##### 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 June 30, 2005
 Commission File Number: 001-13735
 MIDWEST BANC HOLDINGS, INC.
 (Exact name of Registrant as specified in its charter.)
 Delaware(State or other jurisdiction of
incorporation or organization)
    
    36-3252484(I.R.S. Employer Identification Number)
 501 W. North Ave.
Melrose Park, Illinois(Address of principal executive offices)
    
    60160(Zip code)
 
 (708) 865-1053
 (Registrants telephone number, including area code)
 þ o
 þ o
  Class
    
    
    Outstanding at July 26, 2005Common, par value $.01
    
    
    18,322,219




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MIDWEST BANC HOLDINGS, INC.
 Form 10-Q
 Table of Contents
 Page NumberPART IItem 1. Financial Statements
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    40Item 4. Controls and Procedures
    
    41PART IIItem 1. Legal Proceedings
    
    45Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    45Item 3. Defaults upon Senior Securities
    
    45Item 4. Submission of Matters to a Vote of Security Holders
    
    45Item 5. Other Information
    
    46Item 6. Exhibits
    
    46Form 10-Q Signature Page
    
    48Amendment to Stock Purchase AgreementAmended and Restated Certificate of IncorporationRule 13a-14(a) Certification of Principal Executive OfficerRule 13a-14(a) Certification of Principal Financial OfficerCertification Pursuant to Section 906
  i




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
 June 30,
    
    December 31,2005
    
    2004ASSETSCash
    
    $
    44,902
    
    
    $
    49,245Federal funds sold and other short-term investments
    
    
    9,294
    
    
    
    169,779Total cash and cash equivalents
    
    
    54,196
    
    
    
    219,024Securities available-for-sale, at fair value
    
    
    443,233
    
    
    
    437,050Securities
held-to-maturity, at amortized cost (fair value: $74,087 at June 30, 2005 and $89,010 at December 31, 2004)
    
    
    75,012
    
    
    
    88,958Federal Reserve and Federal Home Loan Bank stock, at cost
    
    
    13,974
    
    
    
    13,830Loans
    
    
    1,219,026
    
    
    
    1,097,992Allowance for loan losses
    
    
    (17,419
    )
    
    
    (16,217
    )Net loans
    
    
    1,201,607
    
    
    
    1,081,775Cash surrender value of life insurance
    
    
    44,117
    
    
    
    43,229Premises and equipment, net
    
    
    22,700
    
    
    
    23,515Other real estate
    
    
    11,399
    
    
    
    8,064Core deposit and other intangibles, net
    
    
    2,002
    
    
    
    2,217Goodwill
    
    
    891
    
    
    
    891Due from broker
    
    
    324,043
    
    
    
    Assets held for sale
    
    
    282,495
    
    
    
    274,023Other assets
    
    
    50,494
    
    
    
    44,237Total assets
    
    $
    2,526,163
    
    
    $
    2,236,813LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesDepositsNon-interest-bearing
    
    $
    157,055
    
    
    $
    162,610Interest-bearing
    
    
    1,345,153
    
    
    
    1,339,036Total deposits
    
    
    1,502,208
    
    
    
    1,501,646Federal funds purchased
    
    
    73,000
    
    
    
    Securities sold under agreements to repurchase
    
    
    202,647
    
    
    
    146,885Advances from the Federal Home Loan Bank
    
    
    150,000
    
    
    
    118,079Junior subordinated debt owed to unconsolidated trusts
    
    
    55,672
    
    
    
    55,672Due to broker
    
    
    116,419
    
    
    
    Liabilities held for sale
    
    
    255,728
    
    
    
    250,456Other liabilities
    
    
    30,390
    
    
    
    26,652Total liabilities
    
    
    2,386,064
    
    
    
    2,099,390Commitments and contingencies (see note 13)Stockholders EquityPreferred stock, $.01 par value, 1,000,000 shares authorized;
none issued
    
    
    
    
    
    
    Common stock, $.01 par value, 32,000,000 shares authorized;
18,668,140 issued
    
    
    187
    
    
    
    187Additional paid-in capital
    
    
    66,114
    
    
    
    65,781Retained earnings
    
    
    79,182
    
    
    
    95,829Unearned stock-based compensation
    
    
    (2,605
    )
    
    
    (2,642
    )Accumulated other comprehensive loss
    
    
    (1,676
    )
    
    
    (16,457
    )Treasury stock, at cost (345,921 shares at June 30, 2005 and
586,413 shares at December 31, 2004)
    
    
    (1,103
    )
    
    
    (5,275
    )Total stockholders equity
    
    
    140,099
    
    
    
    137,423Total liabilities and stockholders equity
    
    $
    2,526,163
    
    
    $
    2,236,813
 See accompanying notes to unaudited consolidated financial statements.
 PAGE 1




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Interest IncomeLoans
    
    $
    18,897
    
    
    $
    14,250
    
    
    $
    36,139
    
    
    $
    28,720SecuritiesTaxable
    
    
    7,349
    
    
    
    6,293
    
    
    
    14,063
    
    
    
    13,564Exempt from federal income taxes
    
    
    145
    
    
    
    130
    
    
    
    239
    
    
    
    371Trading securities
    
    
    124
    
    
    
    318
    
    
    
    190
    
    
    
    318Dividend income from Federal Reserve and
Federal Home Loan Bank stock
    
    
    192
    
    
    
    278
    
    
    
    387
    
    
    
    574Federal funds sold and other short-term investments
    
    
    24
    
    
    
    468
    
    
    
    245
    
    
    
    908Total interest income
    
    
    26,731
    
    
    
    21,737
    
    
    
    51,263
    
    
    
    44,455Interest ExpenseDeposits
    
    
    8,323
    
    
    
    6,522
    
    
    
    16,076
    
    
    
    12,964Federal funds purchased
    
    
    236
    
    
    
    1
    
    
    
    287
    
    
    
    1Securities sold under agreements to repurchase
    
    
    1,529
    
    
    
    1,011
    
    
    
    2,593
    
    
    
    2,091Advances from the Federal Home Loan Bank
    
    
    1,594
    
    
    
    2,065
    
    
    
    3,026
    
    
    
    4,131Junior subordinated debt owed to unconsolidated trusts
    
    
    979
    
    
    
    859
    
    
    
    1,964
    
    
    
    1,712Note payable
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    21Total interest expense
    
    
    12,661
    
    
    
    10,458
    
    
    
    23,955
    
    
    
    20,920Net interest income
    
    
    14,070
    
    
    
    11,279
    
    
    
    27,308
    
    
    
    23,535Provision for loan losses
    
    
    813
    
    
    
    600
    
    
    
    1,627
    
    
    
    1,200Net interest income after provision for loan losses
    
    
    13,257
    
    
    
    10,679
    
    
    
    25,681
    
    
    
    22,335Noninterest IncomeCustomer service fees
    
    
    1,305
    
    
    
    1,369
    
    
    
    2,531
    
    
    
    2,643Net gains (losses) on securities transactions
    
    
    (17,184
    )
    
    
    (978
    )
    
    
    (17,440
    )
    
    
    1,870Net trading gains (losses)
    
    
    118
    
    
    
    952
    
    
    
    131
    
    
    
    (913
    )Gains on sales of loans
    
    
    76
    
    
    
    169
    
    
    
    138
    
    
    
    330Insurance and brokerage commissions
    
    
    381
    
    
    
    326
    
    
    
    766
    
    
    
    708Trust
    
    
    77
    
    
    
    84
    
    
    
    144
    
    
    
    162Increase in cash surrender value of life insurance
    
    
    542
    
    
    
    234
    
    
    
    888
    
    
    
    679Other
    
    
    259
    
    
    
    180
    
    
    
    497
    
    
    
    369Total noninterest income
    
    
    (14,426
    )
    
    
    2,336
    
    
    
    (12,345
    )
    
    
    5,848Noninterest ExpensesSalaries and employee benefits
    
    
    6,846
    
    
    
    5,743
    
    
    
    13,357
    
    
    
    11,404Occupancy and equipment
    
    
    1,538
    
    
    
    1,455
    
    
    
    3,015
    
    
    
    2,920Professional services
    
    
    1,188
    
    
    
    1,033
    
    
    
    2,339
    
    
    
    1,863Loss on extinguishment of debt
    
    
    13,125
    
    
    
    
    
    
    
    13,125
    
    
    
    Other
    
    
    4,973
    
    
    
    1,819
    
    
    
    6,550
    
    
    
    3,563Total noninterest expenses
    
    
    27,670
    
    
    
    10,050
    
    
    
    38,386
    
    
    
    19,750Income (loss) before income taxes and discontinued operations
    
    
    (28,839
    )
    
    
    2,965
    
    
    
    (25,050
    )
    
    
    8,433Provision for income taxes
    
    
    (11,690
    )
    
    
    557
    
    
    
    (10,878
    )
    
    
    1,855Income (loss) from continuing operations
    
    
    (17,149
    )
    
    
    2,408
    
    
    
    (14,172
    )
    
    
    6,578Discontinued OperationsIncome from discontinued operations before income taxes
    
    
    1,050
    
    
    
    1,062
    
    
    
    2,682
    
    
    
    1,907Provision for income taxes
    
    
    251
    
    
    
    286
    
    
    
    778
    
    
    
    476Income from discontinued operations
    
    
    799
    
    
    
    776
    
    
    
    1,904
    
    
    
    1,431Net Income (Loss)
    
    $
    (16,350
    )
    
    $
    3,184
    
    
    $
    (12,268
    )
    
    $
    8,009Basic earnings per share from continuing operations
    
    $
    (0.94
    )
    
    $
    0.14
    
    
    $
    (0.78
    )
    
    $
    0.37Basic earnings per share from discontinued operations
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.11
    
    
    $
    0.08Basic earnings per share
    
    $
    (0.90
    )
    
    $
    0.18
    
    
    $
    (0.67
    )
    
    $
    0.45Diluted earnings per share from continuing operations
    
    $
    (0.94
    )
    
    $
    0.13
    
    
    $
    (0.78
    )
    
    $
    0.36Diluted earnings per share from discontinued operations
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.11
    
    
    $
    0.08Diluted earnings per share
    
    $
    (0.90
    )
    
    $
    0.17
    
    
    $
    (0.67
    )
    
    $
    0.44Cash dividends declared per common share
    
    $
    0.12
    
    
    $
    0.12
    
    
    $
    0.24
    
    
    $
    0.24
 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 six months ended June 30, 2005 and 2004
(In thousands, except share and per share data)
 AccumulatedAdditional
    
    
    
    
    
    Unearned
    
    Other
    
    
    
    
    
