    814
    
    
    
    2,886
    
    
    
    3,385Net Income
    
    $
    4,836
    
    
    $
    5,982
    
    
    $
    14,355
    
    
    $
    14,813Basic earnings per share
    
    $
    0.20
    
    
    $
    0.24
    
    
    $
    0.58
    
    
    $
    0.65Diluted earnings per share
    
    $
    0.20
    
    
    $
    0.24
    
    
    $
    0.58
    
    
    $
    0.64Cash dividends declared per common share
    
    $
    0.13
    
    
    $
    0.13
    
    
    $
    0.39
    
    
    $
    0.38
 See accompanying notes to unaudited consolidated financial statements.
 PAGE 2




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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (Unaudited)
For the Nine Months Ended September 30, 2007 and 2006
(In thousands, except share and per share data)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    TotalCommon
    
    
    Paid in
    
    
    Retained
    
    
    Restricted
    
    
    Comprehensive
    
    
    Treasury
    
    
    StockholdersStock
    
    
    Capital
    
    
    Earnings
    
    
    Stock
    
    
    Loss
    
    
    Stock
    
    
    EquityBalance, December 31, 2005
    
    $
    221
    
    
    $
    134,857
    
    
    $
    92,121
    
    
    $
    (3,013
    )
    
    $
    (7,606
    )
    
    $
    (454
    )
    
    $
    216,126Cash dividends declared ($0.38 per share)
    
    
    
    
    
    
    
    
    
    
    (8,802
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,802
    )Issuance of 2,865,933 of common shares
upon acquisition
    
    
    29
    
    
    
    63,738
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,767Issuance of common stock upon
exercise of 150,644 stock options,
net of tax benefit
    
    
    2
    
    
    
    2,558
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,560Purchase of 70,368 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,652
    )
    
    
    (1,652
    )Reclassification of restricted stock in conjunction with the adoption of FAS 123 (R)
    
    
    
    
    
    
    (3,013
    )
    
    
    
    
    
    
    3,013
    
    
    
    
    
    
    
    
    
    
    
    Issuance of 263,316 shares of restricted stock
    
    
    2
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeiture of 7,400 shares of restricted stock
    
    
    
    
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (120
    )
    
    
    Stock-based compensation
    
    
    
    
    
    
    1,620
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,620Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    14,813
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,813Net increase in fair value of
securities classified as available-
for-sale, net of income taxes and
reclassification adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,045
    
    
    
    
    
    
    
    1,045Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,858Balance, September 30, 2006
    
    $
    254
    
    
    $
    199,878
    
    
    $
    98,132
    
    
    $
    
    
    
    $
    (6,561
    )
    
    $
    (2,226
    )
    
    $
    289,477Balance, December 31, 2006
    
    $
    255
    
    
    $
    200,797
    
    
    $
    97,807
    
    
    $
    
    
    
    $
    (6,273
    )
    
    $
    (5,344
    )
    
    $
    287,242Cash dividends declared ($0.39 per share)
    
    
    
    
    
    
    
    
    
    
    (9,746
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,746
    )Issuance of common stock upon
exercise of 27,443 stock options,
net of tax benefit
    
    
    
    
    
    
    321
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    321Purchase of 321,500 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,963
    )
    
    
    (4,963
    )Stock-based compensation
    
    
    
    
    
    
    2,325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,325Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    14,355
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,355Net decrease in fair value of
securities classified as available-
for-sale, net of income taxes and
reclassification adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,301
    )
    
    
    
    
    
    
    (4,301
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,054Balance, September 30, 2007
    
    $
    255
    
    
    $
    203,443
    
    
    $
    102,416
    
    
    $
    
    
    
    $
    (10,574
    )
    
    $
    (10,307
    )
    
    $
    285,233
 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)
(In thousands)
 Nine Months EndedSeptember 30,2007
    
    
    2006Cash flows from operating activitiesNet income
    
    $
    14,355
    
    
    $
    14,813Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation
    
    
    2,332
    
    
    
    1,856Provision for loan losses
    
    
    3,481
    
    
    
    6,550Amortization of purchase accounting adjustments and other intangibles, net
    
    
    920
    
    
    
    582Proceeds from sales of trading securities, net
    
    
    
    
    
    
    (14,485
    )Amortization of premiums and discounts on securities, net
    
    
    643
    
    
    
    (624
    )Realized (gain) loss on sale of available-for-sale securities, net
    
    
    (23
    )
    
    
    195Net gain on sales of trading securities, net
    
    
    
    
    
    
    624Net gain on sales of loans held for sale
    
    
    (441
    )
    
    
    (490
    )Originations of loans held for sale
    
    
    (40,800
    )
    
    
    (41,068
    )Proceeds from sales of loans held for sale
    
    
    43,913
    
    
    
    40,149Increase in cash surrender value of life insurance
    
    
    (2,192
    )
    
    
    (1,700
    )Deferred income taxes
    
    
    4,918
    
    
    
    (1,109
    )Loss on sale of foreclosed properties, net
    
    
    12
    
    
    
    Amortization of deferred stock based compensation
    
    
    2,267
    
    
    
    1,620Change in other assets
    
    
    (5,477
    )
    
    
    (8,478
    )Change in other liabilities
    
    
    (9,035
    )
    
    
    8,385Net cash provided by operating activities
    
    
    14,873
    
    
    
    6,820Cash flows from investing activitiesSales of securities available-for-sale
    
    
    97,571
    
    
    
    26,114Maturities of securities available-for-sale
    
    
    20,592
    
    
    
    16,500Principal payments on securities available-for-sale
    
    
    56,019
    
    
    
    57,844Purchases of securities available-for-sale
    
    
    (252,572
    )
    
    
    (43,309
    )Maturities of securities held-to-maturity
    
    
    
    
    
    
    2,190Principal payments on securities held-to-maturity
    
    
    4,816
    
    
    
    6,386Purchase of mortgage loans
    
    
    (5,776
    )
    
    
    Loan originations and principal collections, net
    
    
    (55,807
    )
    
    
    (63,061
    )Proceeds from sale/leaseback of branch property
    
    
    
    
    
    
    4,403Cash received, net of cash and cash equivalents in acquisition and stock issuance
    
    
    
    
    
    
    (41,044
    )Proceeds from sale of foreclosed properties
    
    
    225
    
    
    
    8,555Investment in life insurance
    
    
    
    
    
    
    (5,926
    )Additions to property and equipment
    
    
    (2,840
    )
    
    
    (3,521
    )Net cash used in investing activities
    
    
    (137,772
    )
    
    
    (34,869
    )Cash flows from financing activitiesNet increase in deposits
    
    
    36,488
    
    
    
    37,095Proceeds from borrowings
    
    
    102,500
    
    
    
    200,000Repayments on borrowings
    
    
    (100,000
    )
    
    
    (100,000
    )Cash dividends paid
    
    
    (9,774
    )
    
    
    (8,165
    )Change in federal funds purchased and securities sold under agreements to repurchase
    
    
    62,039
    
    
    
    (99,132
    )Repurchase of common stock
    
    
    (4,963
    )
    
    
    (1,652
    )Proceeds from issuance of common or treasury stock under stock and incentive plan
    
    
    281
    
    
    
    1,955Net cash provided by financing activities
    
    
    86,571
    
    
    
    30,101(Decrease) increase in cash and cash equivalents
    
    
    (36,328
    )
    
    
    2,052Cash and cash equivalents at beginning of period
    
    
    100,532
    
    
    
    70,599Cash and cash equivalents at end of period
    
    $
    64,204
    
    
    $
    72,651
 See accompanying notes to unaudited consolidated financial statements.
 PAGE 4




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED (Unaudited)
(In thousands)
 Nine Months EndedSeptember 30,2007
    
    
    2006Supplemental disclosuresCash paid during period for:Interest
    
    $
    75,730
    
    
    $
    55,942Income taxes, net
    
    
    6,219
    
    
    
    2,811AcquisitionNoncash assets acquired
    
    $
    
    
    
    $
    619,835Liabilities assumed
    
    
    
    
    
    
    515,024Net noncash assets acquired
    
    $
    
    
    
    $
    104,811Cash and cash equivalents acquired
    
    $
    
    
    
    $
    24,363
 See accompanying notes to unaudited consolidated financial statements.
 PAGE 5




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  BASIS OF PRESENTATION
   NOTE 2  NEW ACCOUNTING PRONOUNCEMENTS
    PAGE 6




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  NOTE 3  BUSINESS COMBINATIONS
 Royal American Corporation
   PAGE 7




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Nine months endedSeptember 30,2006Net interest income
    
    $
    65,384Net income
    
    
    10,457Basic earnings per share
    
    
    0.43Diluted earnings per share
    
    
    0.42
  Northwest Suburban Bancorp, Inc.
  PAGE 8




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 4  SECURITIES
  September 30, 2007TotalHeld-to-Maturity
    
    
    Available-for-Sale
    
    
    
    
    
    
    
    
    
    
    % ofAmortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    AmortizedCost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost(Dollars in thousands)U.S. Treasury and obligations of
U.S. government-sponsored entities
    
    $
    
    
    
    $
    
    
    
    $
    151,984
    
    
    $
    152,164
    
    
    $
    151,984
    
    
    $
    152,164
    
    
    
    21.12
    %Obligations of states and
political subdivisions
    
    
    1,684
    
    
    
    1,686
    
    
    
    46,079
    
    
    
    45,586
    
    
    
    47,763
    
    
    
    47,272
    
    
    
    6.64Mortgage-backed securities
    
    
    39,294
    
    
    
    37,926
    
    
    
    373,159
    
    
    
    364,296
    
    
    
    412,453
    
    
    
    402,222
    
    
    
    57.33Equity securities (1)
    
    
    
    
    
    
    
    
    
    
    85,176
    
    
    
    77,521
    
    
    
    85,176
    
    
    
    77,521
    
    
    
    11.84Other bonds
    
    
    
    
    
    
    
    
    
    
    22,100
    
    
    
    21,419
    
    
    
    22,100
    
    
    
    21,419
    
    
    
    3.07Total
    
    $
    40,978
    
    
    $
    39,612
    
    
    $
    678,498
    
    
    $
    660,986
    
    
    $
    719,476
    
    
    $
    700,598
    
    
    
    100.00
    %
 December 31, 2006TotalHeld-to-Maturity
    
    
    Available-for-Sale
    
    
    
    
    
    
    
    
    
    
    % ofAmortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    AmortizedCost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost(Dollars in thousands)U.S. Treasury and obligations of
U.S. government-sponsored entities
    
    $
    
    
    
    $
    
    
    
    $
    6,958
    
    
    $
    6,958
    
    
    $
    6,958
    
    
    $
    6,958
    
    
    
    1.08
    %Obligations of states and
political subdivisions
    
    
    1,686
    
    
    
    1,697
    
    
    
    97,167
    
    
    
    96,987
    
    
    
    98,853
    
    
    
    98,684
    
    
    
    15.29Mortgage-backed securities
    
    
    44,245
    
    
    
    42,990
    
    
    
    444,392
    
    
    
    434,108
    
    
    
    488,637
    
    
    
    477,098
    
    
    
    75.56Equity securities (1)
    
    
    
    
    
    
    
    
    
    
    41,131
    
    
    
    41,521
    
    
    
    41,131
    
    
    
    41,521
    
    
    
    6.36Other bonds
    
    
    
    
    
    
    
    
    
    
    11,034
    
    
    
    10,407
    
    
    
    11,034
    
    
    
    10,407
    
    
    
    1.71Total
    
    $
    45,931
    
    
    $
    44,687
    
    
    $
    600,682
    
    
    $
    589,981
    
    
    $
    646,613
    
    
    $
    634,668
    
    
    
    100.00
    %
 
 (1)
    
    Includes issues from government-sponsored entities (Federal Home Loan Mortgage Corporation
and Federal National Mortgage Association). PAGE 9




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  September 30, 2007Less 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 states and political subdivisions
    
    $
    24,911
    
    
    $
    (297
    )
    
    $
    13,163
    
    
    $
    (283
    )
    
    $
    38,074
    
    
    $
    (580
    )Mortgage-backed securities:U.S. government-sponsored entities (1)
    
    
    16,225
    
    
    
    (38
    )
    
    
    338,666
    
    
    
    (8,846
    )
    
    
    354,891
    
    
    
    (8,884
    )Equity securities (2)
    
    
    77,521
    
    
    
    (7,656
    )
    
    
    
    
    
    
    
    
    
    
    77,521
    
    
    
    (7,656
    )Corporate and other debt securities
    
    
    11,054
    
    
    
    (27
    )
    
    
    10,365
    
    
    
    (653
    )
    
    
    21,419
    
    
    
    (680
    )Total available-for-sale
    
    
    129,711
    
    
    
    (8,018
    )
    
    
    362,194
    
    
    
    (9,782
    )
    
    
    491,905
    
    
    
    (17,800
    )Securities held-to-maturity:Obligations of states and political subdivisions
    
    
    800
    
    
    
    (2
    )
    
    
    201
    
    
    
    (1
    )
    
    
    1,001
    
    
    
    (3
    )Mortgage-backed securities:U.S. government agencies (3)
    
    
    2
    
    
    
    
    
    
    
    8,253
    
    
    
    (225
    )
    
    
    8,255
    
    
    
    (225
    )U.S. government-sponsored entities (1)
    
    
    
    
    
    
    
    
    
    
    29,156
    
    
    
    (1,144
    )
    
    
    29,156
    
    
    
    (1,144
    )Total held-to-maturity
    
    
    802
    
    
    
    (2
    )
    
    
    37,610
    
    
    
    (1,370
    )
    
    
    38,412
    
    
    
    (1,372
    )Total temporarily impaired securities
    
    $
    130,513
    
    
    $
    (8,020
    )
    
    $
    399,804
    
    
    $
    (11,152
    )
    
    $
    530,317
    
    
    $
    (19,172
    )
 
 (1)
    
    Includes obligations of the Federal Home Loan Mortgage Corporation (FHLMC) and Federal
National Mortgage Association (FNMA).(2)
    
    Includes issues from government-sponsored entities (FNMA and FHLMC).(3)
    
    Includes obligations of the Government National Mortgage Association (GNMA).  
    
