##### 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, 2006
 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
  o þ o
 o þ
  Class
    
    
    Outstanding at August 9, 2006Common, par value $.01
    
    

24,805,174




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##### 



MIDWEST BANC HOLDINGS, INC.
 Form 10-Q
 Table of Contents
 Page NumberPART IItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4. Controls and Procedures
    
    
    38PART IIItem 1. Legal Proceedings
    
    
    42Item 1A. Risk Factors
    
    
    42Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    42Item 3. Defaults upon Senior Securities
    
    
    42Item 4. Submission of Matters to a Vote of Security Holders
    
    
    42Item 5. Other Information
    
    
    43Item 6. Exhibits
    
    
    43Form 10-Q Signature Page
    
    
    46Amended and Restated Certificate of IncorporationStock and Incentive PlanCertification of Principal Executive OfficerCertification of Principal Financial OfficerSection 906 Certifications
  i




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
 June 30,
    
    
    December 31,2006
    
    
    2005ASSETSCash
    
    $
    61,804
    
    
    $
    58,329Federal funds sold and other short-term investments
    
    
    52,152
    
    
    
    12,270Total cash and cash equivalents
    
    
    113,956
    
    
    
    70,599Securities available-for-sale
    
    
    623,222
    
    
    
    687,937Securities held-to-maturity (fair value: $49,629 at June 30,
2006 and $58,332 at December 31, 2005)
    
    
    52,363
    
    
    
    59,451Federal Reserve and Federal Home Loan Bank stock, at cost
    
    
    16,105
    
    
    
    14,661Loans held for sale
    
    
    3,639
    
    
    
    1,912Loans
    
    
    1,422,830
    
    
    
    1,349,996Allowance for loan losses
    
    
    (20,874
    )
    
    
    (17,760
    )Net loans
    
    
    1,401,956
    
    
    
    1,332,236Cash surrender value of life insurance
    
    
    51,383
    
    
    
    44,433Premises and equipment, net
    
    
    22,965
    
    
    
    22,247Other real estate
    
    
    5,237
    
    
    
    11,154Core deposit and other intangibles, net
    
    
    1,592
    
    
    
    1,788Goodwill
    
    
    891
    
    
    
    891Other assets
    
    
    68,293
    
    
    
    60,299Total assets
    
    $
    2,361,602
    
    
    $
    2,307,608LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesDepositsNoninterest-bearing
    
    $
    165,837
    
    
    $
    158,406Interest-bearing
    
    
    1,418,230
    
    
    
    1,364,978Total deposits
    
    
    1,584,067
    
    
    
    1,523,384Federal funds purchased
    
    
    
    
    
    
    68,000Securities sold under agreements to repurchase
    
    
    221,603
    
    
    
    264,808Advances from the Federal Home Loan Bank
    
    
    250,000
    
    
    
    150,000Junior subordinated debt owed to unconsolidated trusts
    
    
    55,672
    
    
    
    55,672Due to broker
    
    
    8,203
    
    
    
    1,301Other liabilities
    
    
    28,945
    
    
    
    28,317Total liabilities
    
    
    2,148,490
    
    
    
    2,091,482Commitments and contingencies (see note 11)Stockholders EquityPreferred stock, $0.01 par value, 1,000,000 shares authorized;
none issued
    
    
    
    
    
    
    Common stock, $0.01 par value, 64,000,000 shares authorized;
22,265,568 shares issued at June 30, 2006 and
22,139,089 shares issued at December 31, 2005
    
    
    222
    
    
    
    221Additional paid-in capital
    
    
    134,336
    
    
    
    134,857Retained earnings
    
    
    95,424
    
    
    
    92,121Restricted stock
    
    
    
    
    
    
    (3,013
    )Accumulated other comprehensive loss
    
    
    (16,380
    )
    
    
    (7,606
    )Treasury stock, at cost ( 319,627 shares at June 30, 2006 and
325,311 shares at December 31, 2005)
    
    
    (490
    )
    
    
    (454
    )Total stockholders equity
    
    
    213,112
    
    
    
    216,126Total liabilities and stockholders equity
    
    $
    2,361,602
    
    
    $
    2,307,608
 See accompanying notes to unaudited consolidated financial statements.
 PAGE 1




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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Interest IncomeLoans
    
    $
    26,663
    
    
    $
    18,897
    
    
    $
    51,050
    
    
    $
    36,139SecuritiesTaxable
    
    
    7,469
    
    
    
    7,349
    
    
    
    15,391
    
    
    
    14,063Exempt from federal income taxes
    
    
    833
    
    
    
    145
    
    
    
    1,652
    
    
    
    239Trading securities
    
    
    
    
    
    
    124
    
    
    
    
    
    
    
    190Dividend income from Federal Reserve and Federal Home Loan
Bank stock
    
    
    139
    
    
    
    192
    
    
    
    276
    
    
    
    387Federal funds sold and other short-term investments
    
    
    186
    
    
    
    24
    
    
    
    280
    
    
    
    245Total interest income
    
    
    35,290
    
    
    
    26,731
    
    
    
    68,649
    
    
    
    51,263Interest ExpenseDeposits
    
    
    12,323
    
    
    
    8,323
    
    
    
    23,060
    
    
    
    16,076Federal funds purchased
    
    
    150
    
    
    
    236
    
    
    
    398
    
    
    
    287Securities sold under agreements to repurchase
    
    
    2,208
    
    
    
    1,529
    
    
    
    4,879
    
    
    
    2,593Advances from the Federal Home Loan Bank
    
    
    1,982
    
    
    
    1,594
    
    
    
    3,521
    
    
    
    3,026Junior subordinated debt owed to unconsolidated trusts
    
    
    1,074
    
    
    
    979
    
    
    
    2,077
    
    
    
    1,964Note payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9Total interest expense
    
    
    17,737
    
    
    
    12,661
    
    
    
    33,935
    
    
    
    23,955Net interest income
    
    
    17,553
    
    
    
    14,070
    
    
    
    34,714
    
    
    
    27,308Provision for loan losses
    
    
    5,000
    
    
    
    813
    
    
    
    5,000
    
    
    
    1,627Net interest income after provision for loan losses
    
    
    12,553
    
    
    
    13,257
    
    
    
    29,714
    
    
    
    25,681Noninterest IncomeCustomer service fees
    
    
    1,415
    
    
    
    1,305
    
    
    
    2,618
    
    
    
    2,531Net losses on securities transactions
    
    
    
    
    
    
    (17,184
    )
    
    
    (195
    )
    
    
    (17,440
    )Net trading profits
    
    
    
    
    
    
    118
    
    
    
    
    
    
    
    131Gains on sales of loans
    
    
    205
    
    
    
    76
    
    
    
    296
    
    
    