    TotalCommon
    
    Paid-in
    
    Retained
    
    Stock-based
    
    Comprehensive
    
    Treasury
    
    StockholdersStock
    
    Capital
    
    Earnings
    
    Compensation
    
    Loss
    
    Stock
    
    EquityBalance, January 1, 2004
    
    $
    187
    
    
    $
    64,330
    
    
    $
    102,041
    
    
    $
    
    
    
    $
    (15,824
    )
    
    $
    (7,653
    )
    
    $
    143,081Cash dividends declared ($0.24 per
share)
    
    
    
    
    
    
    
    
    
    
    (4,292
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,292
    )Issuance of common stock upon
exercise of 35,626 stock options,
inclusive of tax benefit
    
    
    
    
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    344
    
    
    
    494Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    8,009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,009Net decrease in fair value of
securities classified as available-
for-sale, net of income taxes and
reclassification adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,326
    )
    
    
    
    
    
    
    (7,326
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    683Balance, June 30, 2004
    
    $
    187
    
    
    $
    64,480
    
    
    $
    105,758
    
    
    $
    
    
    
    $
    (23,150
    )
    
    $
    (7,309
    )
    
    $
    139,966Balance, January 1, 2005
    
    $
    187
    
    
    $
    65,781
    
    
    $
    95,829
    
    
    $
    (2,642
    )
    
    $
    (16,457
    )
    
    $
    (5,275
    )
    
    $
    137,423Cash dividends declared ($0.24 per
share)
    
    
    
    
    
    
    
    
    
    
    (4,379
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,379
    )Issuance of common stock upon
exercise of 360,492 stock options,
inclusive of tax benefit
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,011
    
    
    
    4,207Issuance of
15,000 shares of restricted
stock
    
    
    
    
    
    
    137
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    161
    
    
    
    298Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    37Comprehensive incomeNet loss
    
    
    
    
    
    
    
    
    
    
    (12,268
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,268
    )Net increase in fair value of
securities classified as available-
for-sale, net of income taxes and
reclassification adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,781
    
    
    
    
    
    
    
    14,781Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,513Balance, June 30, 2005
    
    $
    187
    
    
    $
    66,114
    
    
    $
    79,182
    
    
    $
    (2,605
    )
    
    $
    (1,676
    )
    
    $
    (1,103
    )
    
    $
    140,099
 See accompanying notes to unaudited consolidated financial statements.
 PAGE 3




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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended June 30, 2005 and 2004
(In thousands)
 2005
    
    2004Cash flows from continuing operating activitiesNet income from continuing operations
    
    $
    (14,172
    )
    
    $
    6,578Adjustments to reconcile net income from continuing operations to net
cash provided by continuing operating activitiesDepreciation
    
    
    1,184
    
    
    
    1,102Provision for loan losses
    
    
    1,627
    
    
    
    1,200Amortization of other intangibles
    
    
    215
    
    
    
    148Proceeds from sales (purchases) of trading securities, net
    
    
    131
    
    
    
    (3,669
    )Amortization of premiums and discounts on securities, net
    
    
    1,331
    
    
    
    1,445Realized (gain) loss on sale of available-for-sale securities, net
    
    
    17,440
    
    
    
    (1,870
    )Net (gain) loss on sales of trading securities
    
    
    (131
    )
    
    
    3,669Net gain on sales of mortgage loans
    
    
    (138
    )
    
    
    (330
    )Net change in real estate loans held for sale
    
    
    (508
    )
    
    
    (419
    )Increase in cash surrender value of life insurance
    
    
    (888
    )
    
    
    (679
    )Deferred income taxes
    
    
    (10,092
    )
    
    
    144Gain on sale of other real estate
    
    
    (64
    )
    
    
    Amortization of unearned stock based compensation
    
    
    335
    
    
    
    Change in other assets
    
    
    (9,229
    )
    
    
    8,679Change in other liabilities
    
    
    10,240
    
    
    
    (1,787
    )Net cash provided by (used in) continuing operating activities
    
    
    (2,719
    )
    
    
    14,211Cash flows from continuing investing activitiesSales of securities available-for-sale
    
    
    101,807
    
    
    
    388,241Maturities of securities available-for-sale
    
    
    218
    
    
    
    5,234Principal payments on securities
    
    
    23,016
    
    
    
    37,599Purchases of securities available-for-sale
    
    
    (320,612
    )
    
    
    (424,461
    )Purchases of securities held-to-maturity
    
    
    (1,011
    )
    
    
    (66,669
    )Maturities of securities held-to-maturity
    
    
    1,475
    
    
    
    1,075Sale of futures contracts
    
    
    
    
    
    
    (400
    )Purchase of mortgage loans
    
    
    
    
    
    
    (31,215
    )Loan originations and principal collections, net
    
    
    (124,484
    )
    
    
    (20,452
    )Proceeds from sale of other real estate
    
    
    400
    
    
    
    406Additions to property and equipment
    
    
    (369
    )
    
    
    (1,761
    )Net cash used in continuing investing activities
    
    
    (319,560
    )
    
    
    (112,403
    )Cash flows from continuing financing activitiesNet increase in deposits
    
    
    562
    
    
    
    6,165Issuance of junior subordinated debt
    
    
    20,619
    
    
    
    Payments of junior subordinated debt
    
    
    (20,619
    )
    
    
    Proceeds from borrowings
    
    
    152,000
    
    
    
    Repayments on borrowings
    
    
    (123,500
    )
    
    
    (2,000
    )Cash dividends paid
    
    
    (4,338
    )
    
    
    (4,291
    )Change in federal funds purchased and securities
sold under agreements to repurchase
    
    
    128,762
    
    
    
    (186
    )Proceeds from issuance of treasury stock under stock option plan
    
    
    3,965
    
    
    
    271Net cash provided by (used in) continuing financing activities
    
    
    157,451
    
    
    
    (41
    )Decrease in cash and cash equivalents from continuing operations
    
    
    (164,828
    )
    
    
    (98,233
    )Cash and cash equivalents from continuing operations at beginning of
period
    
    
    219,024
    
    
    
    175,263Cash and cash equivalents from continuing operations at end of period
    
    $
    54,196
    
    
    $
    77,030
 See accompanying notes to unaudited consolidated financial statements.
 PAGE 4




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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Continued)
 2005
    
    2004Supplemental disclosuresCash paid for:Interest
    
    $
    23,947
    
    
    $
    23,799Income Taxes
    
    
    2,338
    
    
    
    3,731
 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  DISCONTINUED OPERATIONS
     PAGE 7




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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  (Unaudited)
    
    (Unaudited)June 30,
    
    December 31,2005
    
    2004ASSETS HELD FOR SALE:Cash
    
    $
    6,554
    
    
    $
    6,492Federal funds sold and other short-term investments
    
    
    25
    
    
    
    17,915Securities available-for-sale
    
    
    116,150
    
    
    
    94,770Securities held-to-maturity
    
    
    630
    
    
    
    774Federal Reserve and Federal Home Loan Bank stock, at cost
    
    
    2,618
    
    
    
    2,561Loans
    
    
    137,729
    
    
    
    132,408Allowance for loan losses
    
    
    (1,649
    )
    
    
    (1,744
    )Net loans
    
    
    136,080
    
    
    
    130,664Cash surrender value of life insurance
    
    
    6,404
    
    
    
    6,271Premises and equipment, net
    
    
    3,835
    
    
    
    4,006Other real estate
    
    
    155
    
    
    
    160Goodwill
    
    
    3,469
    
    
    
    3,469Other assets
    
    
    6,575
    
    
    
    6,941Total assets held for sale
    
    $
    282,495
    
    
    $
    274,023LIABILITIES HELD FOR SALE:LiabilitiesDepositsNon-interest-bearing
    
    $
    10,410
    
    
    $
    14,385Interest-bearing
    
    
    162,531
    
    
    
    166,390Total deposits
    
    
    172,941
    
    
    
    180,775Federal funds purchased
    
    
    2,775
    
    
    
    Securities sold under agreements to repurchase
    
    
    61,674
    
    
    
    51,516Advances from the Federal Home Loan Bank
    
    
    15,469
    
    
    
    15,549Other liabilities
    
    
    2,869
    
    
    
    2,616Total liabilities
    
    $
    255,728
    
    
    $
    250,456
  (Unaudited)
    
    (Unaudited)Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Interest income
    
    $
    3,553
    
    
    $
    3,267
    
    
    $
    6,747
    
    
    $
    6,642Interest expense
    
    
    1,474
    
    
    
    1,457
    
    
    
    2,785
    
    
    
    2,921Net interest income
    
    
    2,079
    
    
    
    1,810
    
    
    
    3,962
    
    
    
    3,721Provision for loan losses
    
    
    100
    
    
    
    156
    
    
    
    (283
    )
    
    
    312Net interest income after provision for loan losses
    
    
    1,979
    
    
    
    1,654
    
    
    
    4,245
    
    
    
    3,409Noninterest income
    
    
    484
    
    
    
    793
    
    
    
    1,322
    
    
    
    1,223Noninterest expense
    
    
    1,413
    
    
    
    1,385
    
    
    
    2,885
    
    
    
    2,725Income before income taxes
    
    
    1,050
    
    
    
    1,062
    
    
    
    2,682
    
    
    
    1,907Provision for income taxes
    
    
    251
    
    
    
    286
    
    
    
    778
    
    
    
    476Income from discontinued operations
    
    $
    799
    
    
    $
    776
    
    
    $
    1,904
    
    
    $
    1,431
 PAGE 8




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 4  COMPREHENSIVE INCOME
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income (loss) from continuing operations
    
    $
    (17,149
    )
    
    $
    2,408
    
    
    $
    (14,172
    )
    
    $
    6,578Net income from discontinued operations
    
    
    799
    
    
    
    776
    
    
    
    1,904
    
    
    
    1,431Net income (loss)
    
    
    (16,350
    )
    
    
    3,184
    
    
    
    (12,268
    )
    
    
    8,009Net increase (decrease) in fair value of securities
classified as available-for-sale, net of income taxes
    
    
    21,577
    
    
    
    (4,478
    )
    
    
    14,781
    
    
    
    (7,326
    )Total
comprehensive income (loss)
    
    $
    5,227
    
    
    $
    1,294
    
    
    $
    2,513
    
    
    $
    683
 NOTE 5  SECURITIES
  June 30, 2005Held-to-Maturity
    
    Available-for-Sale
    
    TotalAmortized
    
    Fair
    
    Amortized
    
    
    
    
    
    Amortized
    
    
    
    
    