    The unrealized loss for U.S. government-sponsored entities mortgage-backed securities
relate primarily to debt securities issued by FNMA and FHLMC and are rated AAA; 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
mortgage-backed securities are notes with a weighted average maturity of approximately
22 years and a weighted average interest rate of 5.01%.
    
    The unrealized losses on corporate and other debt securities relate to securities which
were rated A- or better by either Moodys or S&P. These debt securities have a weighted
average maturity of approximately 19 years and a weighted average interest rate of 5.38%.
    
    The unrealized losses on equity securities relate to preferred equity securities issued
by FNMA and FHLMC which were rated AA- or better by either Moodys or S&P and have a
weighted average dividend rate of 5.81%.
 PAGE 10




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 5  LOANS
  September 30,
    
    
    December 31,2007
    
    
    2006% of Gross
    
    
    
    
    
    
    % of GrossAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans(Dollars in thousands)Commercial
    
    $
    421,361
    
    
    
    21.0
    %
    
    $
    376,944
    
    
    
    19.4
    %Construction
    
    
    405,464
    
    
    
    20.2
    
    
    
    424,181
    
    
    
    21.8Commercial real estate
    
    
    787,123
    
    
    
    39.2
    
    
    
    761,742
    
    
    
    39.0ConsumerHome equity
    
    
    144,629
    
    
    
    7.2
    
    
    
    147,366
    
    
    
    7.6Other consumer
    
    
    7,905
    
    
    
    0.4
    
    
    
    9,373
    
    
    
    0.5Total consumer
    
    
    152,534
    
    
    
    7.6
    
    
    
    156,739
    
    
    
    8.1Residential mortgage
    
    
    241,319
    
    
    
    12.0
    
    
    
    227,762
    
    
    
    11.7Total loans, gross
    
    
    2,007,801
    
    
    
    100.0
    %
    
    
    1,947,368
    
    
    
    100.0
    %Net deferred fees
    
    
    (355
    )
    
    
    
    
    
    
    (552
    )Total loans, net
    
    $
    2,007,446
    
    
    
    
    
    
    $
    1,946,816
 NOTE 6  ALLOWANCE FOR LOAN LOSSES
  Nine Months EndedSeptember 30,2007
    
    
    2006(In thousands)Balance, at beginning of period
    
    $
    23,229
    
    
    $
    17,760Addition resulting from acquisition
    
    
    
    
    
    
    3,244Provision charged to operations
    
    
    3,481
    
    
    
    6,550Loans charged off
    
    
    (3,183
    )
    
    
    (2,601
    )Recoveries
    
    
    1,352
    
    
    
    589Net loans charged off
    
    
    (1,831
    )
    
    
    (2,012
    )Balance, at end of period
    
    $
    24,879
    
    
    $
    25,542
 PAGE 11




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 7  GOODWILL AND INTANGIBLES
  September 30, 2007
    
    December 31, 2006Gross Carrying
    
    Accumulated
    
    Net Carrying
    
    Gross Carrying
    
    Accumulated
    
    Net CarryingAmount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    AmountAmortized intangible assets:Core deposit and other intangibles
    
    $
    13,030
    
    
    $
    (3,444
    )
    
    $
    9,586
    
    
    $
    13,618
    
    
    $
    (2,345
    )
    
    $
    11,273
   Core Depositand OtherGoodwill
    
    
    IntangiblesBalance at beginning of period
    
    $
    79,488
    
    
    $
    11,273Amortization
    
    
    
    
    
    
    (1,099
    )Purchase price adjustment
    
    
    369
    
    
    
    Core deposit intangible retired (1)
    
    
    
    
    
    
    (588
    )Balance at end of period
    
    $
    79,857
    
    
    $
    9,586
 
 (1)
    
    On January 3, 2003, the Company purchased Big Foot Financial Corp. As a result of
this acquisition, the Company had unrecognized tax benefits related to employee severance
payments and acquisition costs. These unrecognized tax benefits were recognized in the
first quarter of 2007, when the statute of limitations for Internal Revenue Service (IRS)
audit of the final short period return closed. These unrecognized tax benefits, totaling
$429,000, were credited to the core deposit intangible created as a result of the
acquisition. A reversal of $283,000 in tax liability established on the date of
acquisition was also credited to the core deposit intangible in the first quarter of 2007.
During the third quarter of 2007, the core deposit intangible was increased by $124,000 due
to an adjustment related the estimated tax liability established on the date of
acquisition. PAGE 12




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 8  EARNINGS PER SHARE
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(In thousands, except per share data)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006BasicNet income
    
    $
    4,836
    
    
    $
    5,982
    
    
    $
    14,355
    
    
    $
    14,813Weighted average common shares outstanding
    
    
    24,454
    
    
    
    24,811
    
    
    
    24,594
    
    
    
    22,886Basic earnings per share
    
    $
    0.20
    
    
    $
    0.24
    
    
    $
    0.58
    
    
    $
    0.65DilutedNet income
    
    $
    4,836
    
    
    $
    5,982
    
    
    $
    14,355
    
    
    $
    14,813Weighted average common shares outstanding
    
    
    24,454
    
    
    
    24,811
    
    
    
    24,594
    
    
    
    22,886Dilutive effect of stock options
    
    
    85
    
    
    
    196
    
    
    
    117
    
    
    
    199Dilutive effect of restricted stock
    
    
    108
    
    
    
    169
    
    
    
    110
    
    
    
    194Diluted average common shares
    
    
    24,647
    
    
    
    25,176
    
    
    
    24,821
    
    
    
    23,279Diluted earnings per share
    
    $
    0.20
    
    
    $
    0.24
    
    
    $
    0.58
    
    
    $
    0.64
  NOTE 9  STOCK COMPENSATION AND RESTRICTED STOCK AWARDS
   PAGE 13




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Weighted AverageNumber of
    
    Exercise PriceOptions
    
    Per ShareOutstanding at December 31, 2006
    
    
    517,048
    
    
    $
    13.90Granted
    
    
    
    
    
    
    Exercised
    
    
    (27,443
    )
    
    
    10.25Forfeited
    
    
    (1,453
    )
    
    
    15.21Outstanding at September 30, 2007
    
    
    488,152
    
    
    
    13.97
     Number of
    
    Weighted AverageRestricted
    
    Grant-Date Fair ValueShares
    
    Per ShareOutstanding at December 31, 2006
    
    
    480,629
    
    
    $
    21.59Granted
    
    
    200
    
    
    
    15.01Vested
    
    
    (36,611
    )
    
    
    19.00Forfeited
    
    
    (5,726
    )
    
    
    22.28Outstanding at September 30, 2007
    
    
    438,492
    
    
    
    21.80
 PAGE 14




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 10  OFF-BALANCE-SHEET RISK
  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
    
    $
    167,039
    
    
    $
    33,069
    
    
    $
    2,066
    
    
    $
    14
    
    
    $
    202,188Consumer real estate
    
    
    35,297
    
    
    
    14,652
    
    
    
    31,067
    
    
    
    32,186
    
    
    
    113,202Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,624
    
    
    
    1,624Commercial
    
    
    186,038
    
    
    
    7,841
    
    
    
    1,777
    
    
    
    3,134
    
    
    
    198,790Letters of credit
    
    
    39,271
    
    
    
    20,682
    
    
    
    7,211
    
    
    
    380
    
    
    
    67,544Commitments to extend credit
    
    
    88,936
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,936Total commitments
    
    $
    516,581
    
    
    $
    76,244
    
    
    $
    42,121
    
    
    $
    37,338
    
    
    $
    672,284
   NOTE 11  INCOME TAXES
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Income taxes computed at federal statutory rate
    
    $
    2,101
    
    
    
    35.0
    %
    
    $
    2,377
    
    
    
    35.0
    %
    
    $
    6,034
    
    
    
    35.0
    %
    
    $
    6,369
    
    
    
    35.0
    %Tax-exempt interest income on securities and loans
    
    
    (166
    )
    
    
    (2.8
    )
    
    
    (313
    )
    
    
    (4.6
    )
    
    
    (550
    )
    
    
    (3.2
    )
    
    
    (869
    )
    
    
    (4.8
    )General business credits
    
    
    (289
    )
    
    
    (4.8
    )
    
    
    (495
    )
    
    
    (7.3
    )
    
    
    (509
    )
    
    
    (3.0
    )
    
    
    (555
    )
    
    
    (3.1
    )State income taxes, net of federal tax benefit
due to state operating loss
    
    
    (323
    )
    
    
    (5.4
    )
    
    
    (254
    )
    
    
    (3.7
    )
    
    
    (840
    )
    
    
    (4.9
    )
    
    
    (290
    )
    
    
    (1.6
    )Life insurance cash surrender value increase, net of premiums
    
    
    (258
    )
    
    
    (4.3
    )
    
    
    (236
    )
    
    
    (3.5
    )
    
    
    (767
    )
    
    
    (4.4
    )
    
    
    (595
    )
    
    
    (3.3
    )Dividends received deduction
    
    
    (301
    )
    
    
    (5.0
    )
    
    
    (272
    )
    
    
    (4.0
    )
    
    
    (913
    )
    
    
    (5.3
    )
    
    
    (717
    )
    
    
    (3.9
    )Nondeductible meals and entertainment
    
    
    10
    
    
    
    0.2
    
    
    
    6
    
    
    
    0.1
    
    
    
    29
    
    
    
    0.2
    
    
    
    15
    
    
    
    0.1Annuity proceeds
    
    
    310
    
    
    
    5.1
    
    
    
    
    
    
    
    
    
    
    
    310
    
    
    
    1.8
    
    
    
    
    
    
    
    Stock based compensation, net
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    0.2Other
    
    
    82
    
    
    
    1.4
    
    
    
    5
    
    
    
    0.1
    
    
    
    92
    
    
    
    0.5
    
    
    
    (2
    )
    
    
    (0.0
    )Total provision for income taxes
    
    $
    1,166
    
    
    
    19.4
    %
    
    $
    814
    
    
    
    12.0
    %
    
    $
    2,886
    
    
    
    16.7
    %
    
    $
    3,385
    
    
    
    18.6
    %
 PAGE 15




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   PAGE 16




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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.
 Critical Accounting Policies and Estimates
  Strategy
  Expand and diversify loan portfolio.
 Expand deposit base.
 Expand footprint in Chicago market.
 PAGE 17




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##### Table of Contents




    
    Expanding the community banking market penetration;
    
    Adding experienced key executives;
    
    Expanding the size of the loan portfolio and diversifying its risk profile by
increasing the percentage of commercial and industrial loans and owner-occupied
commercial real estate loans, while decreasing the percentage of construction loans;
    
    Expanding the deposit base by adding a higher percentage of
noninterest-bearing and interest-bearing demand deposit, money market, and savings
accounts; and
    
    Acquiring approximately $200.0 million in managed trust assets.
   th
  Pro FormaLoans
    
    $
    2,450Earning assets
    
    
    3,250Deposits
    
    
    2,460Total assets
    
    
    3,580Shares outstanding
    
    
    28,160,000
 Expand noninterest income.
  PAGE 18




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PAGE 19




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Selected Consolidated Financial Data
  At or For the Three Months Ended
    
    
    At or For the Nine Months EndedSeptember 30,
    
    
    June 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2007
    
    
    2006(Dollars in thousands, except per share data)Statement of Income Data:Total interest income
    
    $
    47,174
    
    
    $
    45,903
    
    
    $
    46,492
    
    
    $
    138,432
    
    
    $
    114,552Total interest expense
    
    
    26,827
    
    
    
    24,510
    
    
    
    26,523
    
    
    
    79,056
    
    
    
    58,445Net interest income
    
    
    20,347
    
    
    
    21,393
    
    
    
    19,969
    
    
    
    59,376
    
    
    
    56,107Provision for loan losses
    
    
    1,800
    
    
    
    1,550
    
    
    
    1,036
    
    
    
    3,481
    
    
    