    138Insurance and brokerage commissions
    
    
    486
    
    
    
    381
    
    
    
    998
    
    
    
    766Trust
    
    
    86
    
    
    
    77
    
    
    
    163
    
    
    
    144Increase in cash surrender value of life insurance
    
    
    534
    
    
    
    542
    
    
    
    1,024
    
    
    
    888Gain on extinguishment of debt
    
    
    625
    
    
    
    
    
    
    
    1,250
    
    
    
    Other
    
    
    250
    
    
    
    259
    
    
    
    460
    
    
    
    497Total noninterest income
    
    
    3,601
    
    
    
    (14,426
    )
    
    
    6,614
    
    
    
    (12,345
    )Noninterest ExpensesSalaries and employee benefits
    
    
    7,618
    
    
    
    6,846
    
    
    
    15,100
    
    
    
    13,357Occupancy and equipment
    
    
    1,647
    
    
    
    1,538
    
    
    
    3,103
    
    
    
    3,015Professional services
    
    
    1,267
    
    
    
    1,188
    
    
    
    2,347
    
    
    
    2,339Loss on extinguishment of debt
    
    
    
    
    
    
    13,125
    
    
    
    
    
    
    
    13,125Other
    
    
    2,509
    
    
    
    4,973
    
    
    
    4,376
    
    
    
    6,550Total noninterest expenses
    
    
    13,041
    
    
    
    27,670
    
    
    
    24,926
    
    
    
    38,386Income (loss) before income taxes and discontinued operations
    
    
    3,113
    
    
    
    (28,839
    )
    
    
    11,402
    
    
    
    (25,050
    )Provision (benefit) for income taxes
    
    
    223
    
    
    
    (11,690
    )
    
    
    2,571
    
    
    
    (10,878
    )Income (loss) from continuing operations
    
    
    2,890
    
    
    
    (17,149
    )
    
    
    8,831
    
    
    
    (14,172
    )Discontinued operationsIncome from discontinued operations before income taxes
    
    
    
    
    
    
    1,050
    
    
    
    
    
    
    
    2,682Provision for income taxes
    
    
    
    
    
    
    251
    
    
    
    
    
    
    
    778Income from discontinued operations
    
    
    
    
    
    
    799
    
    
    
    
    
    
    
    1,904Net Income (Loss)
    
    $
    2,890
    
    
    $
    (16,350
    )
    
    $
    8,831
    
    
    $
    (12,268
    )Basic earnings per share from continuing operations
    
    $
    0.13
    
    
    $
    (0.94
    )
    
    $
    0.40
    
    
    $
    (0.78
    )Basic earnings per share from discontinued operations
    
    $
    
    
    
    $
    0.04
    
    
    $
    
    
    
    $
    0.11Basic earnings per share
    
    $
    0.13
    
    
    $
    (0.90
    )
    
    $
    0.40
    
    
    $
    (0.67
    )Diluted earnings per share from continuing operations
    
    $
    0.13
    
    
    $
    (0.94
    )
    
    $
    0.40
    
    
    $
    (0.78
    )Diluted earnings per share from discontinued operations
    
    $
    
    
    
    $
    0.04
    
    
    $
    
    
    
    $
    0.11Diluted earnings per share
    
    $
    0.13
    
    
    $
    (0.90
    )
    
    $
    0.40
    
    
    $
    (0.67
    )Cash dividends declared per common share
    
    $
    0.13
    
    
    $
    0.12
    
    
    $
    0.25
    
    
    $
    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, 2006 and 2005
(In thousands, except share and per share data)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    TotalCommon
    
    
    Paid in
    
    
    Retained
    
    
    Restricted
    
    
    Comprehensive
    
    
    Treasury
    
    
    StockholdersStock
    
    
    Capital
    
    
    Earnings
    
    
    Stock
    
    
    Loss
    
    
    Stock
    
    
    EquityBalance, 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
    )
    
    $
    140,099Balance, January 1, 2006
    
    $
    221
    
    
    $
    134,857
    
    
    $
    92,121
    
    
    $
    (3,013
    )
    
    $
    (7,606
    )
    
    $
    (454
    )
    
    $
    216,126Cash dividends declared ($0.25 per share)
    
    
    
    
    
    
    
    
    
    
    (5,528
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,528
    )Issuance of common stock upon
exercise of 97,163 stock options,
net of tax benefit
    
    
    1
    
    
    
    1,643
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,644Reclassification
of restricted stock in conjunction with the adoption of
FAS 123(R)
    
    
    
    
    
    
    (3,013
    )
    
    
    
    
    
    
    3,013
    
    
    
    
    
    
    
    
    
    
    
    Issuance of 29,316 shares of restricted
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeiture of 3,400 shares of restricted
stock
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    Stock-based compensation
    
    
    
    
    
    
    813
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    813Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    8,831
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,831Net decrease in fair value of
securities classified as available-
for-sale, net of income taxes and
reclassification adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,774
    )
    
    
    
    
    
    
    (8,774
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57Balance, June 30, 2006
    
    $
    222
    
    
    $
    134,336
    
    
    $
    95,424
    
    
    $
    
    
    
    $
    (16,380
    )
    
    $
    (490
    )
    
    $
    213,112
 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, 2006 and 2005
(In thousands)
 Revised(1)2006
    
    
    2005Cash flows from continuing operating activitiesNet income (loss)
    
    $
    8,831
    
    
    $
    (12,268
    )Income from discontinued operations
    
    
    
    
    
    
    (1,904
    )Adjustments to reconcile net income to net cash provided by continuing operating activitiesDepreciation
    
    
    1,206
    
    
    
    1,184Provision for loan losses
    
    
    5,000
    
    
    
    1,627Amortization of other intangibles
    
    
    196
    
    
    
    215Proceeds from sales of trading securities, net
    
    
    
    
    
    
    131Amortization of premiums and discounts on securities, net
    
    
    470
    
    
    
    1,331Realized loss on sale of available-for-sale securities, net
    
    
    195
    
    
    
    17,440Net gain on sales of trading securities, net
    
    
    
    
    
    
    (131
    )Net gain on sales of loans held for sale
    
    
    (296
    )
    
    
    (138
    )Originations
of loans held for sale
    
    
    (26,204
    )
    
    
    (9,784
    )Proceeds from
sales of loans held for sale
    
    
    24,773
    
    
    
    9,276Increase in cash surrender value of life insurance
    
    
    (1,024
    )
    
    
    (888
    )Deferred income taxes
    
    
    (1,452
    )
    
    
    (10,092
    )Gain on sale of other real estate, net
    
    
    
    
    
    
    (64
    )Amortization of deferred stock based compensation
    
    
    813
    
    
    
    335Change in other assets
    
    
    (314
    )
    
    
    (9,229
    )Change in other liabilities
    
    
    328
    
    
    