    % ofCost
    
    Value
    
    Cost
    
    Fair Value
    
    Cost
    
    Fair Value
    
    Portfolio(In thousands)Obligations of states and
political subdivisions
    
    $
    8,316
    
    
    $
    8,453
    
    
    $
    15,610
    
    
    $
    15,764
    
    
    $
    23,926
    
    
    $
    24,217
    
    
    
    4.61
    %Mortgage-backed securities
    
    
    66,696
    
    
    
    66,354
    
    
    
    353,909
    
    
    
    353,405
    
    
    
    420,605
    
    
    
    419,759
    
    
    
    81.01Equity securities
    
    
    
    
    
    
    
    
    
    
    63,574
    
    
    
    63,156
    
    
    
    63,574
    
    
    
    63,156
    
    
    
    12.25Other bonds
    
    
    
    
    
    
    
    
    
    
    11,064
    
    
    
    10,908
    
    
    
    11,064
    
    
    
    10,908
    
    
    
    2.13Total
    
    $
    75,012
    
    
    $
    74,807
    
    
    $
    444,157
    
    
    $
    443,233
    
    
    $
    519,169
    
    
    $
    518,040
    
    
    
    100.00
    %
 December 31, 2004Held-to-Maturity
    
    Available-for-Sale
    
    TotalAmortized
    
    Fair
    
    Amortized
    
    
    
    
    
    Amortized
    
    
    
    
    
    % ofCost
    
    Value
    
    Cost
    
    Fair Value
    
    Cost
    
    Fair Value
    
    Portfolio(In thousands)U.S. Treasury and obligations of
U.S. government-sponsored entities
    
    $
    
    
    
    $
    
    
    
    $
    334,870
    
    
    $
    311,144
    
    
    $
    334,870
    
    
    $
    311,144
    
    
    
    60.81
    %Obligations of states and
political subdivisions
    
    
    8,799
    
    
    
    9,043
    
    
    
    320
    
    
    
    320
    
    
    
    9,119
    
    
    
    9,363
    
    
    
    1.66Mortgage-backed securities
    
    
    80,159
    
    
    
    79,967
    
    
    
    34,455
    
    
    
    33,844
    
    
    
    114,614
    
    
    
    113,811
    
    
    
    20.82Equity securities
    
    
    
    
    
    
    
    
    
    
    80,924
    
    
    
    81,089
    
    
    
    80,924
    
    
    
    81,089
    
    
    
    14.70Other bonds
    
    
    
    
    
    
    
    
    
    
    11,074
    
    
    
    10,653
    
    
    
    11,074
    
    
    
    10,653
    
    
    
    2.01Total
    
    $
    88,958
    
    
    $
    89,010
    
    
    $
    461,643
    
    
    $
    437,050
    
    
    $
    550,601
    
    
    $
    526,060
    
    
    
    100.00
    %
 PAGE 9




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  June 30, 2005Less Than 12 Months
    

12
Months or More
    
    TotalFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedValue
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    Losses(In thousands)Securities available-for-sale:Mortgage-backed securities:U.S. government agencies (1)
    
    $
    289
    
    
    $
    (1
    )
    
    $
    576
    
    
    $
    (4
    )
    
    $
    865
    
    
    $
    (5
    )U.S. government-sponsored entities (2)
    
    
    110,452
    
    
    
    (412
    )
    
    
    26,236
    
    
    
    (595
    )
    
    
    136,688
    
    
    
    (1,007
    )Equity securities (3)
    
    
    59,381
    
    
    
    (356
    )
    
    
    3,015
    
    
    
    (69
    )
    
    
    62,396
    
    
    
    (425
    )Corporate and other debt securities
    
    
    
    
    
    
    
    
    
    
    10,908
    
    
    
    (156
    )
    
    
    10,908
    
    
    
    (156
    )Total available-for-sale
    
    $
    170,122
    
    
    $
    (769
    )
    
    $
    40,735
    
    
    $
    (824
    )
    
    $
    210,857
    
    
    $
    (1,593
    )Securities held-to-maturity:Mortgage-backed securities:U.S. government-sponsored entities (2)
    
    $
    4,970
    
    
    $
    (24
    )
    
    $
    34,406
    
    
    $
    (490
    )
    
    $
    39,376
    
    
    $
    (514
    )Total held-to-maturity
    
    $
    4,970
    
    
    $
    (24
    )
    
    $
    34,406
    
    
    $
    (490
    )
    
    $
    39,376
    
    
    $
    (514
    )Total temporarily impaired securities
    
    $
    175,092
    
    
    $
    (793
    )
    
    $
    75,141
    
    
    $
    (1,314
    )
    
    $
    250,233
    
    
    $
    (2107
    )
 
 (1)
    
    Includes obligations of the Government National Mortgage Association (GNMA).(2)
    
    Includes obligations of the Federal Home Loan Mortgage Corporation (FHLMC) and Federal
National Mortgage Association (FNMA).(3)
    
    Includes issues from government-sponsored entities (FNMA and FHLMC). PAGE 10




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  
    
    The unrealized loss for U.S. government-sponsored entities mortgage-backed
securities relate primarily to debt securities issued by FNMA and FHLMC; each security
has a stated maturity date. FNMA is rated Aa3, AA- and A+ by Moodys, S&P and Fitch,
respectively. FHLMC is rated Aa3 and AA- by Moodys and Fitch, respectively. The
mortgage-backed securities are notes with a weighted average maturity of approximately
27 years and a weighted average interest rate of 5.03%.
    
    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 8 1/2 years and a
weighted average interest rate of
4.73%.
    
    The unrealized loss on equity securities relates to preferred stocks issued by FNMA
and FHLMC with an average dividend rate of 5.67%.
  NOTE 6  LOANS
  June 30,
    
    December 31,2005
    
    2004Loan
    
    
    
    
    
    LoanCategory
    
    
    
    
    
    Categoryto Gross
    
    
    
    
    
    to GrossAmount
    
    Loans
    
    Amount
    
    Loans(Dollars in thousands)Commercial
    
    $
    186,897
    
    
    
    15.3
    %
    
    $
    184,558
    
    
    
    16.8
    %Construction
    
    
    303,878
    
    
    
    24.9
    
    
    
    270,836
    
    
    
    24.7Commercial real estate
    
    
    471,075
    
    
    
    38.6
    
    
    
    411,535
    
    
    
    37.5ConsumerHome equity
    
    
    109,501
    
    
    
    9.0
    
    
    
    100,322
    
    
    
    9.1Other consumer
    
    
    4,293
    
    
    
    0.4
    
    
    
    4,377
    
    
    
    0.4Total consumer
    
    
    113,794
    
    
    
    9.4
    
    
    
    104,669
    
    
    
    9.5Residential mortgage
    
    
    143,996
    
    
    
    11.8
    
    
    
    126,740
    
    
    
    11.5Total loans, gross
    
    
    1,219,640
    
    
    
    100.0
    %
    
    
    1,098,368
    
    
    
    100.0
    %Net deferred fees
    
    
    (614
    )
    
    
    
    
    
    
    (376
    )Total loans
    
    $
    1,219,026
    
    
    
    
    
    
    $
    1,097,992
  PAGE 11




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 7  ALLOWANCE FOR LOAN LOSSES
  2005
    
    2004(In thousands)Balance, January 1
    
    $
    16,217
    
    
    $
    14,459Provision charged to expense
    
    
    1,627
    
    
    
    1,200Loans charged off
    
    
    (687
    )
    
    
    (1,043
    )Recoveries
    
    
    262
    
    
    
    117Balance, June 30
    
    $
    17,419
    
    
    $
    14,733
 NOTE 8  GOODWILL AND INTANGIBLES
  June 30, 2005
    
    December 31, 2004Gross Carrying
    
    Accumulated
    
    Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationAmortized intangible assets:Core deposit and other intangibles
    
    $
    3,130
    
    
    $
    (1,128
    )
    
    $
    3,130
    
    
    $
    (913
    )Aggregate intangible amortization
expense:For the three months ending June 30, 2005
    
    $
    107For the six months ending June 30, 2005
    
    $
    215Estimated intangible amortization
expense:For the year ending December 31, 2005
    
    $
    429For the year ending December 31, 2006
    
    
    373For the year ending December 31, 2007
    
    
    354For the year ending December 31, 2008
    
    
    354For the year ending December 31, 2009
    
    
    354
  June 30, 2005Core Depositand OtherGoodwill
    
    IntangiblesBalance at beginning of period
    
    $
    891
    
    
    $
    2,217Amortization
    
    
    
    
    
    
    (215
    )Balance at end of period
    
    $
    891
    
    
    $
    2,002
 PAGE 12




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 9  EARNINGS PER SHARE
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In
thousands, except per share data)
    
    2005
    
    2004
    
    2005
    
    2004BasicIncome (loss) from continuing operations
    
    $
    (17,149
    )
    
    $
    2,408
    
    
    $
    (14,172
    )
    
    $
    6,578Income from discontinued operations
    
    
    799
    
    
    
    776
    
    
    
    1,904
    
    
    
    1,431Net income (loss)
    
    $
    (16,350
    )
    
    $
    3,184
    
    
    $
    (12,268
    )
    
    $
    8,009Weighted average common shares outstanding
    
    
    18,245
    
    
    
    17,880
    
    
    
    18,196
    
    
    
    17,873Basic earnings per share from continuing operations
    
    $
    (0.94
    )
    
    $
    0.14
    
    
    $
    (0.78
    )
    
    $
    0.37Basic earnings per share from discontinued operations
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.11
    
    
    $
    0.08Basic earnings per share
    
    $
    (0.90
    )
    
    $
    0.18
    
    
    $
    (0.67
    )
    
    $
    0.45DilutedIncome (loss) from continuing operations
    
    $
    (17,148
    )
    
    $
    2,408
    
    
    $
    (14,172
    )
    
    $
    6,578Income from discontinued operations
    
    
    798
    
    
    
    776
    
    
    
    1,904
    
    
    
    1,431Net income (loss)
    
    $
    (16,350
    )
    
    $
    3,184
    
    
    $
    (12,268
    )
    
    $
    8,009Weighted average common shares outstanding
    
    
    18,245
    
    
    
    17,880
    
    
    
    18,196
    
    
    
    17,873Dilutive effect of stock options
    
    
    
    
    
    
    447
    
    
    
    
    
    
    
    455Dilutive effect of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted average common shares
    
    
    18,245
    
    
    
    18,327
    
    
    
    18,196
    
    
    
    18,328Diluted earnings per share from continuing operations
    
    $
    (0.94
    )
    
    $
    0.13
    
    
    $
    (0.78
    )
    
    $
    0.36Diluted earnings per share from discontinued operations
    
    $
    0.04
    
    
    $
    0.04
    
    
    $
    0.11
    
    
    $
    0.08Diluted earnings per share
    
    $
    (0.90
    )
    