    6,550Noninterest income
    
    
    3,700
    
    
    
    4,147
    
    
    
    3,896
    
    
    
    11,316
    
    
    
    10,761Noninterest expenses
    
    
    16,245
    
    
    
    17,194
    
    
    
    16,644
    
    
    
    49,970
    
    
    
    42,120Income before income taxes
    
    
    6,002
    
    
    
    6,796
    
    
    
    6,185
    
    
    
    17,241
    
    
    
    18,198Provision for income taxes
    
    
    1,166
    
    
    
    814
    
    
    
    1,078
    
    
    
    2,886
    
    
    
    3,385Net income
    
    $
    4,836
    
    
    $
    5,982
    
    
    $
    5,107
    
    
    $
    14,355
    
    
    $
    14,813Per Share Data:Earnings per share (basic)
    
    $
    0.20
    
    
    $
    0.24
    
    
    $
    0.21
    
    
    $
    0.58
    
    
    $
    0.65Earnings per share (diluted)
    
    
    0.20
    
    
    
    0.24
    
    
    
    0.21
    
    
    
    0.58
    
    
    
    0.64Cash dividends declared
    
    
    0.13
    
    
    
    0.13
    
    
    
    0.13
    
    
    
    0.39
    
    
    
    0.38Book value
    
    
    11.69
    
    
    
    11.67
    
    
    
    11.55
    
    
    
    11.69
    
    
    
    11.67Tangible book value (non-GAAP measure) (9)
    
    
    8.02
    
    
    
    8.03
    
    
    
    7.91
    
    
    
    8.02
    
    
    
    8.03Selected Financial Ratios:Return on average assets (1)
    
    
    0.64
    %
    
    
    0.80
    %
    
    
    0.68
    %
    
    
    0.64
    %
    
    
    0.78
    %Return on average equity (2)
    
    
    6.75
    
    
    
    8.43
    
    
    
    7.07
    
    
    
    6.67
    
    
    
    8.27Dividend payout ratio
    
    
    66.79
    
    
    
    54.70
    
    
    
    63.60
    
    
    
    67.89
    
    
    
    59.41Average equity to average assets
    
    
    9.41
    
    
    
    9.48
    
    
    
    9.62
    
    
    
    9.59
    
    
    
    9.46Tier 1 risk-based capital
    
    
    11.42
    
    
    
    12.64
    
    
    
    11.76
    
    
    
    11.42
    
    
    
    12.64Total risk-based capital
    
    
    12.51
    
    
    
    13.84
    
    
    
    12.81
    
    
    
    12.51
    
    
    
    13.84Net interest margin (tax equivalent) (3)(4)
    
    
    3.10
    
    
    
    3.40
    
    
    
    3.05
    
    
    
    3.05
    
    
    
    3.41Loan to deposit ratio
    
    
    100.63
    
    
    
    94.19
    
    
    
    96.35
    
    
    
    100.63
    
    
    
    94.19Net overhead expense to average assets (5)
    
    
    1.65
    
    
    
    1.74
    
    
    
    1.70
    
    
    
    1.72
    
    
    
    1.65Efficiency ratio (6)
    
    
    63.64
    
    
    
    62.41
    
    
    
    65.78
    
    
    
    66.37
    
    
    
    58.64Loan Quality Ratios:Allowance for loan losses to total loans
    
    
    1.24
    
    
    
    1.34
    
    
    
    1.20
    
    
    
    1.24
    
    
    
    1.34Provision for loan losses to total loans
    
    
    0.36
    
    
    
    0.32
    
    
    
    0.21
    
    
    
    0.23
    
    
    
    0.46Net loans charged off to average total loans
    
    
    0.13
    
    
    
    0.03
    
    
    
    0.27
    
    
    
    0.12
    
    
    
    0.17Nonaccrual loans to total loans (7)
    
    
    2.23
    
    
    
    1.13
    
    
    
    2.20
    
    
    
    2.23
    
    
    
    1.13Nonperforming assets to total assets (8)
    
    
    1.55
    
    
    
    0.83
    
    
    
    1.52
    
    
    
    1.55
    
    
    
    0.83Allowance for loan losses to nonaccrual loans
    
    
    0.56x
    
    
    
    1.18x
    
    
    
    0.54x
    
    
    
    0.56x
    
    
    
    1.18xBalance Sheet Data:Total assets
    
    $
    3,032,565
    
    
    $
    2,942,301
    
    
    $
    3,022,294
    
    
    $
    3,032,565
    
    
    $
    2,942,301Total earning assets
    
    
    2,750,334
    
    
    
    2,628,847
    
    
    
    2,698,762
    
    
    
    2,750,334
    
    
    
    2,628,847Average assets
    
    
    3,020,254
    
    
    
    2,967,572
    
    
    
    3,013,039
    
    
    
    2,999,877
    
    
    
    2,532,571Loans
    
    
    2,007,446
    
    
    
    1,909,026
    
    
    
    1,982,672
    
    
    
    2,007,446
    
    
    
    1,909,026Allowance for loan losses
    
    
    24,879
    
    
    
    25,542
    
    
    
    23,724
    
    
    
    24,879
    
    
    
    25,542Deposits
    
    
    1,994,927
    
    
    
    2,026,836
    
    
    
    2,057,842
    
    
    
    1,994,927
    
    
    
    2,026,836Borrowings
    
    
    717,404
    
    
    
    584,345
    
    
    
    646,793
    
    
    
    717,404
    
    
    
    584,345Stockholders equity
    
    
    285,233
    
    
    
    289,477
    
    
    
    283,575
    
    
    
    285,233
    
    
    
    289,477Tangible stockholders equity (non-GAAP measure) (9)
    
    
    195,790
    
    
    
    199,233
    
    
    
    194,138
    
    
    
    195,790
    
    
    
    199,233
 
 (1)
    
    Net income divided by average assets.(2)
    
    Net income divided by average equity.(3)
    
    Net interest income, on a fully tax-equivalent basis, divided by average earning assets.(4)
    
    The following table reconciles reported net interest income on a fully tax-equivalent basis for the periods presented: Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    June 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2007
    
    
    2006Net interest income
    
    $
    20,347
    
    
    $
    21,393
    
    
    $
    19,969
    
    
    $
    59,376
    
    
    $
    56,107Tax-equivalent adjustment to net interest income
    
    
    837
    
    
    
    1,194
    
    
    
    836
    
    
    
    2,652
    
    
    
    3,066Net interest income, fully tax-equivalent basis
    
    $
    21,184
    
    
    $
    22,587
    
    
    $
    20,805
    
    
    $
    62,028
    
    
    $
    59,173
 PAGE 20




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##### Table of Contents



(5)
    
    Noninterest expense less noninterest income, excluding security gains or losses, divided by average assets.(6)
    
    Noninterest income, excluding security gains or losses, plus net interest income on a fully tax-equivalent
basis divided by noninterest expense excluding amortization and foreclosed properties expense.(7)
    
    Includes total nonaccrual loans.(8)
    
    Includes total nonaccrual and foreclosed properties.(9)
    
    Stockholders equity less goodwill, core deposit and other intangible assets. Management believes that
tangible stockholders equity (non-GAAP measure) is a more useful measure since it excludes the balances of intangible
assets. The following table reconciles reported stockholders equity to tangible stockholders equity for
the periods presented: At September 30,
    
    
    At June 30,2007
    
    
    2006
    
    
    2007Stockholders equity
    
    $
    285,233
    
    
    $
    289,477
    
    
    $
    283,575Core deposit intangible and other intangibles, net
    
    
    9,586
    
    
    
    11,677
    
    
    
    9,812Goodwill
    
    
    79,857
    
    
    
    78,567
    
    
    
    79,625Tangible stockholders equity
    
    $
    195,790
    
    
    $
    199,233
    
    
    $
    194,138
 Results of Operations  Three and Nine Months Ended
September 30, 2007 and 2006
    
    
    Basic and diluted earnings per share for the three months ended September 30, 2007
were $0.20 compared to $0.24 for the comparable period in 2006 and $0.21 for the second
quarter of 2007.
    
    The annualized return on average assets for the three months ended September 30,
2007 was 0.64% compared to 0.80% for the similar period in 2006 and 0.68% for the
second quarter of 2007.
    
    The annualized return on average equity for the three months ended September 30,
2007 was 6.75% compared to 8.43% for the similar period in 2006 and 7.07% for the
second quarter of 2007.
    
    Net income for the third quarter of 2007 was $4.8 million, a 19.1% decrease when
compared to $6.0 million for the third quarter of 2006, and a 5.3% decrease when
compared to the second quarter of 2007.
 PAGE 21




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##### Table of Contents




    
    Top line revenue (net interest income plus noninterest income) increased by $182,000
to $24.0 million for the third quarter of 2007 compared to $23.9 million in the prior
quarter, but decreased by $1.5 million, or 5.8%, compared to $25.5 million for the same
period in 2006.
    
    Interest income increased $1.3 million to $47.2 million in the third quarter of 2007
compared to $45.9 million for the comparable period in 2006. Interest income increased
$682,000 from $46.5 million when compared to the second quarter of 2007 reflecting the
growth in the loan portfolio.
    
    Net interest income increased $378,000 to $20.3 million in the third quarter of 2007
compared to $20.0 million in the second quarter of 2007. Similarly, the net interest
margin increased to 3.10% in the third quarter of 2007 compared to 3.05% in the second
quarter of 2007. Net interest income decreased by 4.9% when compared to the third
quarter of 2006. The net interest margin was 3.40% in the third quarter of 2006.
    
    The Large Problem Credit continues to adversely affect the net interest margin. The
Large Problem Credit accounted for $28.9 million of nonaccrual loans thereby reducing
the net interest margin by 11 basis points for the three months ended September 30,
2007.
    
    The provision for loan losses was $1.8 million in the third quarter of 2007 compared
to $1.6 million for the comparable period in 2006 and $1.0 million in the second
quarter of 2007. This increase in provision for loan losses was due to updated
assessments of impaired loans, the overall growth in the loan portfolio, weakening
economic trends and the increasingly challenging environment for real estate related
businesses.
    
    Noninterest income decreased 10.8% to $3.7 million in the third quarter of 2007
compared to $4.1 million in the third quarter of 2006. Noninterest income was lower
primarily due to the $624,000 trading profits recognized in the third quarter of 2006
and, as anticipated, the decline in gains on sales of loans resulting from the
outsourcing of residential mortgage origination operations. Noninterest income
decreased $196,000 from $3.9 million in the second quarter of 2007 mainly due to the
decrease in gains on sale of loans.
    
    Noninterest expenses decreased 2.4% compared to the $16.6 million in the prior
quarter mainly due to the decrease of salaries and benefits expense, which was partly
offset by increases in occupancy and equipment expense and professional services fees.
Noninterest expenses decreased 5.5% to $16.2 million in the third quarter of 2007
compared to $17.2 million in the third quarter of 2006, mainly as a result of the
merger-related expenses recognized in the prior period.
  
    
    Basic and diluted earnings per share for the nine months ended September 30, 2007
were both $0.58 compared to $0.65 and $0.64 for basic and diluted, respectively, for
the same period in 2006.
    
    The annualized return on average assets for the nine months ended September 30, 2007
was 0.64% compared to 0.78% for the similar period in 2006.
    
    The annualized return on average equity for the nine months ended September 30, 2007
was 6.67% compared to 8.27% for the similar period in 2006.
    
    Interest income increased 20.9% to $138.4 million in the first nine months of 2007
compared to $114.6 million for the comparable period in 2006, primarily due to the
increase in loans following the Royal
 PAGE 22




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##### Table of Contents




    
    Net interest income increased 5.8% to $59.4 million in the first nine months of 2007
compared to $56.1 million in the first nine months of 2006 as a result of the Royal
American acquisition and internal loan growth. The net interest margin was 3.05% for
the nine months ended September 30, 2007 compared to 3.41% for the similar period of
2006.
    
    The Large Problem Credit reduced the net interest margin by approximately 11 basis
points for the nine months ended September 30, 2007 and net income by approximately
$0.11 per share on an annualized basis.
    
    The provision for loan losses was $3.5 million in the first nine months of 2007
compared to $6.6 million for the comparable period in 2006, as a result of the
downgrading of the Large Problem Credit at June 30, 2006.
    
    Noninterest income increased 5.2% to $11.3 million in the first nine months of 2007
compared to $10.8 million in the same period of 2006 primarily due to increases in
trust income and deposit service charges resulting from the Royal American transaction.
    