    10,240Net cash provided by (used in) continuing operating activities
    
    
    12,522
    
    
    
    (2,719
    )Cash flows from continuing investing activitiesSales of securities available-for-sale
    
    
    24,687
    
    
    
    101,807Maturities of securities available-for-sale
    
    
    
    
    
    
    218Principal payments on securities
    
    
    46,179
    
    
    
    23,016Purchases of securities available-for-sale
    
    
    (10,837
    )
    
    
    (320,612
    )Purchases of securities held-to-maturity
    
    
    
    
    
    
    (1,011
    )Maturities of securities held-to-maturity
    
    
    2,025
    
    
    
    1,475Loan originations and principal collections, net
    
    
    (74,923
    )
    
    
    (124,484
    )Proceeds from sale of other real estate
    
    
    6,182
    
    
    
    400Investment in life insurance
    
    
    (5,926
    )
    
    
    Additions to property and equipment
    
    
    (1,924
    )
    
    
    (369
    )Net cash used in continuing investing activities
    
    
    (14,537
    )
    
    
    (319,560
    )Cash flows from continuing financing activitiesNet increase in deposits
    
    
    60,683
    
    
    
    562Issuance of junior subordinated debt owed to unconsolidated trusts, net of debt issuance costs
    
    
    
    
    
    
    20,619Payments of junior subordinated debt owed to unconsolidated trusts
    
    
    
    
    
    
    (20,619
    )Proceeds from borrowings
    
    
    200,000
    
    
    
    152,000Repayments on borrowings
    
    
    (100,000
    )
    
    
    (123,500
    )Cash dividends paid
    
    
    (5,290
    )
    
    
    (4,338
    )Change in federal funds purchased and securities sold under agreements to repurchase
    
    
    (111,205
    )
    
    
    128,762Proceeds from issuance of common or treasury stock under stock and incentive option plan
    
    
    1,184
    
    
    
    3,965Net cash provided by continuing financing activities
    
    
    45,372
    
    
    
    157,451Cash flows from discontinued operationsNet cash provided by operating activities of discontinued operations
    
    
    
    
    
    
    2,461Net cash used in investing activities of discontinued operations
    
    
    
    
    
    
    (25,388
    )Net cash provided by financing activities of discontinued operations
    
    
    
    
    
    
    5,099Net cash used in discontinued operations
    
    
    
    
    
    
    (17,828
    )Increase (decrease) in cash and cash equivalents
    
    
    43,357
    
    
    
    (182,656
    )Cash and cash equivalents at beginning of period (2)
    
    
    70,599
    
    
    
    243,431Cash and cash equivalents at end of period (3)
    
    $
    113,956
    
    
    $
    60,775(2) Includes following balances from discontinued operations
    
    $
    
    
    
    $
    24,407(3) Includes following balances from discontinued operations
    
    
    
    
    
    
    6,579
 See accompanying notes to unaudited consolidated financial statements.
 PAGE 4




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)  (Continued)
 2006
    
    2005Supplemental disclosuresCash paid during period for:Interest
    
    $
    32,346
    
    
    $
    23,947Income taxes
    
    
    736
    
    
    
    2,338Dividends declared not paid
    
    $
    2,875
    
    
    $
    2,190
 
 (1)
    
    The Unaudited Consolidated Statement of Cash Flows for the six months ended
June 30, 2005 has been revised to separately disclose the operating, investing, and financing
portions of the cash flows attributable to discontinued operations.
The previous
statement filed in the Companys June 30, 2005 Quarterly Report on Form 10-Q did not include
discontinued operations. 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
   Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2005
    
    
    2005Interest income
    
    $
    3,553
    
    
    $
    6,747Interest expense
    
    
    1,474
    
    
    
    2,785Net interest income
    
    
    2,079
    
    
    
    3,962Provision for loan losses
    
    
    100
    
    
    
    (283
    )Net interest income after provision for loan losses
    
    
    1,979
    
    
    
    4,245Noninterest income
    
    
    484
    
    
    
    1,322Noninterest expense
    
    
    1,413
    
    
    
    2,885Income before income taxes
    
    
    1,050
    
    
    
    2,682Provision for income taxes
    
    
    251
    
    
    
    778Income from discontinued operations
    
    $
    799
    
    
    $
    1,904
 PAGE 7




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 4  SECURITIES
  June 30, 2006Held-to-Maturity
    
    
    Available-for-Sale
    
    
    TotalAmortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    % ofCost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Portfolio(Dollars in thousands)Obligations of states and
political subdivisions
    
    $
    4,103
    
    
    $
    4,099
    
    
    $
    95,774
    
    
    $
    92,906
    
    
    $
    99,877
    
    
    $
    97,005
    
    
    
    14.21
    %Mortgage-backed securities
    
    
    48,260
    
    
    
    45,530
    
    
    
    480,286
    
    
    
    459,332
    
    
    
    528,546
    
    
    
    504,862
    
    
    
    75.18Equity securities
    
    
    
    
    
    
    
    
    
    
    63,574
    
    
    
    60,995
    
    
    
    63,574
    
    
    
    60,995
    
    
    
    9.04Other bonds
    
    
    
    
    
    
    
    
    
    
    11,044
    
    
    
    9,989
    
    
    
    11,044
    
    
    
    9,989
    
    
    
    1.57Total
    
    $
    52,363
    
    
    $
    49,629
    
    
    $
    650,678
    
    
    $
    623,222
    
    
    $
    703,041
    
    
    $
    672,851
    
    
    
    100.00
    %
 December 31, 2005Held-to-Maturity
    
    
    Available-for-Sale
    
    
    TotalAmortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    % ofCost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Portfolio(Dollars in thousands)U.S. Treasury and obligations of
U.S. government-sponsored entities
    
    $
    
    
    
    $
    
    
    
    $
    24,866
    
    
    $
    24,719
    
    
    $
    24,866
    
    
    $
    24,719
    
    
    
    3.27
    %Obligations of states and
political subdivisions
    
    
    6,138
    
    
    
    6,182
    
    
    
    79,463
    
    
    
    78,350
    
    
    
    85,601
    
    
    
    84,532
    
    
    
    11.26Mortgage-backed securities
    
    
    53,313
    
    
    
    52,150
    
    
    
    521,896
    
    
    
    511,312
    
    
    
    575,209
    
    
    
    563,462
    
    
    
    75.66Equity securities
    
    
    
    
    
    
    
    
    
    
    63,574
    
    
    
    62,930
    
    
    
    63,574
    
    
    
    62,930
    
    
    
    8.36Other bonds
    
    
    
    
    
    
    
    
    
    
    11,054
    
    
    
    10,626
    
    
    
    11,054
    
    
    
    10,626
    
    
    