    $
    0.17
    
    
    $
    (0.67
    )
    
    $
    0.44
  PAGE 13




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 10  STOCK OPTIONS AND COMPENSATION
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,(In
thousands, except per share data)
    
    2005
    
    2004
    
    2005
    
    2004Net income (loss) from continuing operations as reported
    
    $
    (17,148
    )
    
    $
    2,408
    
    
    $
    (14,172
    )
    
    $
    6,578Deduct: stock-based compensation expense
determined under fair value base method
    
    
    94
    
    
    
    89
    
    
    
    188
    
    
    
    178Pro forma net income (loss) from continuing operations
    
    $
    (17,242
    )
    
    $
    2,319
    
    
    $
    (14,360
    )
    
    $
    6,400Basic Earnings Per Share
From Continuing Operations As Reported
    
    $
    (0.94
    )
    
    $
    0.14
    
    
    $
    (0.78
    )
    
    $
    0.37Pro forma basic earnings per share
    
    
    (0.95
    )
    
    
    0.13
    
    
    
    (0.79
    )
    
    
    0.36Diluted Earnings Per Share
From Continuing Operations As Reported
    
    $
    (0.94
    )
    
    $
    0.13
    
    
    $
    (0.78
    )
    
    $
    0.36Pro forma diluted earnings per share
    
    
    (0.95
    )
    
    
    0.13
    
    
    
    (0.79
    )
    
    
    0.35
  PAGE 14




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 11 TRUST PREFERRED SECURITIES
   Mandatory
    
    OptionalIssuer
    
    Issue Date
    
    Amount
    
    Rate
    
    Redemption Date
    
    Redemption DateMBHI Capital Trust II
    
    October 29, 2002
    
    $
    15,000,000
    
    
    LIBOR+3.45%
    
    November 7, 2032
    
    November 7, 2007MBHI Capital Trust III
    
    December 19, 2003
    
    $
    9,000,000
    
    
    LIBOR+3.00%
    
    December 30, 2033
    
    December 30, 2008MBHI Capital Trust IV
    
    December 19, 2003
    
    $
    10,000,000
    
    
    LIBOR+2.85%
    
    January 23, 2034
    
    January 23, 2009MBHI Capital Trust V
    
    June 7, 2005
    
    $
    20,000,000
    
    
    LIBOR+1.77%
    
    June 15, 2035
    
    June 15, 2010
 NOTE 12  DERIVATIVE INSTRUMENTS
   2005
    
    2004(Dollars in thousands)Notional amounts
    
    
    n/a
    
    
    $
    121,500Weighted average fixed rates received
    
    
    n/a
    
    
    
    5.47
    %Weighted average variable rates paid
    
    
    n/a
    
    
    
    3.27
    %Weighted average maturity
    
    
    n/a
    
    
    6.10 yearsFair value
    
    
    n/a
    
    
    $
    (4,251
    )
 PAGE 15




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  2005
    
    2004(Dollars in thousands)Notional amounts
    
    $
    60,000
    
    
    $
    50,000Weighted average maturity
    
    29 Days
    
    92 DaysFair value
    
    $
    86
    
    
    $
    164
   PAGE 16




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 13  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
    
    $
    108,854
    
    
    $
    87,685
    
    
    $
    14,058
    
    
    $
    
    
    
    $
    210,597Consumer real estate
    
    
    14,938
    
    
    
    4,533
    
    
    
    7,982
    
    
    
    34,096
    
    
    
    61,549Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,669
    
    
    
    1,669Commercial
    
    
    78,879
    
    
    
    7
    
    
    
    475
    
    
    
    1,256
    
    
    
    80,617Letters of credit
    
    
    36,360
    
    
    
    5,481
    
    
    
    100
    
    
    
    
    
    
    
    41,941Commitments to extend credit
    
    
    101,240
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,240Total commitments
    
    $
    340,271
    
    
    $
    97,706
    
    
    $
    22,615
    
    
    $
    37,021
    
    
    $
    497,613
   NOTE 14  REGULATORY MATTERS
   PAGE 17




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##### Table of Contents



ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis is intended as a review of significant factors affecting
the financial condition and results of operations of the Company for the periods indicated. The
discussion should be read in conjunction with the unaudited Consolidated Financial Statements and
the Notes thereto presented herein. In addition to historical information, the following
Managements Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements that involve risks and uncertainties. The Companys actual results
could differ significantly from those anticipated in these forward-looking statements as a result
of certain factors discussed in this report. Also, see Note 14  Regulatory Matters to our
unaudited consolidated financial statements for a discussion of certain regulatory matters.
 Critical Accounting Policies and Estimates
  Allowance for Loan Losses:
  PAGE 18




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##### Table of Contents



Evaluation of Securities for Impairment :
 Strategy
  
    
    Recruitment of seasoned commercial lenders, credit analysts, and key risk
and operations managers.
    
    Diversification of the loan portfolio mix by reducing, as a long term goal,
the concentration in commercial real estate lending and expanding commercial,
residential mortgage, home equity, and other consumer lending.
    
    Modifying the structure and mix of the securities portfolio. The Companys
focus on future investment security purchases is to maintain an adequate level of
liquidity and to shorten the duration of its securities portfolio.
    
    Expanding its focus on retail banking activities, including traditional and
non-deposit investment products, and placing greater emphasis on transactional deposit
growth.
 PAGE 19




---



##### Table of Contents




    
    Reducing earnings volatility and the risk in the securities portfolio by
exiting hedge accounting on futures contracts, terminating certain stand-alone
derivatives positions, and instituting a pre-purchase pricing discipline.
    
    Implementing ongoing risk and credit management processes that provide
strong levels of control, minimize risk, and anticipate potential problems.
    
    Developing a growing, well diversified, well priced, and fundamentally
sound loan portfolio.
    
    Focusing deposit efforts on transaction account growth, especially demand
deposit growth.
    
    Developing additional sources of fee income.
    PAGE 20




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##### Table of Contents



Results of Operations  Three and Six Months Ended
June 30, 2005 and 2004
  
    
    Earnings per share from continuing operations:
 
    
    Basic earnings per share from continuing operations for the three months ended
June 30, 2005 were $(0.94) compared to $0.14 for the comparable period in 2004.
    
    Diluted earnings per share from continuing operations for the three months ended
June 30, 2005 were $(0.94) compared to $0.13 for the comparable period in 2004.
 
    
    Consolidated net income from continuing operations for the second quarter of 2005
was $(17.1) million, a $19.6 million decrease when compared to $2.4 million for the
second quarter of 2004. This decrease is mainly attributed to the $17.2 million in net
losses on securities transactions and the $13.1 million loss on extinguishment of FHLB
advances resulting from the balance sheet repositioning.
    
    Core net income from continuing operations (defined as net income excluding the balance sheet
repositioning and employee severance charges as reconciled below) was $3.5 million for
the three months ended June 30, 2005.
    
    The return on average assets from continuing operations for the three months ended
June 30, 2005 was (2.95)% compared to 0.43% for the similar period in 2004; core return
on average assets was 0.60%.
    
    The return on average equity from continuing operations for the three months ended
June 30, 2005 was (48.38)% compared to 6.88% for the similar period in 2004; core
return on average equity was 9.82%.
    
    Net interest income increased 24.7% to $14.1 million in the second quarter of 2005
compared to $11.3 million in the second quarter of 2004 as a result of loan growth.
The net interest margin was 3.08% for the three months ended June 30, 2005 compared to
3.01% for the similar period of 2004.
    
    Interest income on loans increased 32.6% to $18.9 million in the second quarter of
2005 compared to $14.3 million for the comparable period in 2004.
    
    The provision for loan losses increased by 35.5% to $813,000 for the second quarter
of 2005 compared to $600,000 for the comparable period in 2004.
    
    Excluding net losses on securities, noninterest income decreased 16.8% to $2.8
million in the second quarter of 2005 compared to $3.3 million in the second quarter of
2004 reflecting the decrease in trading activity.
    
    Noninterest expenses increased to $27.7 million in the second quarter of 2005
compared
 PAGE 21




---



##### Table of Contents



to $10.1 million in the second quarter of 2004 primarily as a result of the extinguishment
of FHLB advances and the write-down of the other real estate owned.
  
    
    Basic earnings per share from continuing operations for the six months ended June
30, 2005 were $(0.78) compared to $0.37 for the comparable period in 2004.
    
    Diluted earnings per share from continuing operations for the six months ended June
30, 2005 were $(0.78) compared to $0.36 for the comparable period in 2004.
    
    Consolidated net income from continuing operations for the six months ended June 30,
2005 was $(14.2) million compared to the $6.6 million for the similar period in 2004.
    
    Core net income from continuing operations (defined as net income excluding the balance sheet
repositioning and employee severance charges as reconciled below) was $6.5 million for
the six months ended June 30, 2005.
    
    The provision for loan losses increased by 35.6% to
$1.6 million for the first half
of 2005 compared to $1.2 million for similar period in 2004.
    
    The return on average assets from continuing operations for the six months ended
June 30, 2005 was (1.25)% compared to 0.58% for the similar period 2004; core return on
average assets was 0.57%.
    
    The return on average equity from continuing operations for the six months ended
June 30, 2005 was (20.16)% compared to 9.28% for the six months ended June 30, 2004;
core return on average equity was 9.19%.
    
    Net interest income increased 16.0% to $27.3 million in the first half of 2005
compared to $23.5 million in the first half of 2004 as a result of loan growth. The net
interest margin for the first half of 2005 was 3.05% compared to 2.70% for similar
period in 2004.
    
    Interest income on loans increased 25.8% to $36.1 million in the first half of 2005
compared to $28.7 million for the comparable period in 2004.
    
    Excluding net gains or losses on securities, noninterest income increased 28.1% to
$5.1 million in the first half of 2005 compared to $4.0 million in the first half of
2004.
    