    Noninterest expenses increased 18.6% to $50.0 million in the first nine months of
2007 compared to $42.1 million in the same period of 2006, mainly as a result of the
Royal American transaction.
 PAGE 23




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##### Table of Contents



Net Interest Income
  For the Three Months EndedSeptember 30, 2007
    
    
    September 30, 2006
    
    
    June 30, 2007Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    
    Average

    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    

    
    Balance
    

    
    Interest
    
    

    
    Rate
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Interest-Earning Assets:Federal funds sold and interest-bearing
deposits due from banks
    
    $
    23,996
    
    
    
    297
    
    
    
    4.95
    %
    
    $
    13,057
    
    
    $
    157
    
    
    
    4.81
    %
    
    $
    16,857
    
    
    
    205
    
    
    
    4.86
    %Securities:Taxable(1)
    
    
    650,776
    
    
    
    9,128
    
    
    
    5.61
    
    
    
    604,176
    
    
    
    8,273
    
    
    
    5.48
    
    
    
    678,766
    
    
    
    9,261
    
    
    
    5.46Exempt from federal income taxes(1)
    
    
    47,765
    
    
    
    711
    
    
    
    5.95
    
    
    
    99,746
    
    
    
    1,471
    
    
    
    5.90
    
    
    
    47,768
    
    
    
    711
    
    
    
    5.95Total securities
    
    
    698,541
    
    
    
    9,839
    
    
    
    5.63
    
    
    
    703,922
    
    
    
    9,744
    
    
    
    5.52
    
    
    
    726,534
    
    
    
    9,972
    
    
    
    5.49FRB and FHLB stock
    
    
    23,683
    
    
    
    227
    
    
    
    3.83
    
    
    
    20,914
    
    
    
    199
    
    
    
    3.81
    
    
    
    23,688
    
    
    
    226
    
    
    
    3.82Loans held for sale
    
    
    815
    
    
    
    11
    
    
    
    5.40
    
    
    
    2,586
    
    
    
    44
    
    
    
    6.81
    
    
    
    3,011
    
    
    
    48
    
    
    
    6.38Loans:Commercial loans(1)(3)(4)
    
    
    426,366
    
    
    
    8,461
    
    
    
    7.94
    
    
    
    406,046
    
    
    
    8,242
    
    
    
    8.12
    
    
    
    413,416
    
    
    
    8,134
    
    
    
    7.87Commercial real estate
loans(1)(3)(4)(6)
    
    
    1,272,773
    
    
    
    24,293
    
    
    
    7.63
    
    
    
    1,241,622
    
    
    
    23,925
    
    
    
    7.71
    
    
    
    1,257,438
    
    
    
    23,757
    
    
    
    7.56Agricultural loans(1)(3)(4)
    
    
    3,172
    
    
    
    64
    
    
    
    8.07
    
    
    
    2,701
    
    
    
    54
    
    
    
    8.00
    
    
    
    3,538
    
    
    
    72
    
    
    
    8.14Consumer real estate loans(3)(4)(6)
    
    
    277,164
    
    
    
    4,632
    
    
    
    6.68
    
    
    
    255,003
    
    
    
    4,485
    
    
    
    7.04
    
    
    
    277,562
    
    
    
    4,730
    
    
    
    6.82Consumer installment loans(3)(4)
    
    
    9,644
    
    
    
    187
    
    
    
    7.76
    
    
    
    13,569
    
    
    
    247
    
    
    
    7.28
    
    
    
    9,483
    
    
    
    184
    
    
    
    7.76Total loans
    
    
    1,989,119
    
    
    
    37,637
    
    
    
    7.57
    
    
    
    1,918,941
    
    
    
    36,953
    
    
    
    7.72
    
    
    
    1,961,437
    
    
    
    36,877
    
    
    
    7.52Total interest-earning assets
    
    $
    2,736,154
    
    
    $
    48,011
    
    
    
    7.00
    %
    
    $
    2,659,420
    
    
    $
    47,097
    
    
    
    7.08
    %
    
    $
    2,731,527
    
    
    $
    47,328
    
    
    
    6.92
    %Noninterest-Earning Assets:Cash
    
    $
    51,487
    
    
    
    
    
    
    
    
    
    
    $
    78,241
    
    
    
    
    
    
    
    
    
    
    $
    49,301Premises and equipment, net
    
    
    22,404
    
    
    
    
    
    
    
    
    
    
    
    21,084
    
    
    
    
    
    
    
    
    
    
    
    22,279Allowance for loan losses
    
    
    (24,255
    )
    
    
    
    
    
    
    
    
    
    
    (26,727
    )
    
    
    
    
    
    
    
    
    
    
    (23,807
    )Other assets
    
    
    234,464
    
    
    
    
    
    
    
    
    
    
    
    235,554
    
    
    
    
    
    
    
    
    
    
    
    233,739Total noninterest-earning assets
    
    
    284,100
    
    
    
    
    
    
    
    
    
    
    
    308,152
    
    
    
    
    
    
    
    
    
    
    
    281,512Total assets
    
    $
    3,020,254
    
    
    
    
    
    
    
    
    
    
    $
    2,967,572
    
    
    
    
    
    
    
    
    
    
    $
    3,013,039Interest-Bearing Liabilities:Deposits:Demand deposits
    
    $
    175,582
    
    
    $
    862
    
    
    
    1.96
    %
    
    $
    165,672
    
    
    $
    568
    
    
    
    1.37
    %
    
    $
    171,671
    
    
    $
    792
    
    
    
    1.85
    %Money-market demand and savings accounts
    
    
    365,985
    
    
    
    2,394
    
    
    
    2.62
    
    
    
    413,626
    
    
    
    2,589
    
    
    
    2.50
    
    
    
    362,692
    
    
    
    2,380
    
    
    
    2.62Time deposits less than $100,000
    
    
    750,642
    
    
    
    9,123
    
    
    
    4.86
    
    
    
    748,929
    
    
    
    8,118
    
    
    
    4.34
    
    
    
    736,665
    
    
    
    8,917
    
    
    
    4.84Time deposits of $100,000 or more
    
    
    474,194
    
    
    
    6,255
    
    
    
    5.28
    
    
    
    417,731
    
    
    
    5,461
    
    
    
    5.23
    
    
    
    495,549
    
    
    
    6,493
    
    
    
    5.24Public funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,397
    
    
    
    227
    
    
    
    4.68
    
    
    
    
    
    
    
    
    
    
    
    Total interest-bearing deposits
    
    
    1,766,403
    
    
    
    18,634
    
    
    
    4.22
    
    
    
    1,765,355
    
    
    
    16,963
    
    
    
    3.84
    
    
    
    1,766,577
    
    
    
    18,582
    
    
    
    4.21Borrowings:Federal funds purchased and repurchase
agreements
    
    
    307,843
    
    
    
    3,201
    
    
    
    4.16
    
    
    
    255,718
    
    
    
    3,209
    
    
    
    5.02
    
    
    
    283,571
    
    
    
    2,956
    
    
    
    4.17FHLB advances
    
    
    307,418
    
    
    
    3,640
    
    
    
    4.74
    
    
    
    254,862
    
    
    
    3,001
    
    
    
    4.71
    
    
    
    318,256
    
    
    
    3,670
    
    
    
    4.61Notes payable and other borrowings
    
    
    67,294
    
    
    
    1,352
    
    
    
    8.04
    
    
    
    65,788
    
    
    
    1,337
    
    
    
    8.13
    
    
    
    65,837
    
    
    
    1,315
    
    
    
    7.99Total borrowings
    
    
    682,555
    
    
    
    8,193
    
    
    
    4.80
    
    
    
    576,368
    
    
    
    7,547
    
    
    
    5.24
    
    
    
    667,664
    
    
    
    7,941
    
    
    
    4.76Total interest-bearing liabilities
    
    $
    2,448,958
    
    
    $
    26,827
    
    
    
    4.40
    %
    
    $
    2,341,723
    
    
    $
    24,510
    
    
    
    4.20
    %
    
    $
    2,434,241
    
    
    $
    26,523
    
    
    
    4.36
    %Noninterest-Bearing Liabilities:Demand deposits
    
    $
    256,306
    
    
    
    
    
    
    
    
    
    
    $
    296,659
    
    
    
    
    
    
    
    
    
    
    $
    254,679Other liabilities
    
    
    30,759
    
    
    
    
    
    
    
    
    
    
    
    47,823
    
    
    
    
    
    
    
    
    
    
    
    34,359Total noninterest-bearing liabilities
    
    
    287,065
    
    
    
    
    
    
    
    
    
    
    
    344,482
    
    
    
    
    
    
    
    
    
    
    
    289,038Stockholders equity
    
    
    284,231
    
    
    
    
    
    
    
    
    
    
    
    281,367
    
    
    
    
    
    
    
    
    
    
    
    289,760Total liabilities and stockholders equity
    
    $
    3,020,254
    
    
    
    
    
    
    
    
    
    
    $
    2,967,572
    
    
    
    
    
    
    
    
    
    
    $
    3,013,039Net interest income (tax
equivalent)(1)(5)
    
    
    
    
    
    $
    21,184
    
    
    
    2.60
    %
    
    
    
    
    
    $
    22,587
    
    
    
    2.88
    %
    
    
    
    
    
    $
    20,805
    
    
    
    2.56
    %Net
interest margin (tax equivalent)(1)
    
    
    
    
    
    
    
    
    
    
    3.10
    %
    
    
    
    
    
    
    
    
    
    
    3.40
    %
    
    
    
    
    
    
    
    
    
    
    3.05
    %Net interest income(2)(5)
    
    
    
    
    
    $
    20,347
    
    
    
    
    
    
    
    
    
    
    $
    21,393
    
    
    
    
    
    
    
    
    
    
    $
    19,969Net interest margin(2)
    
    
    
    
    
    
    
    
    
    
    2.97
    %
    
    
    
    
    
    
    
    
    
    
    3.22
    %
    
    
    
    
    
    
    
    
    
    
    2.92
    %
 
 (1)
    
    Adjusted for 35% tax rate and adjusted for the dividends-received deduction where applicable. PAGE 24




---



##### Table of Contents



(2)
    
    Not adjusted for 35% tax rate 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 of $766, $726, and $531 for the three months ended September 30, 2007,
September 30, 2006, and June 30, 2007, respectively.(5)
    
    The following table reconciles reported net interest income on a tax equivalent basis for the
periods presented: For the three months ended,September 30,
    
    
    September 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007Net interest income
    
    $
    20,347
    
    
    $
    21,393
    
    
    $
    19,969Tax equivalent adjustment to net interest income
    
    
    837
    
    
    
    1,194
    
    
    
    836Net interest income, tax equivalent basis
    
    $
    21,184
    
    
    $
    22,587
    
    
    $
    20,805
 
 (6)
    
    Includes construction loans. For the Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2006Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Interest-Earning Assets:Federal funds sold and interest-bearing
deposits due from banks
    
    $
    18,976
    
    
    $
    688
    
    
    
    4.83
    %
    
    $
    11,621
    
    
    $
    437
    
    
    
    5.01
    %Securities:Taxable(1)
    
    
    644,567
    
    
    
    26,496
    
    
    
    5.48
    
    
    
    618,985
    
    
    
    24,503
    
    
    
    5.28Exempt from federal income taxes(1)
    
    
    56,211
    
    
    
    2,498
    
    
    
    5.93
    
    
    
    90,966
    
    
    
    4,012
    
    
    
    5.88Total securities
    
    
    700,778
    
    
    
    28,994
    
    
    
    5.52
    
    
    
    709,951
    
    
    
    28,515
    
    
    
    5.36FRB and FHLB stock
    
    
    23,648
    
    
    
    681
    
    
    
    3.84
    
    
    
    16,832
    
    
    
    475
    
    
    
    3.76Loans held for sale
    
    
    1,939
    
    
    
    89
    
    
    
    6.12
    
    
    
    1,756
    
    
    
    84
    
    
    
    6.38Loans:Commercial loans(1)(3)(4)
    
    
    411,034
    
    
    
    24,272
    
    
    
    7.87
    
    
    
    270,941
    
    
    
    16,118
    
    
    
    7.93Commercial real estate loans(1)(3)(4)
    
    
    1,264,709
    
    
    
    71,573
    
    
    
    7.55
    
    
    
    1,057,020
    
    
    
    59,741
    
    
    
    7.54Agricultural loans(3)(4)
    
    
    3,187
    
    
    
    191
    
    
    
    7.99
    
    
    
    2,419
    
    
    
    140
    
    
    
    7.72Consumer real estate loans(3)(4)
    
    
    277,092
    
    
    
    14,037
    
    
    
    6.75
    
    
    
    233,548
    
    
    
    11,688
    
    
    
    6.67Consumer installment loans(3)(4)
    
    
    9,806
    
    
    
    559
    
    
    
    7.60
    
    
    
    7,556
    
    
    
    420
    
    
    
    7.41Total loans
    
    
    1,965,828
    
    
    
    110,632
    
    
    
    7.50
    
    
    
    1,571,484
    
    
    
    88,107
    
    
    
    7.48Total interest-earning assets
    
    $
    2,711,169
    
    
    $
    141,084
    
    
    
    6.93
    %
    
    $
    2,311,644
    
    
    $
    117,618
    
    
    
    6.79
    %Noninterest-Earning Assets:Cash
    
    $
    57,220
    
    
    
    
    
    
    
    
    
    
    $
    59,617Premises and equipment, net
    
    
    22,231
    
    
    
    
    
    
    
    
    
    
    
    21,869Allowance for loan losses
    
    
    (24,321
    )
    
    
    
    
    
    
    
    
    
    
    (20,895
    )Other assets
    
    
    233,578
    
    
    