    1.45Total
    
    $
    59,451
    
    
    $
    58,332
    
    
    $
    700,853
    
    
    $
    687,937
    
    
    $
    760,304
    
    
    $
    746,269
    
    
    
    100.00
    %
 PAGE 8




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  June 30, 2006Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses(In thousands)Securities available-for-sale:Obligations of states and political subdivisions
    
    $
    80,405
    
    
    $
    (2,696
    )
    
    $
    4,048
    
    
    $
    (172
    )
    
    $
    84,453
    
    
    $
    (2,868
    )Mortgage-backed securities:U.S. government agencies (1)
    
    
    13
    
    
    
    
    
    
    
    642
    
    
    
    (14
    )
    
    
    655
    
    
    
    (14
    )U.S. government-sponsored entities (2)
    
    
    69,590
    
    
    
    (2,288
    )
    
    
    388,572
    
    
    
    (18,661
    )
    
    
    458,162
    
    
    
    (20,949
    )Equity securities (3)
    
    
    60,995
    
    
    
    (2,579
    )
    
    
    
    
    
    
    
    
    
    
    60,995
    
    
    
    (2,579
    )Corporate and other debt securities
    
    
    
    
    
    
    
    
    
    
    9,989
    
    
    
    (1,055
    )
    
    
    9,989
    
    
    
    (1,055
    )Total available-for-sale
    
    
    211,003
    
    
    
    (7,563
    )
    
    
    403,251
    
    
    
    (19,902
    )
    
    
    614,254
    
    
    
    (27,465
    )Securities held-to-maturity:Obligations of states and political subdivisions
    
    
    983
    
    
    
    (24
    )
    
    
    
    
    
    
    
    
    
    
    983
    
    
    
    (24
    )Mortgage-backed securities:U.S. government agencies (1)
    
    
    10,401
    
    
    
    (512
    )
    
    
    
    
    
    
    
    
    
    
    10,401
    
    
    
    (512
    )U.S. government-sponsored entities (2)
    
    
    6,095
    
    
    
    (172
    )
    
    
    29,034
    
    
    
    (2,046
    )
    
    
    35,129
    
    
    
    (2,218
    )Total held-to-maturity
    
    
    17,479
    
    
    
    (708
    )
    
    
    29,034
    
    
    
    (2,046
    )
    
    
    46,513
    
    
    
    (2,754
    )Total temporarily impaired securities
    
    $
    228,482
    
    
    $
    (8,271
    )
    
    $
    432,285
    
    
    $
    (21,948
    )
    
    $
    660,767
    
    
    $
    (30,219
    )
 
 (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).  
    
    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
23 years and a weighted average interest rate of 4.87%.
    
    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 7 1/2 years and a weighted average interest
rate of 4.73%.
  PAGE 9




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 5  LOANS
  June 30,
    
    
    December 31,2006
    
    
    2005% of
    
    
    
    
    
    
    % ofGross
    
    
    
    
    
    
    GrossAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans(Dollars in thousands)Commercial
    
    $
    205,536
    
    
    
    14.4
    %
    
    $
    201,284
    
    
    
    14.9
    %Construction
    
    
    416,996
    
    
    
    29.3
    
    
    
    358,785
    
    
    
    26.6Commercial real estate
    
    
    502,057
    
    
    
    35.4
    
    
    
    496,819
    
    
    
    36.8ConsumerHome equity
    
    
    109,918
    
    
    
    7.7
    
    
    
    115,429
    
    
    
    8.5Other consumer
    
    
    4,766
    
    
    
    0.3
    
    
    
    4,273
    
    
    
    0.3Total consumer
    
    
    114,684
    
    
    
    8.0
    
    
    
    119,702
    
    
    
    8.8Residential mortgage
    
    
    184,130
    
    
    
    12.9
    
    
    
    174,184
    
    
    
    12.9Total loans, gross
    
    
    1,423,403
    
    
    
    100.0
    %
    
    
    1,350,774
    
    
    
    100.0
    %Net deferred fees
    
    
    (573
    )
    
    
    
    
    
    
    (778
    )Total loans, net
    
    $
    1,422,830
    
    
    
    
    
    
    $
    1,349,996Loans held for sale
    
    $
    3,639
    
    
    
    
    
    
    $
    1,912
 NOTE 6  ALLOWANCE FOR LOAN LOSSES
  2006
    
    
    2005(In thousands)Balance, January 1
    
    $
    17,760
    
    
    $
    16,217Provision charged to operations
    
    
    5,000
    
    
    
    1,627Loans charged off
    
    
    (2,288
    )
    
    
    (687
    )Recoveries
    
    
    402
    
    
    
    262Balance, June 30
    
    $
    20,874
    
    
    $
    17,419
 PAGE 10




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 7  GOODWILL AND INTANGIBLES
  June 30, 2006
    
    December 31, 2005Gross Carrying
    
    Accumulated
    
    Net Carrying
    
    Gross Carrying
    
    Accumulated
    
    Net CarryingAmount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    AmountAmortized intangible assets:Core deposit and other intangibles
    
    $
    3,130
    
    
    $
    (1,538
    )
    
    $
    1,592
    
    
    $
    3,130
    
    
    $
    (1,342
    )
    
    $
    1,788
   Core Depositand OtherGoodwill
    
    
    IntangiblesBalance, January 1
    
    $
    891
    
    
    $
    1,788Amortization
    
    
    
    
    
    
    (196
    )Balance, June 30
    
    $
    891
    
    
    $
    1,592
 PAGE 11




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 8  EARNINGS PER SHARE
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(In thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005BasicIncome (loss) from continuing operations
    
    $
    2,890
    
    
    $
    (17,149
    )
    
    $
    8,831
    
    
    $
    (14,172
    )Income from discontinued operations
    
    
    
    
    
    
    799
    
    
    
    
    
    
    
    1,904Net income (loss)
    
    $
    2,890
    
    
    $
    (16,350
    )
    
    $
    8,831
    
    
    $
    (12,268
    )Weighted average common shares outstanding
    
    
    21,942
    
    
    
    18,245
    
    
    
    21,907
    
    
    
    18,196Basic earnings per share from continuing operations
    
    $
    0.13
    
    
    $
    (0.94
    )
    
    $
    0.40
    
    
    $
    (0.78
    )Basic earnings per share from discontinued operations
    
    $
    
    
    
    $
    0.04
    
    
    $
    
    
    
    $
    0.11Basic earnings per share
    
    $
    0.13
    
    
    $
    (0.90
    )
    
    $
    0.40
    
    
    $
    (0.67
    )DilutedIncome (loss) from continuing operations
    
    $
    2,890
    
    
    $
    (17,149
    )
    
    $
    8,831
    
    
    $
    (14,172
    )Income from discontinued operations
    
    
    
    
    