    Noninterest expenses increased 94.4% to $38.4 million in the first six months of
2005 compared to $19.8 million in comparable period of 2004.
  QTD
    
    YTDNet loss from continuing operations
    
    $
    (17,149
    )
    
    $
    (14,172
    )Loss on U.S. Agency debt securities, net of tax
    
    
    10,595
    
    
    
    10,595Charge from prepayment of FHLB advances, net of tax
    
    
    5,886
    
    
    
    5,886Charge from unwinding of swaps, net of tax
    
    
    2,206
    
    
    
    2,206Write down on other real estate owned, net of tax
    
    
    1,502
    
    
    
    1,502Charge from redemption of trust preferred securities, net of tax
    
    
    318
    
    
    
    318Employment severance charges, net of tax
    
    
    123
    
    
    
    123Core net income from continuing operations
    
    $
    3,481
    
    
    $
    6,458
 PAGE 22




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##### Table of Contents



Net Interest Income
   For the Three Months EndedJune 30, 2005
    
    June 30, 2004
    
    March 31, 2005Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageBalance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate(Dollars in thousands)Interest-EarningAssets:Federal funds sold and
other short term investments
    
    $
    2,883
    
    
    $
    24
    
    
    
    3.33
    %
    
    $
    182,954
    
    
    $
    468
    
    
    
    1.02
    %
    
    $
    42,645
    
    
    $
    221
    
    
    
    2.07
    %Securities:Taxable(1)
    
    
    683,823
    
    
    
    7,887
    
    
    
    4.61
    
    
    
    650,860
    
    
    
    6,984
    
    
    
    4.29
    
    
    
    638,409
    
    
    
    7,170
    
    
    
    4.49Exempt from federal income
Taxes(1)
    
    
    14,140
    
    
    
    223
    
    
    
    6.31
    
    
    
    11,894
    
    
    
    200
    
    
    
    6.73
    
    
    
    8,481
    
    
    
    144
    
    
    
    6.79Total securities
    
    
    697,963
    
    
    
    8,110
    
    
    
    4.64
    
    
    
    662,754
    
    
    
    7,184
    
    
    
    4.32
    
    
    
    646,890
    
    
    
    7,314
    
    
    
    4.52FRB and FHLB stock
    
    
    13,834
    
    
    
    192
    
    
    
    5.55
    
    
    
    18,334
    
    
    
    278
    
    
    
    6.07
    
    
    
    13,830
    
    
    
    195
    
    
    
    5.64Loans:Commercial loans(1) (3)(4)
    
    
    178,329
    
    
    
    2,890
    
    
    
    6.48
    
    
    
    162,080
    
    
    
    2,205
    
    
    
    5.44
    
    
    
    185,204
    
    
    
    2,705
    
    
    
    5.84Commercial
real estate
Loans(1) (3)(4)(6)
    
    
    832,993
    
    
    
    13,536
    
    
    
    6.50
    
    
    
    703,568
    
    
    
    10,826
    
    
    
    6.15
    
    
    
    777,386
    
    
    
    12,342
    
    
    
    6.35Agricultural loans(3)(4)
    
    
    1,465
    
    
    
    26
    
    
    
    7.10
    
    
    
    1,498
    
    
    
    22
    
    
    
    5.87
    
    
    
    1,237
    
    
    
    20
    
    
    
    6.47Consumer real estate
Loans(3)(4)(6)
    
    
    169,117
    
    
    
    2,452
    
    
    
    5.80
    
    
    
    89,244
    
    
    
    1,201
    
    
    
    5.38
    
    
    
    157,904
    
    
    
    2,185
    
    
    
    5.54Consumer installment
Loans(3)(4)
    
    
    3,793
    
    
    
    69
    
    
    
    7.28
    
    
    
    4,418
    
    
    
    82
    
    
    
    7.42
    
    
    
    3,738
    
    
    
    71
    
    
    
    7.60Total loans
    
    
    1,185,697
    
    
    
    18,973
    
    
    
    6.40
    
    
    
    960,808
    
    
    
    14,336
    
    
    
    5.96
    
    
    
    1,125,469
    
    
    
    17,323
    
    
    
    6.16Total interest-earning
assets
    
    $
    1,900,377
    
    
    $
    27,299
    
    
    
    5.76
    %
    
    $
    1,824,850
    
    
    $
    22,266
    
    
    
    4.88
    %
    
    $
    1,828,834
    
    
    $
    25,053
    
    
    
    5.48
    %Interest-BearingLiabilities:Deposits:Interest-bearing demand
deposits
    
    $
    186,450
    
    
    $
    743
    
    
    
    1.59
    %
    
    $
    186,609
    
    
    $
    592
    
    
    
    1.27
    %
    
    $
    195,529
    
    
    $
    727
    
    
    
    1.49
    %Money-market demand accounts
and savings accounts
    
    
    344,722
    
    
    
    1,403
    
    
    
    1.63
    
    
    
    310,150
    
    
    
    1,001
    
    
    
    1.29
    
    
    
    367,484
    
    
    
    1,585
    
    
    
    1.73Time deposits less than
$100,000
    
    
    758,556
    
    
    
    5,844
    
    
    
    3.08
    
    
    
    713,788
    
    
    
    4,602
    
    
    
    2.58
    
    
    
    702,667
    
    
    
    4,978
    
    
    
    2.83Time deposits of $100,000 or
More
    
    
    38,547
    
    
    
    275
    
    
    
    2.85
    
    
    
    62,592
    
    
    
    327
    
    
    
    2.09
    
    
    
    69,971
    
    
    
    419
    
    
    
    2.40Public funds
    
    
    9,677
    
    
    
    58
    
    
    
    2.40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000
    
    
    
    44
    
    
    
    2.20Total interest-bearing
deposits
    
    
    1,337,952
    
    
    
    8,323
    
    
    
    2.48
    
    
    
    1,273,139
    
    
    
    6,522
    
    
    
    2.04
    
    
    
    1,343,651
    
    
    
    7,753
    
    
    
    2.32Borrowings:Federal funds purchased and
repurchase agreements
    
    
    246,203
    
    
    
    1,765
    
    
    
    2.87
    
    
    
    148,794
    
    
    
    1,012
    
    
    
    2.72
    
    
    
    169,738
    
    
    
    1,115
    
    
    
    2.63FHLB advances
    
    
    118,195
    
    
    
    1,594
    
    
    
    5.39
    
    
    
    216,917
    
    
    
    2,065
    
    
    
    3.81
    
    
    
    118,055
    
    
    
    1,432
    
    
    
    4.85Notes payable and other
Borrowings
    
    
    55,672
    
    
    
    979
    
    
    
    7.03
    
    
    
    55,672
    
    
    
    859
    
    
    
    6.17
    
    
    
    56,494
    
    
    
    994
    
    
    
    7.04Total borrowings
    
    
    420,070
    
    
    
    4,338
    
    
    
    4.12
    
    
    
    421,383
    
    
    
    3,936
    
    
    
    3.72
    
    
    
    344,287
    
    
    
    3,541
    
    
    
    4.12Total interest-bearing
liabilities
    
    $
    1,758,022
    
    
    $
    12,661
    
    
    
    2.88
    %
    
    $
    1,694,522
    
    
    $
    10,458
    
    
    
    2.48
    %
    
    $
    1,687,938
    
    
    $
    11,294
    
    
    
    2.68
    %Net interest income (tax
equivalent)(1) (5)
    
    
    
    
    
    $
    14,638
    
    
    
    2.88
    %
    
    
    
    
    
    $
    11,808
    
    
    
    2.40
    %
    
    
    
    
    
    $
    13,759
    
    
    
    2.80
    %Net interest margin (tax
equivalent)(1)
    
    
    
    
    
    
    
    
    
    
    3.08
    %
    
    
    
    
    
    
    
    
    
    
    2.59
    %
    
    
    
    
    
    
    
    
    
    
    3.01
    %Net interest income(2) (5)
    
    
    
    
    
    $
    14,070
    
    
    
    
    
    
    
    
    
    
    $
    11,279
    
    
    
    
    
    
    
    
    
    
    $
    13,238Net interest margin(2)
    
    
    
    
    
    
    
    
    
    
    2.96
    %
    
    
    
    
    
    
    
    
    
    
    2.47
    %
    
    
    
    
    
    
    
    
    
    
    2.90
    %
 
 (1)
    
    Adjusted for 35% tax rate in 2005 and 2004 and adjusted for the dividends-received
deduction where applicable.(2)
    
    Not adjusted for 35% tax rate in 2005 and 2004 or for the dividends-received deduction.(3)
    
    Nonaccrual loans are included in the average balance; however, these loans are not earning
any interest. PAGE 23




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##### Table of Contents



(4)
    
    Includes loan fees which are immaterial.(5)
    
    The following table reconciles reported net interest income on a tax equivalent basis for the
periods presented: 2Q05
    
    2Q04
    
    1Q05Net interest income
    
    $
    14,070
    
    
    $
    11,279
    
    
    $
    13,238Tax equivalent adjustment to net interest income
    
    
    568
    
    
    
    529
    
    
    
    521Net interest income, tax equivalent basis
    
    $
    14,638
    
    
    $
    11,808
    
    
    $
    13,759
 (6)
    
    Includes construction loans. For the Six Months EndedJune 30, 2005
    
    June 30, 2004Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageBalance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate(Dollars in thousands)Interest-EarningAssets:Federal funds sold and
other short term investments
    
    $
    22,654
    
    
    $
    245
    
    
    
    2.16
    %
    
    $
    182,250
    
    
    $
    908
    
    
    
    1.00
    %Securities:Taxable(1)
    
    
    661,244
    
    
    
    15,057
    
    
    
    4.55
    
    
    
    665,432
    
    
    
    14,778
    
    
    
    4.44Exempt from federal income
Taxes(1)
    
    
    11,326
    
    
    
    367
    
    
    
    6.48
    
    
    
    17,196
    
    
    
    571
    
    
    
    6.64Total securities
    
    
    672,570
    
    
    
    15,424
    
    
    
    4.58
    
    
    
    682,628
    
    
    
    15,349
    
    
    
    4.50FRB and FHLB stock
    
    
    13,830
    
    
    
    387
    
    
    
    5.60
    
    
    
    18,407
    
    
    
    574
    
    
    
    6.24Loans:Commercial loans(1) (3)(4)
    
    
    181,747
    
    
    
    5,596
    
    
    
    6.16
    
    
    
    166,388
    
    
    
    4,522
    
    
    
    5.44Commercial real estate
Loans(1) (3)(4)
    
    
    805,343
    
    
    
    25,878
    
    
    
    6.43
    
    
    
    693,994
    
    
    
    21,782
    
    
    
    6.28Agricultural loans (3)(4)
    
    
    1,352
    
    
    
    45
    
    
    
    6.66
    
    
    
    1,205
    
    
    
    36
    
    
    
    5.98Consumer real estate
Loans(3)(4)
    
    
    163,541
    
    
    
    4,637
    
    
    
    5.67
    
    
    
    87,307
    
    
    
    2,390
    
    
    
    5.47Consumer installment
Loans(3)(4)
    
    
    3,766
    
    
    
    140
    
    
    
    7.43
    
    
    
    4,506
    
    
    
    168
    
    
    
    7.46Total loans
    
    
    1,155,749
    
    
    
    36,296
    
    
    
    6.28
    
    
    
    953,400
    
    
    
    28,898
    
    
    