    
    
    
    
    
    
    
    
    160,336Total noninterest-earning assets
    
    
    288,708
    
    
    
    
    
    
    
    
    
    
    
    220,927Total assets
    
    $
    2,999,877
    
    
    
    
    
    
    
    
    
    
    $
    2,532,571Interest-Bearing Liabilities:Deposits:Demand deposits
    
    $
    170,166
    
    
    $
    2,384
    
    
    
    1.87
    %
    
    $
    148,869
    
    
    $
    1,117
    
    
    
    1.00
    %Money-market demand and savings accounts
    
    
    368,861
    
    
    
    7,220
    
    
    
    2.61
    
    
    
    328,388
    
    
    
    4,962
    
    
    
    2.01Time deposits less than $100,000
    
    
    739,579
    
    
    
    26,678
    
    
    
    4.81
    
    
    
    756,544
    
    
    
    22,878
    
    
    
    4.03Time deposits of $100,000 or more
    
    
    478,916
    
    
    
    18,833
    
    
    
    5.24
    
    
    
    289,399
    
    
    
    10,548
    
    
    
    4.86Public funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,288
    
    
    
    518
    
    
    
    4.52Total interest-bearing deposits
    
    
    1,757,522
    
    
    
    55,115
    
    
    
    4.18
    
    
    
    1,538,488
    
    
    
    40,023
    
    
    
    3.47Borrowings:Federal funds purchased and repurchase
agreements
    
    
    282,768
    
    
    
    9,015
    
    
    
    4.25
    
    
    
    249,151
    
    
    
    8,486
    
    
    
    4.54FHLB advances
    
    
    315,142
    
    
    
    10,958
    
    
    
    4.64
    
    
    
    210,979
    
    
    
    6,522
    
    
    
    4.12Notes payable and other borrowings
    
    
    66,322
    
    
    
    3,968
    
    
    
    7.98
    
    
    
    59,081
    
    
    
    3,414
    
    
    
    7.70Total borrowings
    
    
    664,232
    
    
    
    23,941
    
    
    
    4.81
    
    
    
    519,211
    
    
    
    18,422
    
    
    
    4.73Total interest-bearing liabilities
    
    $
    2,421,754
    
    
    $
    79,056
    
    
    
    4.35
    %
    
    $
    2,057,699
    
    
    $
    58,445
    
    
    
    3.79
    %Noninterest-Bearing Liabilities:Demand deposits
    
    $
    255,805
    
    
    
    
    
    
    
    
    
    
    $
    202,901Other liabilities
    
    
    34,743
    
    
    
    
    
    
    
    
    
    
    
    32,495Total noninterest-bearing liabilities
    
    
    290,548
    
    
    
    
    
    
    
    
    
    
    
    235,396Stockholders equity
    
    
    287,575
    
    
    
    
    
    
    
    
    
    
    
    239,476Total liabilities and stockholders equity
    
    $
    2,999,877
    
    
    
    
    
    
    
    
    
    
    $
    2,532,571Net interest income (tax
equivalent)(1)(5)
    
    
    
    
    
    $
    62,028
    
    
    
    2.59
    %
    
    
    
    
    
    $
    59,173
    
    
    
    3.00
    %Net interest margin (tax
equivalent)(1)
    
    
    
    
    
    
    
    
    
    
    3.05
    %
    
    
    
    
    
    
    
    
    
    
    3.41
    %Net interest income(2)(5)
    
    
    
    
    
    $
    59,376
    
    
    
    
    
    
    
    
    
    
    $
    56,107Net interest margin(2)
    
    
    
    
    
    
    
    
    
    
    2.92
    %
    
    
    
    
    
    
    
    
    
    
    3.24
    %
 PAGE 25




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##### Table of Contents



(1)
    
    Adjusted for 35% tax rate and adjusted for the dividends-received deduction where applicable.(2)
    
    Not adjusted for 35% tax rate 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 of $1,966 and $2,207 for the nine months ended September 30, 2007 and
2006, respectively.(5)
    
    The following table reconciles reported net interest income on a tax equivalent basis for the
periods presented: For the nine months ended,September 30,2007
    
    
    2006Net interest income
    
    $
    59,376
    
    
    $
    56,107Tax equivalent adjustment to net interest income
    
    
    2,652
    
    
    
    3,066Net interest income, tax equivalent basis
    
    $
    62,028
    
    
    $
    59,173
 (6)
    
    Includes construction loans.     
    
    Yields on average earning assets decreased 8 basis points in the third quarter of
2007 compared to the third quarter of 2006, but average balances of earning assets
increased by $76.7 million. Yields on average earning assets increased by 8 basis
points compared to the second quarter of 2007. Loan growth and higher yields on
loans and securities contributed to the linked-quarter increase in net interest
income. Yields on average earning assets increased 14 basis points in the first nine
months of 2007 compared to the similar period in 2006, and average balances increased
by $399.5 million.
    
    Average yields on loans for the third quarter of 2007 increased by 5 basis points
to 7.57% compared to the second quarter of 2007 but decreased by 14 basis points
compared to the same period in 2006. For the first nine months of 2007, average
yields earned on loans increased slightly by 2 basis points to 7.50% compared to
2006. Average loans increased by $70.2 million in the quarter ended September 30,
2007 compared to the same period in 2006. Compared to the second quarter of 2007,
average balances rose $27.7 million, as a result of the growth in commercial and
commercial real estate loans. Average loans increased by $394.3 million in the first
nine months of 2007 compared
 PAGE 26




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##### Table of Contents



to the same period in 2006.
    
    Yields on average securities increased 11 basis points while balances decreased by
$5.4 million in the third quarter of 2007 compared to the similar period in 2006.
Yields on average securities increased by 14 basis points compared to the second
quarter of 2007, while average balances decreased by $28.0 million. Yields on
average securities increased 16 basis points in the first nine months of 2007
compared to the similar period in 2006, while average balances decreased by $9.2
million. Yields on average securities increased as a result of the sale of certain
municipal bonds and mortgage-backed securities and the investment in higher-yielding
U.S. government-sponsored entities during 2007.
  
    
    The Companys cost of funds increased by 4 basis points on a linked-quarter basis
as a result of increased rates paid on interest-bearing liabilities. Management has
repriced deposit rates in step with Federal Open Market Committee actions and as
market conditions permit. Average interest-bearing liabilities increased by $14.7
million during the third quarter of 2007 compared to the prior quarter, primarily to
fund loan growth. Yields on average interest-bearing liabilities increased by 20
basis points, and average balances increased $107.2 million in the third quarter of
2007 compared to the similar period in 2006. When compared to the first nine months
of 2006, the cost of funds increased by 56 basis points to 4.35% for the first nine
months of 2007, while average interest-bearing liabilities increased $364.1 million.
    
    Average interest-bearing deposits increased by $1.0 million while average rates
increased 38 basis points in the third quarter of 2007 compared to the similar period
of 2006. Average rates paid on interest-bearing deposits and average balances
remained fairly flat compared to the second quarter of 2007. Yields on average
interest-bearing deposits increased 71 basis points in the first nine months of 2007
compared to the similar period in 2006, and average balances increased by $219.0
million.
    
    Average interest-bearing demand deposit, money market, and savings accounts
increased by $7.2 million compared to the second quarter of 2007 but decreased by
$37.7 million for the third quarter of 2007 compared to 2006. On a year-to-date
basis, average interest-bearing demand deposit, money market, and savings accounts
increased by $61.8 million compared to September 30, 2006. The Company continues to
focus its marketing efforts to increase core deposits to alleviate margin pressure.
    
    The increase in average rates paid on interest-bearing deposits was partially
offset by the decrease in costs of average borrowings of 44 basis points in the third
quarter of 2007 compared to the same period in 2006, while average balances increased
by $106.2 million. Average borrowings increased by $14.9 million in the third
quarter of 2007 and yields increased by 4 basis points to 4.80% compared to the
second quarter of 2007. On a year-to-date basis, average borrowings increased by
$145.0 million compared to September 2006 and average rates paid increased by 8 basis
points.
    
    Yields on average securities were 5.63% for the third quarter of 2007 compared to
5.49% for the second quarter of 2007. Yields on average borrowings were 4.80% for
the third quarter of 2007 compared to 4.76% for the second quarter of 2007. The
spread between yields on average securities and rates on average borrowings increased
to 83 basis points during the third quarter of 2007 compared to 73 basis points
during the second quarter of 2007.
 PAGE 27




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##### Table of Contents



Noninterest Income
  
    
    Noninterest income was $3.7 million for the three months ended September 30, 2007,
a decrease of $447,000, or 10.8%, over the comparable period in 2006, and $196,000
compared to the second quarter of 2007.
    
    Excluding the $624,000 trading profits recognized in the third quarter of 2006,
noninterest income for the third quarter of 2007 increased by $177,000, or 5.0%, from
the third quarter of 2006, while gains on sales of loans decreased during the third
quarter of 2007 by $154,000 to $41,000 compared to the third quarter of 2006 and by
$184,000 when compared to the second quarter of 2007. As expected, gains on sales of
loans decreased as a result of the Companys previously announced departure from this
line of business in July 2007.
    
    The annualized noninterest income to average assets ratio was 0.49% for the three
months ended September 30, 2007 compared to 0.55% for the same period in 2006 and
0.52% for the three months ended June 30, 2007.
    
    Management continues to focus on revenue growth in the wealth management area
including assets under management as well as brokerage and trust lines of business.
In the first quarter of 2007, the Company restructured its broker-dealer operations
and negotiated more favorable clearing broker-dealer charges.
 §
    
    Trust income increased by $96,000 in the third quarter of 2007 compared to
the same period in 2006 but declined by $49,000 compared to the second
quarter of 2007. Compared to year end, assets under management increased to
$259.2 million at September 30, 2007 from $223.9 million.§
    
    Insurance and brokerage commissions increased by $207,000 in the three
months ended September 30, 2007 compared to the similar period in 2006 and
rose by $144,000 compared to the second quarter of 2007. The increase in
insurance and brokerage commissions during the third quarter was driven by
higher variable rate annuity sales.
 
    
    Customer service fees decreased slightly by $8,000 in the third quarter of 2007
compared to the same period in 2006 and declined by $40,000 compared to the second
quarter of 2007.
    
    The increase in the cash surrender value of life insurance increased by $60,000 to
$736,000 during the three months ended September 30, 2007 compared to the similar
period in 2006 and by $33,000 compared to the second quarter of 2007.
  
    
    Noninterest income was $11.3 million for the nine months ended September 30, 2007,
an increase of $556,000, or 5.2%, over the comparable period in 2006.
 PAGE 28




---



##### Table of Contents




    
    Excluding the $1.3 million gains on extinguishment of debt and $624,000 trading
profits recognized in the first nine months of 2006, the increase in noninterest
income from the first nine months of 2006 was $2.4 million, or 27.3%. Gains on sales
of loans declined during the first nine months of 2007 by $49,000 to $441,000
compared to the same period in 2006. As expected, gains on sales of loans decreased
as a result of the Companys previously announced departure from this line of
business in July 2007 which was offset by the decrease in fixed costs.
    
    The annualized noninterest income to average assets ratio was 0.50% for the nine
months ended September 30, 2007 compared to 0.57% for the same period in 2006.
    
    Wealth management remains a key revenue focus area of opportunity for the Company.
 §
    
    Trust revenues increased by $829,000, primarily due to trust business from
the Royal American acquisition.§
    
    Insurance and brokerage commissions increased by $323,000 during the first
nine months of 2007 compared to the prior year.
 
    
    Customer service fees increased by $583,000 in the first nine months of 2007
compared to the same period in 2006 due the larger deposit base resulting from the
Royal American transaction.
    
    The cash surrender value of life insurance increased by $492,000 to $2.2 million
during the nine months ended September 30, 2007 compared to the similar period in
2006.
  Noninterest Expenses
  
    
    Total noninterest expenses decreased 5.5%, or $949,000, to $16.2 million during
the third quarter of 2007 compared to $17.2 million for the similar period in 2006,
mainly due to the $1.6 million merger-related expenses recognized in 2006.
Noninterest expenses have declined for the second consecutive quarter. In comparison
to the second quarter of 2007, total noninterest expenses decreased $399,000, and the
decline in the second quarter was $437,000 from the first quarter of 2007. This
decrease was mainly attributed to the decrease of salaries and benefits expense,
which was partly offset by increases in occupancy and equipment expense and
professional services fees.
    
    The annualized noninterest expenses to average assets ratio was 2.13% for the
three months ended September 30, 2007 compared to 2.30% for the same period in 2006,
2.22% for the three months ended June 30, 2007, and 2.34% for the three months ended
March 31, 2007.
    
    The efficiency ratio improved to 63.64% for the third quarter of 2007 compared to
65.78% in the previous quarter and 69.83% in the first quarter of 2007 reflecting the
decrease in expenses. When compared to the third quarter of 2006, the efficiency
ratio increased from 62.41%.
 PAGE 29




---



##### Table of Contents




    
    Salaries and benefits expense decreased by $623,000, or 6.0%, during the third
quarter of 2007 compared to the second quarter of 2007 as a result of outsourcing the
residential mortgage origination operations and janitorial services as well as a
reduction in incentive compensation which is tied to budgeted profitability. Salaries
and benefits expense increased by $421,000 compared to the third quarter of 2006.
    