    
    799
    
    
    
    
    
    
    
    1,904Net income (loss)
    
    $
    2,890
    
    
    $
    (16,350
    )
    
    $
    8,831
    
    
    $
    (12,268
    )Weighted average common shares outstanding
    
    
    21,942
    
    
    
    18,245
    
    
    
    21,907
    
    
    
    18,196Dilutive effect of stock options (1)
    
    
    211
    
    
    
    220
    
    
    
    219
    
    
    
    237Dilutive effect of restricted stock (1)
    
    
    23
    
    
    
    
    
    
    
    27
    
    
    
    1Diluted average common shares
    
    
    22,176
    
    
    
    18,465
    
    
    
    22,153
    
    
    
    18,434Diluted average common shares  continuing operations
    
    
    22,176
    
    
    
    18,245
    
    
    
    22,153
    
    
    
    18,196Diluted average common shares  discontinued operations
    
    
    22,176
    
    
    
    18,465
    
    
    
    22,153
    
    
    
    18,434Diluted earnings per share from continuing operations
    
    $
    0.13
    
    
    $
    (0.94
    )
    
    $
    0.40
    
    
    $
    (0.78
    )Diluted earnings per share from discontinued operations
    
    $
    
    
    
    $
    0.04
    
    
    $
    
    
    
    $
    0.11Diluted earnings per share
    
    $
    0.13
    
    
    $
    (0.90
    )
    
    $
    0.40
    
    
    $
    (0.67
    )
 
 (1)
    
    No dilutive shares from stock options or restricted stock were included in the
computation of earnings per share if there was a resulting loss from continuing operations or net loss.  PAGE 12




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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 9  STOCK COMPENSATION AND RESTRICTED STOCK AWARDS
    Weighted Average
    
    
    Weighted AverageNumber of
    
    
    Exercise Price
    
    
    Grant-Date Fair ValueOptions
    
    
    Per Share
    
    
    Per ShareOutstanding at January 1, 2006
    
    
    687,942
    
    
    $
    13.83
    
    
    $
    4.57Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (97,163
    )
    
    
    12.19
    
    
    
    3.81Forfeited
    
    
    (9,125
    )
    
    
    17.63
    
    
    
    6.80Outstanding at June 30, 2006
    
    
    581,654
    
    
    
    14.05
    
    
    
    4.52
  Outstanding
    
    
    ExercisableWeighted AverageRemaining
    
    
    
    
    
    
    Weighted AverageRange of Exercise Price
    
    Number
    
    
    Contractual Life
    
    
    Number
    
    
    Exercise Price$8.50-10.59
    
    
    232,467
    
    
    
    4.05
    
    
    
    232,467
    
    
    $
    9.63$10.75-14.90
    
    
    166,687
    
    
    
    3.90
    
    
    
    166,687
    
    
    
    13.43$18.34-22.03
    
    
    182,500
    
    
    
    7.77
    
    
    
    132,625
    
    
    
    20.72Outstanding at June 30, 2006
    
    
    581,654
    
    
    
    4.81
    
    
    
    531,779
    
    
    
    13.59
 PAGE 13




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,(In thousands, except per share data)
    
    2005
    
    
    2005Net loss as reported
    
    $
    (16,350
    )
    
    $
    (12,268
    )Deduct: stock-based compensation expense
determined under fair value based method
    
    
    94
    
    
    
    188Pro forma net loss
    
    $
    (16,444
    )
    
    $
    (12,456
    )Basic earnings per share as reported
    
    $
    (0.90
    )
    
    $
    (0.67
    )Pro forma basic earnings per share
    
    
    (0.90
    )
    
    
    (0.68
    )Diluted earnings per share as reported
    
    $
    (0.90
    )
    
    $
    (0.67
    )Pro forma diluted earnings per share
    
    
    (0.90
    )
    
    
    (0.68
    )
  PAGE 14




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   Number of
    
    
    Weighted AverageRestricted
    
    
    Grant-Date Fair ValueShares
    
    
    Per ShareOutstanding at January 1, 2006
    
    
    178,700
    
    
    $
    18.97Granted
    
    
    29,316
    
    
    
    22.25Vested
    
    
    (30,000
    )
    
    
    18.71Forfeited
    
    
    (3,400
    )
    
    
    19.43Outstanding at June 30, 2006
    
    
    174,616
    
    
    
    19.55
  NOTE 10  DERIVATIVE INSTRUMENTS
  PAGE 15




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 11  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
    
    $
    164,375
    
    
    $
    45,537
    
    
    $
    1,032
    
    
    $
    36
    
    
    $
    210,980Consumer real estate
    
    
    20,422
    
    
    
    5,298
    
    
    
    17,115
    
    
    
    59,350
    
    
    
    102,185Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,070
    
    
    
    2,070Commercial
    
    
    67,090
    
    
    
    10,162
    
    
    
    220
    
    
    
    1,244
    
    
    
    78,716Letters of credit
    
    
    35,858
    
    
    
    11,007
    
    
    
    290
    
    
    
    375
    
    
    
    47,530Commitments to extend credit
    
    
    72,597
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,597Total commercial commitments
    
    $
    360,342
    
    
    $
    72,004
    
    
    $
    18,657
    
    
    $
    63,075
    
    
    $
    514,078
   NOTE 12  BUSINESS COMBINATION
  PAGE 16




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##### Table of Contents



ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis is intended as a review of significant factors affecting
the financial condition and results of operations of the Company for the periods indicated. The
discussion should be read in conjunction with the unaudited Consolidated Financial Statements and
the Notes thereto presented herein. In addition to historical information, the following
Managements Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements that involve risks and uncertainties. The Companys actual results
could differ significantly from those anticipated in these forward-looking statements as a result
of certain factors discussed in this report.
 Critical Accounting Policies and Estimates
   Strategy
  Expand and diversify loan portfolio.
 Expand deposit base.
 Expand footprint in Chicago market.
 PAGE 17




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##### Table of Contents



Expand noninterest income.
  Results of Operations  Three Months Ended
June 30, 2006 and 2005
  
    
    Basic and diluted earnings per share from continuing operations for the three months
ended June 30, 2006 were $0.13 compared to $(0.94) for the comparable period in 2005
and $0.27 for the first quarter of 2006.
    
    Income from continuing operations for the second quarter of 2006 was $2.9 million,
an 116.9% increase when compared to a $17.1 million loss for the second quarter of
2005, but a 51.4% decrease when compared to the first quarter of 2006. Core income
from continuing operations (defined as net income excluding the balance sheet
repositioning charges as reconciled below) was $1.9 million for the three months ended
June 30, 2005, or $0.10 per diluted share.
    