    6.06Total interest-earning
assets
    
    $
    1,864,803
    
    
    $
    52,352
    
    
    
    5.62
    %
    
    $
    1,836,685
    
    
    $
    45,729
    
    
    
    4.98
    %Interest-BearingLiabilities:Deposits:Interest-bearing demand
deposits
    
    $
    190,965
    
    
    $
    1,471
    
    
    
    1.54
    %
    
    $
    181,444
    
    
    $
    1,148
    
    
    
    1.27
    %Money-market demand accounts
and savings accounts
    
    
    356,040
    
    
    
    2,988
    
    
    
    1.68
    
    
    
    317,664
    
    
    
    2,007
    
    
    
    1.26Time deposits less than
$100,000
    
    
    730,766
    
    
    
    10,822
    
    
    
    2.96
    
    
    
    703,399
    
    
    
    9,053
    
    
    
    2.57Time deposits of $100,000 or
More
    
    
    54,172
    
    
    
    694
    
    
    
    2.56
    
    
    
    63,945
    
    
    
    670
    
    
    
    2.10Public funds
    
    
    8,843
    
    
    
    101
    
    
    
    2.28
    
    
    
    13,874
    
    
    
    86
    
    
    
    1.24Total interest-bearing
deposits
    
    
    1,340,786
    
    
    
    16,076
    
    
    
    2.40
    
    
    
    1,280,326
    
    
    
    12,964
    
    
    
    2.02Borrowings:Federal funds purchased and
repurchase agreements
    
    
    207,261
    
    
    
    2,880
    
    
    
    2.78
    
    
    
    148,383
    
    
    
    2,092
    
    
    
    2.82FHLB advances
    
    
    118,125
    
    
    
    3,026
    
    
    
    5.12
    
    
    
    215,768
    
    
    
    4,131
    
    
    
    3.83Notes payable and other
Borrowings
    
    
    56,080
    
    
    
    1,973
    
    
    
    7.04
    
    
    
    56,408
    
    
    
    1,733
    
    
    
    6.14Total borrowings
    
    
    381,466
    
    
    
    7,879
    
    
    
    4.14
    
    
    
    420,559
    
    
    
    7,956
    
    
    
    3.78Total interest-bearing
Liabilities
    
    $
    1,722,252
    
    
    $
    23,955
    
    
    
    2.78
    %
    
    $
    1,700,885
    
    
    $
    20,920
    
    
    
    2.46
    %Net interest income (tax
equivalent)(1) (5)
    
    
    
    
    
    $
    28,397
    
    
    
    2.84
    %
    
    
    
    
    
    $
    24,809
    
    
    
    2.52
    %Net interest margin (tax
equivalent)(1)
    
    
    
    
    
    
    
    
    
    
    3.05
    %
    
    
    
    
    
    
    
    
    
    
    2.70
    %Net interest income(2) (5)
    
    
    
    
    
    $
    27,308
    
    
    
    
    
    
    
    
    
    
    $
    23,535Net interest margin(2)
    
    
    
    
    
    
    
    
    
    
    2.93
    %
    
    
    
    
    
    
    
    
    
    
    2.56
    %
 
 (1)
    
    Adjusted for 35% tax rate in 2005 and 2004 and adjusted for the dividends-received
deduction where applicable.(2)
    
    Not adjusted for 35% tax rate in 2005 and 2004 or for the dividends-received deduction.(3)
    
    Nonaccrual loans are included in the average balance; however, these loans are not earning
any interest.(4)
    
    Includes loan fees which are immaterial.(5)
    
    The following table reconciles reported net interest income on a tax equivalent basis for the
periods presented: 2Q05
    
    2Q04Net interest income
    
    $
    27,308
    
    
    $
    23,535Tax equivalent adjustment to net interest income
    
    
    1,089
    
    
    
    1,274Net interest income, tax equivalent basis
    
    $
    28,397
    
    
    $
    24,809
 
 (6)
    
    Includes construction loans. PAGE 24




---



##### Table of Contents




    
    Yields on average earning assets increased 88 basis points in the
second quarter of 2005 compared to the second quarter of 2004, and average balances
increased by $75.5 million. Yields on average earning assets increased 64 basis
points in the first six months of 2005 compared to the similar period in 2004, and
average balances increased by $28.1 million.
    
    Yields on average earning assets increased by 28 basis points
during the second quarter of 2005 compared
to the first quarter of 2005.
    
    Average cash equivalents decreased by $180.0 million compared to the
second quarter of 2004 and by $159.6 million compared to the six months ended June
30, 2004, due to more proactive funds management.
    
    Yields on average loans increased by 44 basis points while average
loans increased by $224.9 million in the quarter ended June 30, 2005 compared to
the same period in 2004 and by $60.2 million compared to the
first quarter of 2005.
Year-to-date yields on loans increased by 22 basis points and averages balances
increased by $202.3 million compared to the same period in 2004.
    
    Yields on average securities increased 32 basis points and balances
increased by $35.2 million in the second quarter of 2005 compared to the similar
period in 2004. Yields on average securities increased by 12 basis points compared
to the first quarter of 2005. Year-to-date yields on securities increased slightly
by 8 basis points while average balances decreased by $10.1 million compared to the
same period in 2004.
 
    
    Consistent with its strategy, the Company has changed the mix
of its securities portfolio through the sale of U.S. government-sponsored
entity notes in the fourth quarter of 2004 and the first half 2005 and the
investment in mortgage-backed securities described below.
    
    During the first six months of 2005, the Company invested
$277.5 million in hybrid adjustable rate mortgage-backed securities with a
weighted average yield of 4.85% as well as $60.1 million in 15-year fixed
mortgage-backed securities with a weighted average yield of 4.66%. The
Company expects these securities to provide added liquidity to fund future
loan growth.
 PAGE 25




---



##### Table of Contents




    
    Yields on interest-bearing liabilities increased by 40 basis points and
the average balances increased $63.5 million in the second quarter of 2005 compared
to the similar period in 2004. Compared to the first quarter of 2005, yields on
interest-bearing liabilities increased by 20 basis points, while balances increased
by $70.1 million. Yields on average interest-bearing liabilities increased 32
basis points in the first six months of 2005 compared to similar the similar period
in 2004, and average balances increased by $21.4 million.
    
    Average interest-bearing deposits increased by $64.8 million while
yields increased 44 basis points compared to the similar period of 2004. Most of
this increase was in money market and savings accounts and certificates of deposit
less than $100,000. Year-to-date yields and balances on interest-bearing
deposits increased by 38 basis points and $60.5 million, respectively, compared to
the same period in 2004.
    
    Average interest-bearing deposits decreased by $5.7 million compared to
the prior quarter, and yields increased by 16 basis points.
    
    Total average borrowings decreased slightly by $1.3 million while
yields increased by 40 basis points. Compared to the prior quarter, average
borrowings increased by $75.8 million while average rates remained constant.
Year-to-date yields increased by 36 basis points while average balances increase by
$39.1 million.
    
    During June 2005, the Company prepaid
$121.5 million of FHLB advances with
an average rate of 5.47%, unwound the interest rate swaps associated with those
advances, and replaced them with $150.0 million in new advances with an average
rate of 3.48%.
    
    The Company also redeemed $20.6 million of its junior subordinated debt
at a rate of 10.0% during June 2005 and replaced it with  another issuance for the
same amount at LIBOR plus 177 basis points, with an initial rate of 5.13%.
 Noninterest Income
  
    
    Net trading profits were $118,000 in the second quarter of 2005
compared to $952,000 in the second quarter of 2004. This decrease reflects
managements decision to reduce the level of trading activities and to re-focus the
securities portfolio to provide liquidity for loan growth. Similarly, net trading
profits were $131,000 for the first half of 2005 compared to net trading losses of
$913,000 for the same period in 2004.
 PAGE 26




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##### Table of Contents




    
    Insurance and brokerage commissions increased by $55,000 in the three
months ended June 30, 2005 compared to the similar period in 2004 and by $58,000 in
the six months ended June 30, 2005 compared to the similar period in 2004.
    
    Customer service fees decreased by 4.7% and 4.2% in the first three and
six months ended June 30, 2005.
    
    Gains on sales of loans decreased during the three and six months ended
June 30, 2005 by 55.0% or $93,000 and 58.2% or $192,000, respectively, compared to
the same periods of 2004, due to a lower level of mortgage refinancing volume and
more variable rate mortgages which were retained in the portfolio rather than sold.
    
    Increase in the cash surrender value of life insurance increased by
$308,000 to $542,000 during the three months ended June 30, 2005 compared to the
similar period in 2004 and increased by $209,000 for the first half of 2005
compared to the same period in 2004.
    
    Trust income decreased by $7,000 and $18,000 compared to the three and
six months ended June 30, 2004, respectively.
    
    Net losses on securities transactions increased by $16.2 million to
$17.2 million during the second quarter of 2005 compared to the similar period in
2004 as the result of the sale of the U.S. government-sponsored entity notes
associated with the balance sheet repositioning. Correspondingly, net losses on
securities transactions were $17.4 million for the first half of 2005 compared to
net gains of $1.9 million in the comparable period of 2004.
 Noninterest Expenses
   
    
    Salaries and benefits expense increased by $1.1 million or 19.2%
during the second quarter of 2005 compared to the second quarter of 2004
reflecting 18 additions to management. Similarly, salaries and benefits expense
increased by $2.0 or 17.1% during the first half of 2005 compared to the first
half of 2004.
    
    Occupancy expense increased by $83,000 and $95,000 during the three
and six months ended June 30, 2005, respectively, compared to the similar periods
in 2004.
 PAGE 27




---



##### Table of Contents




    
    Professional services expense rose $155,000 to $1.2 million and
$476,000 to $2.3 million in the three and six months ended June 30, 2005,
respectively, compared to the similar periods in 2004 reflecting increases in
internal and external audit expense, some of it relating to Sarbanes-Oxley
compliance.
    
    Marketing expenses were $249,000 and $483,000 higher than in the
second quarter and first half of 2004 as a result of increased marketing efforts.
    
    As a result of the balance sheet repositioning, a $13.1 million loss
on the extinguishment of FHLB advances was recorded; $9.5 million in prepayment
penalties and $3.6 million to unwind the interest rate swaps associated with the
advances.
    
    Reflected in the second quarter noninterest expenses also was the $2.4
million write-down of the townhouse project held in other real estate owned.
 Income Taxes
  Financial Condition
  
    
    Total assets increased 12.9% to $2.5 billion at June 30, 2005 compared to year end.
    
    In line with the Companys objectives, total loans increased 11.0% to $1.2 billion at
June 30, 2005 compared to year end 2004 and increased 20.9% from a year ago.
    