    Occupancy and equipment expense increased by $477,000 during the third quarter of
2007 to $2.4 million compared to the similar period in 2006 and by $171,000 compared
to the second quarter of 2007.
    
    Professional services expense declined by $155,000, or 10.7%, to $1.3 million in
the third quarter of 2007, compared to the third quarter of 2006 but rose by
$210,000, or 19.3%, compared to the second quarter of 2007.
    
    Marketing expenses in the third quarter of 2007 were $120,000 higher than in the
third quarter of 2006, and $60,000 higher than the second quarter of 2007.
  
    
    Total noninterest expenses increased 18.6%, or $7.9 million, to $50.0 million
during the first nine months of 2007 compared to $42.1 million for the similar period
in 2006 mainly attributable to Royal American.
    
    The annualized noninterest expenses to average assets ratio was 2.23% for the nine
months ended September 30, 2007 compared to 2.22% for the same period in 2006.
    
    The efficiency ratio was 66.37% for the first nine months of 2007 compared to
58.64% for the same period in 2006 as a result of noninterest expenses increasing to
a greater extent than top line revenue on a tax equivalent basis.
    
    Salaries and benefits expense increased by $6.1 million, or 25.1%, during the
first nine months of 2007 compared to 2006, reflecting additions to management and
the addition of 50 full-time equivalent employees from Royal American.
    
    Occupancy and equipment expense increased by $1.8 million during the nine months
ended September 30, 2007 to $6.7 million compared to the similar period in 2006
reflecting the six additional offices acquired from Royal American and the Franklin
Park office opened in June 2006.
    
    Professional services expense declined by $208,000 to $3.6 million in the first
nine months of 2007 compared to the same period in 2006.
    
    Marketing expenses for the nine months ended September 30, 2007 were $237,000
million higher than in the same period in 2006.
 PAGE 30




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##### Table of Contents



Income Taxes
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Income taxes computed at federal statutory rate
    
    $
    2,101
    
    
    
    35.0
    %
    
    $
    2,377
    
    
    
    35.0
    %
    
    $
    6,034
    
    
    
    35.0
    %
    
    $
    6,369
    
    
    
    35.0
    %Tax-exempt interest income on securities and loans
    
    
    (166
    )
    
    
    (2.8
    )
    
    
    (313
    )
    
    
    (4.6
    )
    
    
    (550
    )
    
    
    (3.2
    )
    
    
    (869
    )
    
    
    (4.8
    )General business credits
    
    
    (289
    )
    
    
    (4.8
    )
    
    
    (495
    )
    
    
    (7.3
    )
    
    
    (509
    )
    
    
    (3.0
    )
    
    
    (555
    )
    
    
    (3.1
    )State income taxes, net of federal tax benefit
due to state operating loss
    
    
    (323
    )
    
    
    (5.4
    )
    
    
    (254
    )
    
    
    (3.7
    )
    
    
    (840
    )
    
    
    (4.9
    )
    
    
    (290
    )
    
    
    (1.6
    )Life insurance cash surrender value increase, net of premiums
    
    
    (258
    )
    
    
    (4.3
    )
    
    
    (236
    )
    
    
    (3.5
    )
    
    
    (767
    )
    
    
    (4.4
    )
    
    
    (595
    )
    
    
    (3.3
    )Dividends received deduction
    
    
    (301
    )
    
    
    (5.0
    )
    
    
    (272
    )
    
    
    (4.0
    )
    
    
    (913
    )
    
    
    (5.3
    )
    
    
    (717
    )
    
    
    (3.9
    )Nondeductible meals and entertainment
    
    
    10
    
    
    
    0.2
    
    
    
    6
    
    
    
    0.1
    
    
    
    29
    
    
    
    0.2
    
    
    
    15
    
    
    
    0.1Annuity proceeds
    
    
    310
    
    
    
    5.1
    
    
    
    
    
    
    
    
    
    
    
    310
    
    
    
    1.8
    
    
    
    
    
    
    
    Stock based compensation, net
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    0.2Other
    
    
    82
    
    
    
    1.4
    
    
    
    5
    
    
    
    0.1
    
    
    
    92
    
    
    
    0.5
    
    
    
    (2
    )
    
    
    (0.0
    )Total provision for income taxes
    
    $
    1,166
    
    
    
    19.4
    %
    
    $
    814
    
    
    
    12.0
    %
    
    $
    2,886
    
    
    
    16.7
    %
    
    $
    3,385
    
    
    
    18.6
    %
 Recent Developments
   PAGE 31




---



##### Table of Contents



Financial Condition
  
    
    Total assets increased $90.5 million to $3.0 billion at September 30, 2007 compared to
year end 2006 and up $90.3 million compared to September 30, 2006.
    
    Total loans increased $60.6 million to $2.0 billion at September 30, 2007 compared to
year end 2006 and increased $98.4 million over the third quarter of 2006.
    
    The loan to deposit ratio increased to 100.63% from 99.44% at December 31, 2006, and was
higher than the 94.19% figure recorded at September 30, 2006.
    
    Deposits increased by $37.1 million to $2.0 billion at September 30, 2007 compared to
year end 2006 but decreased by $31.9 million when compared to September 30, 2006. Deposit
growth from year end was centered in certificates of deposit, mainly brokered certificates
of deposit.
 PAGE 32




---



##### Table of Contents



Fair MarketRoyal
    
    
    Value
    
    
    AsAmerican
    
    
    Adjustment
    
    
    Adjusted(In thousands)Assets acquired:Cash and cash equivalents
    
    $
    24,363
    
    
    $
    
    
    
    $
    24,363Securities available-for-sale
    
    
    16,487
    
    
    
    
    
    
    
    16,487Federal Reserve and Federal Home Loan Bank stock
    
    
    1,427
    
    
    
    
    
    
    
    1,427Loans, net
    
    
    497,376
    
    
    
    (2,837
    )
    
    
    494,539Cash value of life insurance
    
    
    12,467
    
    
    
    
    
    
    
    12,467Premises and equipment, net
    
    
    1,254
    
    
    
    41
    
    
    
    1,295Core deposit intangible, net
    
    
    
    
    
    
    10,488
    
    
    
    10,488Goodwill
    
    
    
    
    
    
    78,597
    
    
    
    78,597Other assets
    
    
    4,535
    
    
    
    
    
    
    
    4,535Total assets acquired
    
    $
    557,909
    
    
    $
    86,289
    
    
    $
    644,198Liabilities assumed:Deposits
    
    $
    467,878
    
    
    $
    (1,867
    )
    
    $
    466,011Federal funds purchased
    
    
    30,000
    
    
    
    
    
    
    
    30,000Advances from the Federal Home Loan Bank
    
    
    5,000
    
    
    
    (146
    )
    
    
    4,854Junior subordinated debentures
    
    
    10,310
    
    
    
    (204
    )
    
    
    10,106Other liabilities
    
    
    115
    
    
    
    3,938
    
    
    
    4,053Total liabilities assumed
    
    $
    513,303
    
    
    $
    1,721
    
    
    $
    515,024Assets acquired less liabilities assumed
    
    $
    44,606
    
    
    $
    84,568
    
    
    $
    129,174
  
    
    The quality of the loan portfolio remained stable.
 §
    
    Nonaccrual loans excluding the Large Problem Credit that was previously disclosed
were 0.80% of loans, up from 0.75% at June 30, 2007 but down from the December 31, 2006
level of 0.89%.§
    
    Nonaccrual loans were 2.23% of total loans at September 30, 2007, 2.20% of total
loans at year end, and 1.13% at September 30, 2006. The increase
over September 30, 2006 was mostly a result
of the Large Problem Credit.§
    
    There were no loans over 90 days past due and accruing at September 30, 2007.
Foreclosed properties decreased slightly from $2.3 million at June 30, 2007 to $2.2
million.§
    
    There have been no additions to foreclosed properties for the first nine months of
2007.§
    
    Loan delinquencies 30-89 days were 0.49% of loans at September 30, 2007, down from
0.63% at June 30, 2007.§
    
    Total nonperforming assets, excluding the Large Problem Credit, were up 6.2% from
June 30, 2007, and down 8.1% compared to December 31, 2006.§
    
    Nonperforming assets were 1.55% of total assets at September 30, 2007 and year end
but increased from the 0.83% recorded at September 30, 2006 due to the Large Problem
Credit.
 
    
    The Companys loan quality statistics are adversely affected by the Large Problem
Credit. At September 30, 2007, the remaining total loan exposure is $28.9 million, all of
which is on nonaccrual.
 PAGE 33




---



##### Table of Contents




    
    The Company recorded a $5.0 million provision for loan losses relating to the Large
Problem Credit in the second quarter of 2006. The Company recorded an additional $5.5
million provision and charged off $7.5 million of the principal balance in the fourth
quarter of 2006 to reflect the deterioration of the Large Problem Credit. There were no
charge offs on this credit during 2007.
    
    The allowance for loan losses was 1.24% of total loans, versus 1.19% at year end 2006
and 1.34% at September 30, 2006.
    
    The allowance for loan losses was 0.56 times nonaccrual loans at September 30, 2007,
0.54 times nonaccrual loans at year end, and 1.18 times nonaccrual loans at September 30,
2006, with the decrease from September 30, 2006 being primarily attributed to the Large Problem
Credit.
 Loans
  September 30,
    
    
    December 31,2007

    
    
    2006% of Gross
    
    
    
    
    
    
    % of GrossAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans(Dollars in thousands)Commercial
    
    $
    421,361
    
    
    
    21.0
    %
    
    $
    376,944
    
    
    
    19.4
    %Construction
    
    
    405,464
    
    
    
    20.2
    
    
    
    424,181
    
    
    
    21.8Commercial real estate
    
    
    787,123
    
    
    
    39.2
    
    
    
    761,742
    
    
    
    39.0ConsumerHome equity
    
    
    144,629
    
    
    
    7.2
    
    
    
    147,366
    
    
    
    7.6Other consumer
    
    
    7,905
    
    
    
    0.4
    
    
    
    9,373
    
    
    
    0.5Total consumer
    
    
    152,534
    
    
    
    7.6
    
    
    
    156,739
    
    
    
    8.1Residential mortgage
    
    
    241,319
    
    
    
    12.0
    
    
    
    227,762
    
    
    
    11.7Total loans, gross
    
    
    2,007,801
    
    
    
    100.0
    %
    
    
    1,947,368
    
    
    
    100.0
    %Net deferred fees
    
    
    (355
    )
    
    
    
    
    
    
    (552
    )Total loans, net
    
    $
    2,007,446
    
    
    
    
    
    
    $
    1,946,816
  
    
    The Company continues to focus its loan growth efforts in commercial and industrial
lending opportunities which in many cases includes owner-occupied commercial real estate
loans. The Companys stated objective is to diversify and reduce risk in the loan
portfolio.
    
    Commercial loans grew by $44.4 million to $421.4 million as of September 30, 2007 from
$376.9 million as of December 31, 2006. Commercial loans represent 21.0% of total gross
loans, up from 19.4% at year end.
    
    Construction loans decreased by $18.7 million to $405.5 million as of September 30, 2007
from $424.2 million at December 31, 2006. The slow down in all forms of real estate also
precipitated a change in the loan mix. Construction loans decreased to 20.2% of the
portfolio from 21.8% at year end.
    