    Net interest income increased 24.8% to $17.6 million in the second quarter of 2006
compared to $14.1 million in the second quarter of 2005 as a result of loan growth and
increased loan rates. The net interest margin was 3.46% for the three months ended
June 30, 2006 compared to 3.08% for the similar period of 2005 and 3.39% for the three
months ended March 31, 2006.
    
    Interest income on loans increased 41.1% to $26.7 million in the second quarter of
2006 compared to $18.9 million for the comparable period in 2005. Interest income on
loans increased 9.3% when compared to the first quarter of 2006.
    
    The annualized return on average assets from continuing operations for the three
months ended June 30, 2006 was 0.50% compared to a negative 2.95% for the similar
period in 2005 and 1.05% for the first quarter of 2006; annualized core return on
average assets from continuing operations was 0.32% for second quarter in 2005.
    
    The annualized return on average equity from continuing operations for the three
months ended June 30, 2006 was 5.31% compared to a negative 48.38% for the similar
period in 2005 and 11.06% for the first quarter of 2006; annualized core return on
average equity from continuing operations was 5.24% for the second quarter of 2005.
    
    The provision for loan losses was $5.0 million in the second quarter of 2006
compared to $813,000 for the comparable period in 2005. This increase was related to a
downgrading of $15.3 million of a loan relationship;
$5.0 million of this loan relationship is on nonaccrual status.
Additional portions of this loan relationship may be placed on
nonaccrual status depending on many variables. Additional loan
proceeds may also be provided as part of the loan workout strategy.
 PAGE 18




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##### Table of Contents




    
    Excluding losses on securities, noninterest income increased 30.6% to $3.6 million
in the second quarter of 2006 compared to $2.8 million in the second quarter of 2005
primarily as a result of the
gain on extinguishment of debt of $625,000 from the assignment of a $50.0 million FHLB
advance in the second quarter of 2006. Compared to the first quarter of 2006,
noninterest income exluding losses on securities increased by 12.3%.
    
    Noninterest expenses decreased 52.9% to $13.0 million in the second quarter of 2006
compared to $27.7 million in the second quarter of 2005, due to the $13.1 million loss
on extinguishment of debt in 2005 relating to the balance sheet repositioning.
Noninterest expenses increased 9.7% when compared to the first quarter of 2006. Since
June 30, 2005, there have been 42 new full-time equivalent employees added to revenue
production, support, and risk management.
  
    
    Basic and diluted earnings per share from continuing operations for the six months
ended June 30, 2006 were $0.40 compared to $(0.78) for the same period in 2005.
    
    Income from continuing operations for the first six months of 2006 was $8.8 million,
an 162.3% increase when compared to the $14.2 million loss for the first six months of
2005. Core income from continuing operations for the six months ended June 30, 2005
was $4.8 million or $0.26 per diluted share.
    
    Net interest income increased by 27.1% to $34.7 million in the first half of 2006
compared to $27.3 million in the first half of 2005.
    
    Interest income on loans increased 41.3% to $51.1 million in the first six months of
2006 compared to $36.1 million for the same period in 2005 as a result of increases in
rates as well as balances.
    
    The annualized return on average assets from continuing operations for the six
months ended June 30, 2006 was 0.77% compared to a negative 1.25% for the same period
in 2005; core annualized return on average assets from continuing operations was 0.43%
for the six months ended June 30, 2005.
    
    The annualized return on average equity from continuing operations for the six
months ended June 30, 2006 was 8.16% compared to a negative 20.16% for the same period
2005; core annualized return on average equity from continuing operations was 6.87% for
the six months ended June 30, 2005.
    
    The provision for loan losses rose to $5.0 million in the first half of 2006
compared to $1.6 million for the comparable period in 2005, as a result of the
downgrading of $15.3 million of a loan relationship.
    
    Excluding losses on securities, noninterest income increased 33.6% to $6.8 million
in the first half of 2006 compared to $5.1 million in the same period of 2005 primarily
as a result of the gain on extinguishment of debt in the first and second quarters of
2006.
    
    Noninterest expenses decreased 35.1% to $24.9 million in the first half of 2006
compared to $38.4 million in the same period of 2005 as a result of the loss on
extinguishment of debt totaling $13.1 million in 2005.
 PAGE 19




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2005
    
    
    2005Loss 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 swaps, net of tax
    
    
    2,206
    
    
    
    2,206Charge from redemption of trust preferred
securities, net of tax
    
    
    318
    
    
    
    318Core income from continuing operations
    
    $
    1,856
    
    
    $
    4,833
 Net Interest Income
  PAGE 20




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##### Table of Contents



For the Three Months EndedJune 30, 2006
    
    
    June 30, 2005
    
    
    March 31, 2006Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Interest-Earning Assets:Federal funds sold and interest- bearing
deposits due from banks
    
    $
    11,834
    
    
    $
    186
    
    
    
    6.29
    %
    
    $
    2,883
    
    
    $
    24
    
    
    
    3.33
    %
    
    $
    9,939
    
    
    $
    94
    
    
    
    3.78
    %Securities:Taxable(1)
    
    
    601,238
    
    
    
    7,893
    
    
    
    5.25
    
    
    
    683,823
    
    
    
    7,887
    
    
    
    4.61
    
    
    
    652,066
    
    
    
    8,337
    
    
    
    5.11Exempt from federal income taxes(1)
    
    
    87,396
    
    
    
    1,281
    
    
    
    5.86
    
    
    
    14,140
    
    
    
    223
    
    
    
    6.31
    
    
    
    85,601
    
    
    
    1,260
    
    
    
    5.89Total securities
    
    
    688,634
    
    
    
    9,174
    
    
    
    5.32
    
    
    
    697,963
    
    
    
    8,110
    
    
    
    4.64
    
    
    
    737,667
    
    
    
    9,597
    
    
    
    5.20FRB and FHLB stock
    
    
    14,851
    
    
    
    139
    
    
    
    3.74
    
    
    
    13,834
    
    
    
    192
    
    
    
    5.55
    
    
    
    14,661
    
    
    
    137
    
    
    
    3.74Loans:Commercial loans(1)(3)(4)
    
    
    208,637
    
    
    
    4,172
    
    
    
    8.00
    
    
    
    178,329
    
    
    
    2,890
    
    
    
    6.48
    
    
    
    195,831
    
    
    
    3,704
    
    
    
    7.57Commercial real estate loans(1)(3)(4)(6)
    
    
    979,351
    
    
    
    18,655
    
    
    
    7.62
    
    
    
    832,993
    
    
    
    13,536
    
    
    
    6.50
    
    
    
    946,846
    
    
    
    17,161
    
    
    
    7.25Agricultural loans(1)(3)(4)
    
    
    2,540
    
    
    
    49
    
    
    
    7.72
    
    
    
    1,465
    
    
    
    26
    
    
    
    7.10
    
    
    
    2,009
    
    
    