    The loan to deposit ratio rose to 81.15% from 73.12% at December 31, 2004 and 70.65% at
June 30, 2004.
    
    Deposits increased modestly by $562,000 to $1.5 billion in the second quarter of 2005
compared to year end and increased by 5.3% compared to June 30, 2004.
    
    Due to the pending sale of MBWI, the related assets and
liabilities are reflected on the
balance sheets as assets held for sale and liabilities held for sale.
  
    
    Net charge-offs were $425,000 for the six months ended June 30, 2005 compared to
$926,000 for the similar period in 2004.
 PAGE 28




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##### Table of Contents




    
    The allowance for loan losses was 1.43% of total loans, versus 1.48% at year end and
1.46% at June 30, 2004.
    
    The allowance for loan losses increased to 2.63 times nonperforming loans from 1.74
times at year end and 1.23 times at June 30, 2004.
    
    Nonaccruing loans were reduced to 0.54% of total loans from 0.85% at year end and
1.19% at June 30, 2004.
    
    Nonperforming assets declined to 0.71% of total assets from 0.78% at year end and 0.80%
at June 30, 2004.
 Loans
  June 30,
    
    December 31,2005
    
    2004Loan
    
    
    
    
    
    LoanCategory
    
    
    
    
    
    Categoryto Gross
    
    
    
    
    
    to GrossAmount
    
    Loans
    
    Amount
    
    Loans(Dollars in thousands)Commercial
    
    $
    186,897
    
    
    
    15.3
    %
    
    $
    184,558
    
    
    
    16.8
    %Construction
    
    
    303,878
    
    
    
    24.9
    
    
    
    270,836
    
    
    
    24.7Commercial real estate
    
    
    471,075
    
    
    
    38.6
    
    
    
    411,535
    
    
    
    37.5ConsumerHome equity
    
    
    109,501
    
    
    
    9.0
    
    
    
    100,322
    
    
    
    9.1Other consumer
    
    
    4,293
    
    
    
    0.4
    
    
    
    4,377
    
    
    
    0.4Total consumer
    
    
    113,794
    
    
    
    9.3
    
    
    
    104,669
    
    
    
    9.5Residential mortgage
    
    
    143,996
    
    
    
    11.8
    
    
    
    126,740
    
    
    
    11.5Total loans, gross
    
    
    1,219,640
    
    
    
    100.0
    %
    
    
    1,098,368
    
    
    
    100.0
    %Net deferred fees
    
    
    (614
    )
    
    
    
    
    
    
    (376
    )Total loans
    
    $
    1,219,026
    
    
    
    
    
    
    $
    1,097,992
   
    
    Commercial loans increased $2.3 million to $186.9 million as of June 30, 2005 from
$184.6 million as of December 31, 2004.
    
    Construction loans increased by $33.0 million to $303.9 million as of June 30, 2005
from $270.8 million at December 31, 2004.
    
    Commercial real estate loans rose to $471.1 million at June 30, 2005, an increase of
14.5% from December 31, 2004 reflecting the addition of lending personnel to assist in the
growth in this primary area of focus.
 PAGE 29




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##### Table of Contents




    
    Consumer loans increased $9.1 million, or 8.7%, as of June 30, 2005 compared to
December 31, 2004.
    
    Residential mortgage loans increased $17.3 million to $144.0 million as of June 30,
2005 from $126.7 million as of December 31, 2004.
   
    
    The primary risks associated with commercial loans are the quality of the borrowers
management, financial strength and cash flow resources, and the impact of local economic
factors.
    
    Risks associated with real estate loans include concentrations of loans in a certain
loan type, such as commercial or residential, and fluctuating land and property values.
    
    Consumer loans also have risks associated with concentrations of loans in a single type
of loan, as well as the risk a borrower may become unemployed as a result of deteriorating
economic conditions.
 Allowance for Loan Losses
   2005
    
    2004(In thousands)Balance, January 1
    
    $
    16,217
    
    
    $
    14,459Provision charged to operations
    
    
    1,627
    
    
    
    1,200Loans charged off
    
    
    (687
    )
    
    
    (1,043
    )Recoveries
    
    
    262
    
    
    
    117Balance, June 30
    
    $
    17,419
    
    
    $
    14,733
 PAGE 31




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PAGE 32




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##### Table of Contents



June 30, 2005
    
    
    December 31, 2004QTD
    
    
    YTD
    
    
    QTD
    
    
    YTDNet loans charged off to average loans
    
    
    0.13
    %
    
    
    0.07
    %
    
    
    0.20
    %
    
    
    0.17
    %Provision for loan losses to total loans
    
    
    0.27
    %
    
    
    0.27
    %
    
    
    0.68
    %
    
    
    0.31
    %Allowance for loan losses to total loans
    
    
    1.43
    %
    
    
    1.43
    %
    
    
    1.48
    %
    
    
    1.48
    %Allowance to nonaccruing loans
    
    
    2.63
    x
    
    
    2.63
    x
    
    
    1.74
    x
    
    
    1.74
    x
 Nonaccrual Loans and Nonperforming Assets
   June 30,
    
    December 31,2005
    
    2004(Dollars in thousands)Impaired and other loans 90 days past
due and accruing
    
    $
    7
    
    
    $
    21Nonaccrual and impaired loans not
accruing
    
    $
    6,622
    
    
    $
    9,296Other real estate
    
    
    11,399
    
    
    
    8,064Total nonperforming assets
    
    $
    18,021
    
    
    $
    17,360Total nonaccruing loans to total
Loans
    
    
    0.54
    %
    
    
    0.85
    %Total nonperforming assets to total
loans and other real estate
    
    
    1.46
    
    
    
    1.57Total nonperforming assets to total
assets
    
    
    0.71
    
    
    
    0.78
  PAGE 33




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##### Table of Contents



June 30,
    
    December 31,2005
    
    2004(In thousands)Special mention
    
    $
    34,950
    
    
    $
    22,535Substandard
    
    $
    32,986
    
    
    $
    36,797Doubtful
    
    
    272
    
    
    
    1,472Total classified
    
    
    33,258
    
    
    
    38,269Total special mention and classified
    
    $
    68,208
    
    
    $
    60,804
   PAGE 34




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##### Table of Contents



Securities
   June 30, 2005Held-to-Maturity
    
    Available-for-Sale
    
    TotalAmortized
    
    Fair
    
    Amortized
    
    
    
    
    
    Amortized
    
    
    
    
    
    % ofCost
    
    Value
    
    Cost
    
    Fair Value
    
    Cost
    
    Fair Value
    
    Portfolio(In thousands)Obligations of states and
political subdivisions
    
    $
    8,316
    
    
    $
    8,453
    
    
    $
    15,610
    
    
    $
    15,764
    
    
    $
    23,926
    
    
    $
    24,217
    
    
    
    4.61
    %Mortgage-backed securities
    
    
    66,696
    
    
    
    66,354
    
    
    
    353,909
    
    
    
    353,405
    
    
    
    420,605
    
    
    
    419,759
    
    
    
    81.01Equity securities
    
    
    
    
    
    
    
    
    
    
    63,574
    
    
    
    63,156
    
    
    
    63,574
    
    
    
    63,156
    
    
    
    12.25Other bonds
    
    
    
    
    
    
    
    
    
    
    11,064
    
    
    
    10,908
    
    
    
    11,064
    
    
    
    10,908
    
    
    
    2.13Total
    
    $
    75,012
    
    
    $
    74,807
    
    
    $
    444,157
    
    
    $
    443,233
    
    
    $
    519,169
    
    
    $
    518,040
    
    
    
    100.00
    %
   
    
    The Company has changed the mix of its securities portfolio through the sale of U.S.
government-sponsored entity notes in the fourth quarter of 2004 and the first half of 2005
and the investment in mortgage-backed securities to increase liquidity to fund loans as
described below. The Company has established a limit on the duration of all purchases to
a maximum of 9 years and on the premium paid to a maximum of 1% of the underlying
principal (price of $101) for mortgage-backed securities. These limits were set to reduce
the prepayment risk in a declining interest rate environment.
    
    During the first six months of 2005, the Company invested $277.5 million in 5/1, 7/1,
and 10/1 hybrid adjustable rate mortgage-backed securities with a weighted average yield
of 4.85% as well as $60.1 million in 15-year fixed mortgage-backed securities with a
weighted average yield of 4.66%. The Company expects these securities to provide added
liquidity to fund future loan growth. Accordingly, U.S. government and
government-sponsored entity mortgage-backed securities increased $319.6 million, from
$33.8 million at December 31, 2004 to $353.4 million at June 30, 2005.
 PAGE 35




---



##### Table of Contents




    
    Equity securities decreased $17.9 million, following the sale of the FNMA Series F
perpetual preferred equity securities, from $81.1 million at December 31, 2004 to $63.2
million at June 30, 2005. Equity securities included capital securities of U.S.
government-sponsored entities.
    
    Obligations of state and political subdivisions increased $15.4 million to $15.8
million at June 30, 2005 from $320,000 at December 31, 2004 reflecting the purchases in
the second quarter of 2005.
    
    Other bonds increased $255,000 to $10.9 million at June 30, 2005 compared to $10.7
million at December 31, 2004. Other bonds include high grade corporate bonds primarily
issued by financial institutions.
    Other Assets
  Deposits and Borrowed Funds
  
    
    Noninterest-bearing deposits were $157.1 million at June 30, 2005,
approximately $5.6 million lower than the $162.6 million level at December 31,
2004.
    
    Over the same period, interest-bearing deposits increased 0.5%, or $6.1
million to $1.3 billion at June 30, 2005 compared to December 31, 2004.
    
    Core deposits, which include demand, interest-bearing demand, money
market, and savings, decreased $32.8 million to $686.0 million at June 30, 2005
from $718.8 million at December 31, 2004.
    