    Consumer loans decreased $4.2 million to $152.5 million as of September 30, 2007
compared to $156.7 million December 31, 2006.
 PAGE 34




---



##### Table of Contents




    
    Residential mortgage loans increased $13.6 million to $241.3 million as of September 30,
2007 from $227.8 million as of December 31, 2006.
   Allowance for Loan Losses
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)Balance, at beginning of period
    
    $
    23,724
    
    
    $
    20,874
    
    
    $
    23,229
    
    
    $
    17,760Addition resulting from acquisition
    
    
    
    
    
    
    3,244
    
    
    
    
    
    
    
    3,244Provision charged to operations
    
    
    1,800
    
    
    
    1,550
    
    
    
    3,481
    
    
    
    6,550Loans charged off
    
    
    (1,159
    )
    
    
    (313
    )
    
    
    (3,183
    )
    
    
    (2,601
    )Recoveries
    
    
    514
    
    
    
    187
    
    
    
    1,352
    
    
    
    589Net loans charged off
    
    
    (645
    )
    
    
    (126
    )
    
    
    (1,831
    )
    
    
    (2,012
    )Balance, at end of period
    
    $
    24,879
    
    
    $
    25,542
    
    
    $
    24,879
    
    
    $
    25,542
 PAGE 35




---



##### Table of Contents



September 30,
    
    
    December 31,
    
    
    September 30,2007
    
    
    2006
    
    
    2006Net loans charged off to average loans during quarter
    
    
    0.13
    %
    
    
    1.62
    %
    
    
    0.03
    %Provision for loan losses to loans
    
    
    0.36
    
    
    
    1.12
    
    
    
    0.32Allowance for loan losses to loans
    
    
    1.24
    
    
    
    1.19
    
    
    
    1.34Allowance to nonaccrual loans
    
    
    0.56
    x
    
    
    0.54

    x

    
    
    1.18
    x
     PAGE 36




---



##### Table of Contents



Nonaccrual Loans and Nonperforming Assets
     September 30,
    
    
    December 31,2007
    
    
    2006(Dollars in thousands)Impaired and other loans 90 days past due
and accruing
    
    $
    
    
    
    $
    34Nonaccrual and impaired loans not accruing
    
    $
    44,681
    
    
    $
    42,826Foreclosed properties
    
    
    2,246
    
    
    
    2,640Total nonperforming assets
    
    $
    46,927
    
    
    $
    45,466Nonaccrual loans to loans
    
    
    2.23
    %
    
    
    2.20
    %Nonperforming assets to loans
and foreclosed properties
    
    
    2.34
    
    
    
    2.33Nonperforming assets to assets
    
    
    1.55
    
    
    
    1.55
  PAGE 37




---



##### Table of Contents



Securities
  September 30, 2007TotalHeld-to-Maturity
    
    
    Available-for-Sale
    
    
    
    
    
    
    
    
    
    
    % ofAmortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    AmortizedCost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost(Dollars in thousands)U.S. Treasury and obligations of
U.S. government-sponsored entities
    
    $
    
    
    
    $
    
    
    
    $
    151,984
    
    
    $
    152,164
    
    
    $
    151,984
    
    
    $
    152,164
    
    
    
    21.12
    %Obligations of states and
political subdivisions
    
    
    1,684
    
    
    
    1,686
    
    
    
    46,079
    
    
    
    45,586
    
    
    
    47,763
    
    
    
    47,272
    
    
    
    6.64Mortgage-backed securities
    
    
    39,294
    
    
    
    37,926
    
    
    
    373,159
    
    
    
    364,296
    
    
    
    412,453
    
    
    
    402,222
    
    
    
    57.33Equity securities
    
    
    
    
    
    
    
    
    
    
    85,176
    
    
    
    77,521
    
    
    
    85,176
    
    
    
    77,521
    
    
    
    11.84Other bonds
    
    
    
    
    
    
    
    
    
    
    22,100
    
    
    
    21,419
    
    
    
    22,100
    
    
    
    21,419
    
    
    
    3.07Total
    
    $
    40,978
    
    
    $
    39,612
    
    
    $
    678,498
    
    
    $
    660,986
    
    
    $
    719,476
    
    
    $
    700,598
    
    
    
    100.00
    %
   
    
    U.S. Treasury and obligations of U.S. government-sponsored entities increased by $145.2
million to $152.2 million, or 23.0% of the securities portfolio, at September 30, 2007
compared to $7.0 million at year end.
    
    U.S. government agency and government-sponsored entity mortgage-backed securities
decreased 16.0%, or $69.8 million, from $434.1 million at December 31, 2006 to $364.3
million, or 55.1% of the securities portfolio, at September 30, 2007.
    
    Equity securities increased $36.0 million to $77.5 million, or 11.7% of the securities
portfolio, at September 30, 2007 from December 31, 2006. Equity securities included capital
securities of U.S. government-sponsored entities.
    
    Obligations of state and political subdivisions decreased $51.4 million to $45.6
million, or 3.2% of the securities portfolio, at September 30, 2007 from December 31, 2006.
   PAGE 38




---



##### Table of Contents



Cash Surrender Value of Life Insurance
  Deposits and Borrowed Funds
  September 30,
    
    
    December 31,2007
    
    
    2006(In thousands)Noninterest-bearing demand
    
    $
    246,153
    
    
    $
    276,381Interest-bearing demand
    
    
    171,635
    
    
    
    161,585Money-market demand and savings
    
    
    377,299
    
    
    
    377,955Time deposits less than $100,000
    
    
    740,541
    
    
    
    721,578Time deposits of $100,000 or more
    
    
    459,299
    
    
    
    420,311Total interest-bearing deposits
    
    
    1,748,774
    
    
    
    1,681,429Total
    
    $
    1,994,927
    
    
    $
    1,957,810
  
    
    Noninterest-bearing deposits were $246.2 million at September 30, 2007, $30.2
million less than the $276.4 million level at December 31, 2006.
    
    Over the same period, interest-bearing deposits increased 4.0%, or $67.3 million
to $1.7 billion at September 30, 2007.
    
    Core deposits, which include demand deposit, interest-bearing demand deposit,
money market, and savings accounts, decreased $20.8 million to $795.1 million at
September 30, 2007 from $815.9 million at December 31, 2006.
    
    Certificates of deposit under $100,000 increased $19.0 million from December 31,
2006 to $740.5 million at September 30, 2007.
    
    Certificates of deposit over $100,000 increased $39.0 million from December 31,
2006 to $459.3 million at September 30, 2007. The majority of the increase was a
result of increased brokered certificates of deposit coupled with the migration of
balances in core deposits to certificates of deposits as a result of the increase in
rates. At times, brokered certificates of deposit are less costly than customer
certificates of deposits. During the third quarter, however, brokered certificates
of deposit decreased by $51.2 million.
  PAGE 39




---



##### Table of Contents



September 30,
    
    
    December 31,2007
    
    
    2006(In thousands)Federal funds purchased
    
    $
    12,000
    
    
    $
    66,000Securities sold under agreements to repurchase
    
    
    317,118
    
    
    
    201,079Federal Home Loan Bank advances
    
    
    319,925
    
    
    
    319,883Junior subordinated debentures
    
    
    65,861
    
    
    
    65,812Note payable
    
    
    2,500
    
    
    
    Total
    
    $
    717,404
    
    
    $
    652,774
   Capital Resources
   PAGE 40




---



##### Table of Contents



September 30,
    
    
    December 31,2007
    
    
    2006(In thousands)Risk-weighted assets
    
    $
    2,299,474
    
    
    $
    2,237,305Average assets
    
    
    3,020,254
    
    
    
    2,946,366Capital components:Stockholders equity
    
    $
    285,233
    
    
    $
    287,242Guaranteed trust preferred securities
    
    
    64,000
    
    
    
    64,000Less: Core deposit and other intangibles, net
    
    
    (9,586
    )
    
    
    (11,273
    )Less: Goodwill
    
    
    (79,857
    )
    
    
    (79,488
    )Plus: Unrealized losses on securities
    
    
    10,574
    
    
    
    6,273Unrealized losses on equity securities
    
    
    (7,654
    )
    
    
    Tier I capital
    
    
    262,710
    
    
    
    266,754Allowance for loan losses
    
    
    24,879
    
    
    
    23,229Reserve for unfunded commitments
    
    
    233
    
    
    
    Unrealized gains on equity securities
    
    
    
    
    
    
    175Total risk-based capital
    
    $
    287,822
    
    
    $
    290,158
  At September 30, 2007Minimum Required
    
    
    Minimum RequiredActual
    
    
    for Capital Adequacy
    
    
    to be Well CapitalizedAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(Dollars in thousands)Total capital to risk-weighted assets
Company
    
    $
    287,822
    
    
    
    12.5
    %
    
    $
    183,958
    
    
    
    8.0
    %
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    284,021
    
    
    
    12.4
    
    
    
    183,206
    
    
    
    8.0
    
    
    $
    229,008
    
    
    
    10.0
    %Tier I capital to risk-weighted assets
Company
    
    
    262,710
    
    
    
    11.4
    
    
    
    91,979
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    259,142
    
    
    
    11.3
    
    
    
    91,603
    
    
    
    4.0
    
    
    
    137,405
    
    
    
    6.0Tier I capital to average assets
Company
    
    
    262,710
    
    
    
    8.7
    
    
    
    120,810
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    259,142
    
    
    
    8.6
    
    
    
    120,424
    
    
    
    4.0
    
    
    
    150,530
    
    
    
    5.0
 PAGE 41




---



##### Table of Contents



At December 31, 2006Minimum Required
    
    Minimum RequiredActual
    
    for Capital Adequacy
    
    to be Well CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)Total capital to risk-weighted assets
Company
    
    $
    290,158
    
    
    
    13.0
    %
    
    $
    178,984
    
    
    
    8.0
    %
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    272,619
    
    
    
    12.2
    
    
    
    178,113
    
    
    
    8.0
    
    
    $
    222,641
    
    
    
    10.0
    %Tier I capital to risk-weighted assets
Company
    
    
    266,754
    
    
    
    11.9
    
    
    
    89,492
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    249,214
    
    
    
    11.2
    
    
    
    89,056
    
    
    
    4.0
    
    
    
    133,584
    
    
    
    6.0Tier I capital to average assets
Company
    
    
    266,754
    
    
    
    9.1
    
    
    
    117,855
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    249,214
    
    
    
    8.5
    
    
    
    117,140
    
    
    
    4.0
    
    
    
    146,425
    
    
    
    5.0
 Liquidity
     PAGE 42




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##### Table of Contents



ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
 Interest Rate Sensitivity Analysis
  Change in Net Interest Income Over One Year HorizonGuidelineSeptember 30, 2007
    
    December 31, 2006
    
    MaximumDollar
    
    %
    
    Dollar
    
    %
    
    %Change
    
    Change
    
    Change
    
    Change
    
    Change(Dollars in thousands)+200 bp
    
    $
    (1,398
    )
    
    
    (1.7
    )%
    
    $
    (3,172
    )
    
    
    (4.00
    )%
    
    
    (10.0
    )%+100 bp
    
    
    1,024
    
    
    
    1.3
    
    
    
    (1,683
    )
    
    
    (2.12
    )
    
    
    (10.0
    )-100 bp
    
    
    (2,346
    )
    
    
    (2.9
    )
    
    
    1,410
    
    
    
    1.78
    
    
    
    (10.0
    )-200 bp
    
    
    (6,561
    )
    
    
    (8.0
    )
    
    
    (1,511
    )
    
    
    (1.90
    )
    
    
    (10.0
    )
   PAGE 43




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##### Table of Contents



ITEM 4  CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls Over Financial Reporting
  PAGE 44




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##### Table of Contents



SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
     
    
    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 the allowance for loan losses to absorb the amount of
actual losses inherent in the existing portfolio of loans;
    
    The ability to ultimately collect on the Large Problem Credit;
    
    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 Banks loan portfolio and individual large loans;
 PAGE 45




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##### Table of Contents




    
    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 the allowance for
loan losses and estimation of values of collateral or cash flow projections 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;
    
    The ability to successfully acquire low cost deposits or funding;
    
    The ability to successfully execute strategies to increase noninterest
income;
    
    The ability of the Company to fully realize expected cost savings and
revenues in connection with acquisitions, or the ability to realize them on a timely
basis;
 
    
    The risk of borrower, depositor, and other customer attrition after
acquisitions are completed;
 
    
    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 Company or the Bank to comply with banking
laws, rules or regulations;
    
    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
business conducted by the Company;
 PAGE 46




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##### Table of Contents




    
    Acts of war or terrorism; and
    
    Other economic, competitive, governmental, regulatory, and technical factors
affecting the Companys operations, products, services, and prices.
   PAGE 47




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##### Table of Contents



PART II
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  TotalNumberof Shares
    
    
    Maximum NumberTotal
    
    
    
    
    
    
    Purchased as Part
    
    
    of Shares thatNumber
    
    
    Average
    
    
    of Publicly
    
    
    May Yet Beof Shares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    Purchased UnderPeriod
    
    Purchased
    
    
    per Share
    
    
    or Programs
    
    
    the Plans or Programs7/1/07 - 7/31/07
    
    
    142,000
    
    
    $
    14.05
    
    
    
    142,000
    
    
    
    714,1118/1/07 - 8/31/07
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    714,1119/1/07 - 9/30/07
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    714,111Total
    
    
    142,000
    
    
    $
    14.05
    
    
    
    142,000
    
    
    
    714,111
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  PAGE 48




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##### Table of Contents



Item 5. Other Information
  
 Item 6. Exhibits
  2.6
    
    Agreement and Plan of Merger, dated as of February 8, 2006, by and
between Midwest Banc Holdings, Inc. and Royal American Corporation
(incorporated by reference to Registrants Report on Form 8-K filed
February 8, 2006, File No. 001-13735).2.8
    
    Agreement and Plan of Merger, dated as of March 22, 2007, by and
between Midwest Banc Holdings, Inc. and Northwest Suburban
Bancorp., Inc. (incorporated by reference to Registrants Report on
Form 8-K filed March 23, 2007, File No. 001-13735).3.1
    
    Amended and Restated Certificate of Incorporation, as amended.3.2
    
    Amended and Restated By-laws, filed September 27, 2005
(incorporated by reference to Registrants Report on Form 8-K filed
September 27, 2005, 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.*10.1
    
    Midwest Banc Holdings, Inc. Stock and Incentive Plan (incorporated
by reference to Registrants Form 10-K for the year ended December
31, 2006, File No. 001-13735).*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
and 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 2001 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).*10.17
    