    37
    
    
    
    7.37Consumer real estate loans(3)(4)(6)
    
    
    227,913
    
    
    
    3,768
    
    
    
    6.61
    
    
    
    169,117
    
    
    
    2,452
    
    
    
    5.80
    
    
    
    219,997
    
    
    
    3,475
    
    
    
    6.32Consumer installment loans(3)(4)
    
    
    4,557
    
    
    
    90
    
    
    
    7.90
    
    
    
    3,793
    
    
    
    69
    
    
    
    7.28
    
    
    
    4,441
    
    
    
    83
    
    
    
    7.48Total loans
    
    
    1,422,998
    
    
    
    26,734
    
    
    
    7.52
    
    
    
    1,185,697
    
    
    
    18,973
    
    
    
    6.40
    
    
    
    1,369,124
    
    
    
    24,460
    
    
    
    7.16Total interest-earning assets
    
    $
    2,138,317
    
    
    $
    36,233
    
    
    
    6.76
    %
    
    $
    1,900,377
    
    
    $
    27,299
    
    
    
    5.76
    %
    
    $
    2,131,391
    
    
    $
    34,288
    
    
    
    6.44
    %Interest-Bearing Liabilities:Deposits:Interest-bearing demand deposits
    
    $
    136,094
    
    
    $
    269
    
    
    
    0.79
    %
    
    $
    186,450
    
    
    $
    743
    
    
    
    1.59
    %
    
    $
    144,609
    
    
    $
    280
    
    
    
    0.77
    %Money-market demand accounts and savings accounts
    
    
    276,221
    
    
    
    1,158
    
    
    
    1.68
    
    
    
    344,722
    
    
    
    1,403
    
    
    
    1.63
    
    
    
    294,002
    
    
    
    1,215
    
    
    
    1.65Time deposits less than $100,000
    
    
    758,439
    
    
    
    7,685
    
    
    
    4.05
    
    
    
    758,556
    
    
    
    5,844
    
    
    
    3.08
    
    
    
    762,412
    
    
    
    7,075
    
    
    
    3.71Time deposits of $100,000 or more
    
    
    260,695
    
    
    
    3,068
    
    
    
    4.71
    
    
    
    38,547
    
    
    
    275
    
    
    
    2.85
    
    
    
    187,239
    
    
    
    2,019
    
    
    
    4.31Public funds
    
    
    12,539
    
    
    
    143
    
    
    
    4.56
    
    
    
    9,677
    
    
    
    58
    
    
    
    2.40
    
    
    
    13,866
    
    
    
    148
    
    
    
    4.27Total interest-bearing deposits
    
    
    1,443,988
    
    
    
    12,323
    
    
    
    3.40
    
    
    
    1,337,952
    
    
    
    8,323
    
    
    
    2.48
    
    
    
    1,402,128
    
    
    
    10,737
    
    
    
    3.08Borrowings:Federal funds purchased and repurchase agreements
    
    
    207,660
    
    
    
    2,358
    
    
    
    4.54
    
    
    
    246,203
    
    
    
    1,765
    
    
    
    2.87
    
    
    
    284,390
    
    
    
    2,919
    
    
    
    4.11FHLB advances
    
    
    206,594
    
    
    
    1,982
    
    
    
    3.84
    
    
    
    118,195
    
    
    
    1,594
    
    
    
    5.39
    
    
    
    170,556
    
    
    
    1,539
    
    
    
    3.61Notes payable and other borrowings
    
    
    55,672
    
    
    
    1,074
    
    
    
    7.72
    
    
    
    55,672
    
    
    
    979
    
    
    
    7.03
    
    
    
    55,672
    
    
    
    1,003
    
    
    
    7.21Total borrowings
    
    
    469,926
    
    
    
    5,414
    
    
    
    4.60
    
    
    
    420,070
    
    
    
    4,338
    
    
    
    4.12
    
    
    
    510,618
    
    
    
    5,461
    
    
    
    4.28Total interest-bearing liabilities
    
    $
    1,913,914
    
    
    $
    17,737
    
    
    
    3.72
    %
    
    $
    1,758,022
    
    
    $
    12,661
    
    
    
    2.88
    %
    
    $
    1,912,746
    
    
    $
    16,198
    
    
    
    3.40
    %Net interest income (tax equivalent)(1)(5)
    
    
    
    
    
    $
    18,496
    
    
    
    3.04
    %
    
    
    
    
    
    $
    14,638
    
    
    
    2.88
    %
    
    
    
    
    
    $
    18,090
    
    
    
    3.04
    %Net interest margin (tax equivalent)(1)
    
    
    
    
    
    
    
    
    
    
    3.46
    %
    
    
    
    
    
    
    
    
    
    
    3.08
    %
    
    
    
    
    
    
    
    
    
    
    3.39
    %Net interest income(2)(5)
    
    
    
    
    
    $
    17,553
    
    
    
    
    
    
    
    
    
    
    $
    14,070
    
    
    
    
    
    
    
    
    
    
    $
    17,161Net interest margin(2)
    
    
    
    
    
    
    
    
    
    
    3.28
    %
    
    
    
    
    
    
    
    
    
    
    2.96
    %
    
    
    
    
    
    
    
    
    
    
    3.22
    %
 
 (1)
    
    Adjusted for 35.0% tax rate in 2006 and 2005 and adjusted for the dividends-received
deduction where applicable.(2)
    
    Not adjusted for 35.0% tax rate in 2006 and 2005 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: 2Q06
    
    
    2Q05
    
    
    1Q06Net interest income
    
    $
    17,553
    
    
    $
    14,070
    
    
    $
    17,161Tax equivalent adjustment to net interest income
    
    
    943
    
    
    
    568
    
    
    
    929Net interest income, tax equivalent basis
    
    $
    18,496
    
    
    $
    14,638
    
    
    $
    18,090
 (6)
    
    Includes construction loans. PAGE 21




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##### Table of Contents



For the Six Months EndedJune 30, 2006
    
    
    June 30, 2005Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Interest-Earning Assets:Federal funds sold and interest- bearing deposits due from banks
    
    $
    10,892
    
    
    $
    280
    
    
    
    5.14
    %
    
    $
    22,654
    
    
    $
    245
    
    
    
    2.16
    %Securities:Taxable(1)
    
    
    626,512
    
    
    
    16,230
    
    
    
    5.18
    
    
    
    661,244
    
    
    
    15,057
    
    
    
    4.55Exempt from federal income taxes(1)
    
    
    86,503
    
    
    
    2,542
    
    
    
    5.88
    
    
    
    11,326
    
    
    
    367
    
    
    
    6.48Total securities
    
    
    713,015
    
    
    
    18,772
    
    
    
    5.26
    
    
    
    672,570
    
    
    
    15,424
    
    
    