    Certificates of deposit under $100,000 increased $53.7 million from
December 31, 2004 to $764.4 million at June 30, 2005.
 PAGE 36




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##### Table of Contents




    
    Certificates of deposit over $100,000 and public funds decreased $20.3
million from December 31, 2004 to $51.8 million at June 30, 2005.
    2005
    
    2004(In thousands)Federal funds purchased
    
    $
    73,000
    
    
    $
    Securities sold under agreements to
repurchase
    
    
    202,647
    
    
    
    146,885Federal Home Loan Bank advances to bank
subsidiary
    
    
    150,000
    
    
    
    118,079Junior subordinated debt owed to
unconsolidated trusts
    
    
    55,672
    
    
    
    55,672Total
    
    $
    481,319
    
    
    $
    320,636
   PAGE 37




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##### Table of Contents



Capital Resources
      At June 30, 2005Minimum Required
    
    
    Minimum RequiredActual
    
    
    for Capital Adequacy
    
    
    to be Well CapitalizedAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(In thousands)Total capital to risk-weighted assetsCompany
    
    $
    208,012
    
    
    
    12.3
    %
    
    $
    135,325
    
    
    
    8.0
    %
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    176,024
    
    
    
    11.6
    
    
    
    120,998
    
    
    
    8.0
    
    
    $
    151,248
    
    
    
    10.0
    %Tier I capital to risk-weighted assetsCompany
    
    
    187,754
    
    
    
    11.1
    
    
    
    67,663
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    158,605
    
    
    
    10.5
    
    
    
    60,499
    
    
    
    4.0
    
    
    
    90,749
    
    
    
    6.0Tier I capital to average assetsCompany
    
    
    187,754
    
    
    
    8.0
    
    
    
    93,396
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    158,605
    
    
    
    7.8
    
    
    
    81,832
    
    
    
    4.0
    
    
    
    102,290
    
    
    
    5.0




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##### Table of Contents



At December 31, 2004Minimum Required
    
    
    Minimum RequiredActual
    
    
    for Capital Adequacy
    
    
    to be Well CapitalizedAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio(In thousands)Total capital to risk-weighted assetsCompany
    
    $
    219,343
    
    
    
    14.7
    %
    
    $
    119,758
    
    
    
    8.0
    %
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    189,276
    
    
    
    14.3
    
    
    
    105,724
    
    
    
    8.0
    
    
    $
    132,155
    
    
    
    10.0
    %Tier I capital to risk-weighted assetsCompany
    
    
    198,597
    
    
    
    13.3
    
    
    
    59,879
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    172,985
    
    
    
    13.1
    
    
    
    52,862
    
    
    
    4.0
    
    
    
    79,293
    
    
    
    6.0Tier I capital to average assetsCompany
    
    
    198,597
    
    
    
    8.5
    
    
    
    93,225
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    172,985
    
    
    
    8.5
    
    
    
    80,991
    
    
    
    4.0
    
    
    
    101,239
    
    
    
    5.0
 Liquidity




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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 HorizonAt June 30, 2005
    
    
    At December 31, 2004
    
    
    GuidelinesChange in
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    MaximumLevels of
    
    Dollar
    
    
    Percentage
    
    
    Dollar
    
    
    Percentage
    
    
    PercentageInterest Rates
    
    Change
    
    
    Change
    
    
    Change
    
    
    Change
    
    
    Change+200 bp
    
    $
    2,576
    
    
    
    4.97
    %
    
    $
    251
    
    
    
    0.43
    %
    
    
    (15.0
    )%+100 bp
    
    
    1,289
    
    
    
    2.49
    
    
    
    29
    
    
    
    0.05
    
    
    
    (15.0
    )-100 bp
    
    
    1,330
    
    
    
    2.56
    
    
    
    329
    
    
    
    0.56
    
    
    
    (15.0
    )




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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




---



##### 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 allowances for loan losses to absorb the amount of actual losses
inherent in the existing portfolio of loans;
    
    The Companys ability to adapt successfully to technological changes to compete
effectively in the marketplace;
    
    Credit risks and risks from concentrations (by geographic area and by industry) within the




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##### Table of Contents



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




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##### Table of Contents



PART II
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  1.
    
    To elect four members to serve on the Companys Board of Directors for a
term of three years and one member to serve for a term of two years. The nominees for
the three year-terms were Messrs. James J. Giancola, Gerald F. Hartley, Robert D.
Small, and Homer J. Livingston, Jr., and the one nominee for the one-year term was
Mr. Barry I. Forrester.To elect James J. Giancola for a three-year term:
   To elect Gerald F. Hartley for a three-year term:
   To elect Robert D. Small for a three-year term:
   To elect Homer J. Livingston, Jr. for a three-year term:
   To elect Barry I. Forrester for a two-year term:
   2.
    
    To amend and restate the Companys 1996 Stock Option Plan:




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##### Table of Contents



3.
    
    To amend the amended and restated certificate of incorporation of the
Company:
     
 Item 5. Other Information
   
 Item 6. Exhibits
  2.2
    
    
    Amendment to Stock Purchase Agreement between Western Illinois
Bancshares, Inc. and Midwest Banc Holdings, Inc.3.1
    
    
    Amended and Restated Certificate of Incorporation, as amended.3.2
    
    
    Amended and Restated By-laws, filed February 28, 2005
(incorporated by reference to Registrants Report on Form 8-K
filed February 28, 2005, File No. 001-13735).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 Proxy Statement filed
April 13, 2005, Registration 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
& Trust Company (incorporated by reference to Registrants
Registration Statement on Form S-1, Registration No. 333-42827).10.7
    
    
    Lease dated as of March 20, 1996 between Grove Lodge No. 824
Ancient Free and Accepted Masons and Midwest Bank of Hinsdale
(incorporated by reference to Registrants Registration Statement
on Form S-1, Registration No. 333-42827).10.8
    
    
    Office Lease, undated, between Grove Lodge No. 824 Ancient Free
and Accepted Masons and Midwest Bank of Hinsdale (incorporated by
reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).*10.15
    
    
    Form of Supplemental Executive Retirement Agreement (incorporated
by reference to Registrants Form 10-Q for the quarter ended
September 30, 2001, File No. 001-13735).




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##### Table of Contents



*10.16
    
    
    Form of Transitional Employment Agreement (Executive Officer
Group) (incorporated by reference to Registrants Form 10-Q for
the quarter ended September 30, 2001, File No. 001-13735).10.19
    
    
    Agreement and Plan of Reorganization between the Company and Big
Foot Financial Corp. dated as of July 19, 2002 (incorporated by
reference to Annex A of the Registrants Proxy
Statement/Prospectus dated October 23, 2002, Registration
Statement No. 333- 100090).10.21
    
    
    Lease dated as of April 29, 1976, between Sanfilippo, Joseph C.
and Grace Ann and Fairfield Savings and Loan Association, as
amended (incorporated by reference to Registrants Form 10-K for
the year ended December 31, 2003, File No. 001-13735).10.22
    
    
    Lease dated as of August 28, 2002 between Glen Oak Plaza and
Midwest Bank and Trust Company (incorporated by reference to
Registrants Form 10-K for the year ended December 31, 2003, File
No. 001-13735).10.24
    
    
    Loan Agreement as of April 8, 2004, between the Company and
LaSalle Bank National Association (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30, 2004,
File No. 001-13735).10.25
    
    
    Employment Agreement as of September 28, 2004 between the Company
and the Chief Executive Officer (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30, 2004,
File No. 001-13735).10.26
    
    
    Retirement Agreement as of September 28, 2004 between the Company
and retiring Chief Executive Officer (incorporated by reference
to Registrants Form 10-Q for the quarter ended September 30,
2004, File No. 001-13735).10.27
    
    
    Midwest Banc Holdings, Inc. Severance Policy as of June 28, 2005
(incorporated by reference to Registrants Form 8-K dated June
28, 2005, File No. 001-13735).10.28
    
    
    First amendment to Loan Agreement as of April 8, 2004, between
the Company and LaSalle Bank National Association (incorporated
by reference to Registrants Report Form 8-K, dated April 28,
2005, File No. 001-13735).31.1
    
    
    Rule 13a-14(a) Certification of Principal Executive Officer.31.2
    
    
    Rule 13a-14(a) Certification of Principal Financial Officer.32.1
    
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from
the Companys Chief Executive Officer and Chief Financial
Officer.
 
 *
    
    Indicates management contracts or compensatory plans or arrangements required to be filed as
an exhibit.




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##### Table of Contents



SIGNATURES
  Date: July 26, 2005MIDWEST BANC HOLDINGS, INC.(Registrant)By:
    
    /s/ James J. GiancolaJames J. Giancola,President and Chief Executive OfficerBy:
    
    /s/ Daniel R. KadolphDaniel R. Kadolph,Senior Vice President
andChief Financial Officer




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##### Table of Contents



2.2
    
    Amendment to Stock Purchase Agreement between Western Illinois
Bancshares, Inc. and Midwest Banc Holdings, Inc.3.1
    
    Amended and Restated Certificate of Incorporation.3.2
    
    Amended and Restated By-laws, filed February 28, 2005
(incorporated by reference to Registrants Report on Form 8-K
filed February 28, 2005, File No. 001-13735).3.11
    
    Certificate of Amendment of Restated Certificate of Incorporation
(incorporated by reference to Registrants Form 10-Q for quarter
ended June 30, 2002, File No. 001-13735).4.1
    
    Specimen Common Stock Certificate (incorporated by reference to
Registrants Registration Statement on Form S-1, Registration No.
333-42827).4.2
    
    Certain instruments defining the rights of the holders of
long-term debt of the Company and certain of its subsidiaries,
none of which authorize a total amount of indebtedness in excess
of 10% of the total assets of the Company and its subsidiaries on
a consolidated basis, have not been filed as Exhibits. The
Company hereby agrees to furnish a copy of any of these
agreements to the SEC upon request.*10.1
    
    Midwest Banc Holdings, Inc. Stock and Incentive Plan
(incorporated by reference to Registrants Proxy Statement filed
April 13, 2005, Registration 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
& Trust Company (incorporated by reference to Registrants
Registration Statement on Form S-1, Registration No. 333-42827).10.7
    
    Lease dated as of March 20, 1996 between Grove Lodge No. 824
Ancient Free and Accepted Masons and Midwest Bank of Hinsdale
(incorporated by reference to Registrants Registration Statement
on Form S-1, Registration No. 333-42827).10.8
    
    Office Lease, undated, between Grove Lodge No. 824 Ancient Free
and Accepted Masons and Midwest Bank of Hinsdale (incorporated by
reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).*10.15
    
    Form of Supplemental Executive Retirement Agreement (incorporated
by reference to Registrants Form 10-Q for the quarter ended
September 30, 2001, File No. 001-13735).*10.16
    
    Form of Transitional Employment Agreement (Executive Officer
Group) (incorporated by reference to Registrants Form 10-Q for
the quarter ended September 30, 2001, File No. 001-13735).10.19
    
    Agreement and Plan of Reorganization between the Company and Big
Foot Financial Corp. dated as of July 19, 2002 (incorporated by
reference to Annex A of the Registrants Proxy
Statement/Prospectus dated October 23, 2002, Registration
Statement No. 333- 100090).10.21
    
    Lease dated as of April 29, 1976, between Sanfilippo, Joseph C.
and Grace Ann and Fairfield Savings and Loan Association, as
amended (incorporated by reference to Registrants Form 10-K for
the year ended December 31, 2003, File No. 001-13735).




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##### Table of Contents



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