    Form of Restricted Stock Award Agreement for Officers, Restricted
Stock Grant Notice for Officers,
 PAGE 49




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##### Table of Contents



Incentive and Nonqualified Stock
Options Award Agreements, and Stock Option Grant Notice for
Officers (incorporated by reference to Registrants Report on
Form 8-K filed August 29, 2005, File No. 001-13735).*10.18
    
    Form of 2005 Supplemental Executive Retirement Agreement
(incorporated by reference to Registrants Report on Form 8-K filed
October 28, 2005, File No. 001-13735).*10.19
    
    Form of Restricted Stock Award Agreement for Non-employee Directors
and Restricted Stock Grant Notice for Non-employee Directors
(incorporated by reference to Registrants Report on Form 8-K filed
October 28, 2005, File No. 001-13735).10.21
    
    Lease dated as of April 29, 1976, between Joseph C. and Grace Ann
Sanfilippo 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 4, 2007, between the Company and M&I
Marshall & Ilsley Bank (incorporated by reference to Registrants
Report on Form 8-K filed April 6, 2007, 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).*10.27
    
    Midwest Banc Holdings, Inc. Severance Policy as of June 28, 2005
(incorporated by reference to Registrants Form 8-K dated June 28,
2005, File No. 001-13735).10.29
    
    Midwest Banc Holdings, Inc. Directors Deferred Compensation Plan
(incorporated by reference to Registrants Report on Form 8-K filed
December 16, 2005, File No. 001-13735).*10.30
    
    Amendment to Employment Agreement as of September 28, 2004 between
the Company and the Chief Executive Officer (incorporated by
reference to Registrants Report on Form 8-K filed March 24, 2006,
File No. 001-13735).*10.31
    
    Amended and Restated Employment Agreement dated February 8, 2006 by
and between Royal American Bank and Jay Fritz, assumed by the
Company as of July 1, 2006 (incorporated by reference to
Registrants Report on Form 8-K filed July 7, 2006, File
No. 001-13735).10.32
    
    Lease dated April 1, 1993, by and between Royal American Bank and
LaSalle National Trust, N.A., as amended, assumed by the Company as
of July 1, 2006 (incorporated by reference to Registrants
Form 10-Q for the quarter ended September 30, 2006, File
No. 001-13735).10.33
    
    Lease dated April 19, 1993 by and between Royal American Bank and
Hamilton Forsythe 1000 Tower Lane LLC, successor-in-interest to
Bensenville Office Venture, as amended, assumed by the Company as
of July 1, 2006 (incorporated by reference to Registrants
Form 10-Q for the quarter ended September 30, 2006, File
No. 001-13735).10.34
    
    Sublease dated January 31, 2006 by and between Royal American Bank
and JPMorgan Chase Bank, National Association, assumed by the
Company as of July 1, 2006 (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30, 2006,
File No. 001-13735).10.35
    
    Lease dated January 20, 2006 by and between Royal American Bank and
MEG Associates Limited Partnership, assumed by the Company as of
July 1, 2006 (incorporated by reference to Registrants Form 10-Q
for the quarter ended September 30, 2006, File No. 001-13735).10.36
    
    Lease dated October 28, 1996 by and between Royal American Bank and
Tiffany Pointe, Inc./Marquette Bank, as amended, assumed by the
Company as of July 1, 2006 (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30, 2006,
File No. 001-13735).
 PAGE 50




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##### Table of Contents



10.37
    
    Lease dated September 24, 1999, by and between Royal American Bank
and Moats Office Properties, Inc., as amended, assumed by the
Company as of July 1, 2006 (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30, 2006,
File No. 001-13735).10.38
    
    Lease dated July 14, 2006 by and between Midwest Bank and Trust
Company and William C. Moran (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30, 2006,
File No. 001-13735).*10.39
    
    First Amendment to the Form of 2001 Supplemental Executive
Retirement Agreement (incorporated by reference to Registrants
Report on Form 8-K filed October 28, 2005, File No. 001-13735).*10.40
    
    Second Amendment to the Form of 2001 Supplemental Executive
Retirement Agreement (incorporated by reference to Registrants
Form 10-Q for the quarter ended September 30, 2006, File
No. 001-13735).*10.41
    
    Form of 2006 Supplemental Executive Retirement Agreement
(incorporated by reference to Registrants Form 10-Q for the
quarter ended September 30, 2006, File No. 001-13735).*10.42
    
    First Amendment to the Form of 2005 Supplemental Executive
Retirement Agreement (incorporated by reference to Registrants
Form 10-Q for the quarter ended September 30, 2006, File
No. 001-13735).10.43
    
    Lease dated November 9, 2005 by and between Midwest Bank and Trust
Company and Crossings Commercial, LLC (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30, 2006,
File No. 001-13735).10.44
    
    Lease dated August 17, 2005 by and between Royal American Bank and
L.F.A.J.J. Partners, LLC, assumed by the Company as of July 1, 2006
(incorporated by reference to Registrants Form 10-Q for the
quarter ended March 31, 2007, File No. 001-13735).10.45
    
    Loan Agreement dated as of September 28, 2007 and amendment of loan
agreement dated April 4, 2007, between the Company and M&I
Marshall & Ilsley Bank (incorporated by reference to Registrants
Report on Form 8-K filed October 1, 2007, File No. 001-13735).*10.46
    
    Form of 2007 Transitional Employment Agreement (incorporated by
reference to Registrants Report on Form 8-K filed October 1, 2007,
File No. 001-13735).*10.47
    
    Form of 2007 Supplemental Executive Retirement Agreement
(incorporated by reference to Registrants Report on Form 8-K filed
October 1, 2007, File No. 001-13735).*10.48
    
    First Amendment to the Midwest Banc Holdings, Inc. Stock and
Incentive Plan (incorporated by reference to Registrants Report on
Form 8-K filed October 1, 2007, 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 51




---



##### Table of Contents



SIGNATURES
   MIDWEST BANC HOLDINGS, INC.(Registrant)By:
    /s/ James J. GiancolaJames J. Giancola,President and Chief Executive OfficerBy:
    /s/ Daniel R. KadolphDaniel R. Kadolph,Executive Vice President and
Chief Financial Officer PAGE 52




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##### Table of Contents



2.6
    
    Agreement and Plan of Merger, dated as of February 8, 2006, by and
between Midwest Banc Holdings, Inc. and Royal American Corporation
(incorporated by reference to Registrants Report on Form 8-K filed
February 8, 2006, File No. 001-13735).2.8
    
    Agreement and Plan of Merger, dated as of March 22, 2007, by and
between Midwest Banc Holdings, Inc. and Northwest Suburban
Bancorp., Inc. (incorporated by reference to Registrants Report on
Form 8-K filed March 22, 2007, File No. 001-13735).3.1
    
    Amended and Restated Certificate of Incorporation, as amended.3.2
    
    Amended and Restated By-laws, filed September 27, 2005
(incorporated by reference to Registrants Report on Form 8-K filed
September 27, 2005, 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.*10.1
    
    Midwest Banc Holdings, Inc. Stock and Incentive Plan (incorporated
by reference to Registrants Form 10-K for the year ended December
31, 2006, File No. 001-13735).*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
and Trust Company (incorporated by reference to Registrants
Registration
 PAGE 53




---



##### Table of Contents



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 2001 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).*10.17
    
    Form of Restricted Stock Award Agreement for Officers, Restricted
Stock Grant Notice for Officers, Incentive and Nonqualified Stock
Options Award Agreements, and Stock Option Grant Notice for
Officers (incorporated by reference to Registrants Report on
Form 8-K filed August 29, 2005, File No. 001-13735).




---



##### Table of Contents



*10.18
    
    Form of 2005 Supplemental Executive Retirement Agreement
(incorporated by reference to Registrants Report on Form 8-K filed
October 28, 2005, File No. 001-13735).*10.19
    
    Form of Restricted Stock Award Agreement for Non-employee Directors
and Restricted Stock Grant Notice for Non-employee Directors
(incorporated by reference to Registrants Report on Form 8-K filed
October 28, 2005, File No. 001-13735).10.21
    
    Lease dated as of April 29, 1976, between Joseph C. and Grace Ann
Sanfilippo 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 4, 2007, between the Company and M&I
Marshall & Ilsley Bank (incorporated by reference to Registrants
Report on Form 8-K filed April 6, 2007, 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).*10.27
    
    Midwest Banc Holdings, Inc. Severance Policy as of June 28, 2005
(incorporated by reference to Registrants Form 8-K dated June 28,
2005, File No. 001-13735).10.29
    
    Midwest Banc Holdings, Inc. Directors Deferred Compensation Plan
(incorporated by reference to Registrants Report on Form 8-K filed
December 16, 2005, File No. 001-13735).*10.30
    
    Amendment to Employment Agreement as of September 28, 2004 between
the Company and the Chief Executive Officer (incorporated by
reference to Registrants Report on Form 8-K filed March 24, 2006,
File No. 001-13735).*10.31
    
    Amended and Restated Employment Agreement dated February 8, 2006 by
and between Royal American Bank and Jay Fritz, assumed by the
Company as of July 1, 2006 (incorporated by reference to
Registrants Report on Form 8-K filed July 7, 2006, File
No. 001-13735).10.32
    
    Lease dated April 1, 1993, by and between Royal American Bank and
LaSalle National Trust, N.A., as amended, assumed by the Company as
of July 1, 2006 (incorporated by reference to Registrants
Form 10-Q for the quarter ended September 30, 2006, File
No. 001-13735).10.33
    
    Lease dated April 19, 1993 by and between Royal American Bank and
Hamilton Forsythe 1000 Tower Lane LLC, successor-in-interest to
Bensenville Office Venture, as amended, assumed by the Company as
of July 1, 2006 (incorporated by reference to Registrants
Form 10-Q for the quarter ended September 30, 2006, File
No. 001-13735).10.34
    
    Sublease dated January 31, 2006 by and between Royal American Bank
and JPMorgan Chase Bank, National Association, assumed by the
Company as of July 1, 2006 (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30, 2006,
File No. 001-13735).10.35
    
    Lease dated January 20, 2006 by and between Royal American Bank and
MEG Associates Limited Partnership, assumed by the Company as of
July 1, 2006 (incorporated by reference to Registrants Form 10-Q
for the quarter ended September 30, 2006, File No. 001-13735).10.36
    
    Lease dated October 28, 1996 by and between Royal American Bank and
Tiffany Pointe, Inc./Marquette Bank, as amended, assumed by the
Company as of July 1, 2006 (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30, 2006,
File No. 001-13735).10.37
    
    Lease dated September 24, 1999, by and between Royal American Bank
and Moats Office Properties, Inc., as amended, assumed by the
Company as of July 1, 2006 (incorporated by




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##### Table of Contents



reference to
Registrants Form 10-Q for the quarter ended September 30, 2006,
File No. 001-13735).10.38
    
    Lease dated July 14, 2006 by and between Midwest Bank and Trust
Company and William C. Moran (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30, 2006,
File No. 001-13735).*10.39
    
    First Amendment to the Form of 2001 Supplemental Executive
Retirement Agreement (incorporated by reference to Registrants
Report on Form 8-K filed October 28, 2005, File No. 001-13735).*10.40
    
    Second Amendment to the Form of 2001 Supplemental Executive
Retirement Agreement (incorporated by reference to Registrants
Form 10-Q for the quarter ended September 30, 2006, File
No. 001-13735).*10.41
    
    Form of 2006 Supplemental Executive Retirement Agreement
(incorporated by reference to Registrants Form 10-Q for the
quarter ended September 30, 2006, File No. 001-13735).*10.42
    
    First Amendment to the Form of 2005 Supplemental Executive
Retirement Agreement (incorporated by reference to Registrants
Form 10-Q for the quarter ended September 30, 2006, File
No. 001-13735).10.43
    
    Lease dated November 9, 2005 by and between Midwest Bank and Trust
Company and Crossings Commercial, LLC (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30, 2006,
File No. 001-13735).10.44
    
    Lease dated August 17, 2005 by and between Royal American Bank and
L.F.A.J.J. Partners, LLC, assumed by the Company as of July 1, 2006
(incorporated by reference to Registrants Form 10-Q for the
quarter ended March 31, 2007, File No. 001-13735).10.45
    
    Loan Agreement dated as of September 28, 2007 and amendment of loan
agreement dated April 4, 2007, between the Company and M&I
Marshall & Ilsley Bank (incorporated by reference to Registrants
Report on Form 8-K filed October 1, 2007, File No. 001-13735).*10.46
    
    Form of 2007 Transitional Employment Agreement (incorporated by
reference to Registrants Report on Form 8-K filed October 1, 2007,
File No. 001-13735).*10.47
    
    Form of 2007 Supplemental Executive Retirement Agreement
(incorporated by reference to Registrants Report on Form 8-K filed
October 1, 2007, File No. 001-13735).*10.48
    
    First Amendment to the Midwest Banc Holdings, Inc. Stock and
Incentive Plan (incorporated by reference to Registrants Report on
Form 8-K filed October 1, 2007, 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.