    4.58FRB and FHLB stock
    
    
    14,757
    
    
    
    276
    
    
    
    3.74
    
    
    
    13,830
    
    
    
    387
    
    
    
    5.60Loans:Commercial loans(1)(3)(4)
    
    
    202,269
    
    
    
    7,876
    
    
    
    7.79
    
    
    
    181,747
    
    
    
    5,596
    
    
    
    6.16Commercial real estate loans(1)(3)(4)
    
    
    963,188
    
    
    
    35,815
    
    
    
    7.44
    
    
    
    805,343
    
    
    
    25,878
    
    
    
    6.43Agricultural loans(3)(4)
    
    
    2,276
    
    
    
    86
    
    
    
    7.56
    
    
    
    1,352
    
    
    
    45
    
    
    
    6.66Consumer real estate loans(3)(4)
    
    
    223,977
    
    
    
    7,243
    
    
    
    6.47
    
    
    
    163,541
    
    
    
    4,637
    
    
    
    5.67Consumer installment loans(3)(4)
    
    
    4,500
    
    
    
    173
    
    
    
    7.69
    
    
    
    3,766
    
    
    
    140
    
    
    
    7.43Total loans
    
    
    1,396,210
    
    
    
    51,193
    
    
    
    7.34
    
    
    
    1,155,749
    
    
    
    36,296
    
    
    
    6.28Total interest-earning assets
    
    $
    2,134,874
    
    
    $
    70,521
    
    
    
    6.60
    %
    
    $
    1,864,803
    
    
    $
    52,352
    
    
    
    5.62
    %Interest-Bearing Liabilities:Deposits:Interest-bearing demand deposits
    
    $
    140,328
    
    
    $
    549
    
    
    
    0.78
    %
    
    $
    190,965
    
    
    $
    1,471
    
    
    
    1.54
    %Money-market demand accounts and savings accounts
    
    
    285,062
    
    
    
    2,373
    
    
    
    1.66
    
    
    
    356,040
    
    
    
    2,988
    
    
    
    1.68Time deposits less than $100,000
    
    
    760,415
    
    
    
    14,760
    
    
    
    3.88
    
    
    
    730,766
    
    
    
    10,822
    
    
    
    2.96Time deposits of $100,000 or more
    
    
    224,170
    
    
    
    5,087
    
    
    
    4.54
    
    
    
    54,172
    
    
    
    694
    
    
    
    2.56Public funds
    
    
    13,199
    
    
    
    291
    
    
    
    4.41
    
    
    
    8,843
    
    
    
    101
    
    
    
    2.28Total interest-bearing deposits
    
    
    1,423,174
    
    
    
    23,060
    
    
    
    3.24
    
    
    
    1,340,786
    
    
    
    16,076
    
    
    
    2.40Borrowings:Federal funds purchased and repurchase agreements
    
    
    245,813
    
    
    
    5,277
    
    
    
    4.29
    
    
    
    207,261
    
    
    
    2,880
    
    
    
    2.78FHLB advances
    
    
    188,674
    
    
    
    3,521
    
    
    
    3.73
    
    
    
    118,125
    
    
    
    3,026
    
    
    
    5.12Notes payable and other borrowings
    
    
    55,672
    
    
    
    2,077
    
    
    
    7.46
    
    
    
    56,080
    
    
    
    1,973
    
    
    
    7.04Total borrowings
    
    
    490,159
    
    
    
    10,875
    
    
    
    4.44
    
    
    
    381,466
    
    
    
    7,879
    
    
    
    4.14Total interest-bearing liabilities
    
    $
    1,913,333
    
    
    $
    33,935
    
    
    
    3.54
    %
    
    $
    1,722,252
    
    
    $
    23,955
    
    
    
    2.78
    %Net interest income (tax equivalent)(1)(5)
    
    
    
    
    
    $
    36,586
    
    
    
    3.06
    %
    
    
    
    
    
    $
    28,397
    
    
    
    2.84
    %Net interest margin (tax equivalent)(1)
    
    
    
    
    
    
    
    
    
    
    3.43
    %
    
    
    
    
    
    
    
    
    
    
    3.05
    %Net interest income(2)(5)
    
    
    
    
    
    $
    34,714
    
    
    
    
    
    
    
    
    
    
    $
    27,308Net interest margin(2)
    
    
    
    
    
    
    
    
    
    
    3.25
    %
    
    
    
    
    
    
    
    
    
    
    2.93
    %
 
 (1)
    
    Adjusted for 35% tax rate in 2006 and 2005 and adjusted for the dividends-received
deduction where applicable.(2)
    
    Not adjusted for 35% tax rate in 2006 and 2005 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: 2Q06
    
    
    2Q05Net interest income
    
    $
    34,714
    
    
    $
    27,308Tax equivalent adjustment to net interest income
    
    
    1,872
    
    
    
    1,089Net interest income, tax equivalent basis
    
    $
    36,586
    
    
    $
    28,397
 (6)
    
    Includes construction loans.  PAGE 22




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##### Table of Contents




    
    Yields on average earning assets increased 100 basis points in the
second quarter of 2006 compared to the second quarter of 2005, and average balances
on earning assets increased by $237.9 million. Yields on average earning assets
increased by 32 basis points compared to the first quarter of 2006. Yields on
average earning assets increased 98 basis points in the first six months of 2006
compared to the similar period in 2005, and average balances increased by $270.1
million.
    
    Yields on average loans increased 112 basis points as a result of nine
rate increases from June 30, 2005. Average loans increased by $237.3 million in the
quarter ended June 30, 2006 compared to the same period in 2005. Measured to the
first quarter of 2006, yields on average loans increased by 36 basis points, while
average balances rose $53.9 million compared to the first quarter of 2006. Yields
on average loans increased 106 basis points in the first six months of 2006 compared
to the similar period in 2005, and average balances increased by $240.5 million.
    
    Yields on average securities increased 68 basis points while balances
decreased by $9.3 million in the second quarter of 2006 compared to the similar
period in 2005. Yields on average securities increased by 12 basis points compared
to the first quarter of 2006, while average balances decreased by $49.0 million.
The securities portfolio will continue to be a source of cash flow for loan growth
which have yields that are more than 200 basis point above the yields on securities.
Yields on average securities increased 68 basis points in the first six months of
2006 compared to the similar period in 2005, and average balances increased by $40.4
million.
  
    
    Yields on average interest-bearing liabilities increased by 84 basis
points, and average balances increased $155.9 million in the second quarter of 2006
compared to the similar period in 2005. Compared to the first quarter of 2006,
yields on interest-bearing liabilities increased by 32 basis points, and average
balances increased $1.2 million. Yields on average interest-bearing liabilities
increased 76 basis points in the first six months of 2006 compared to the similar
period in 2005, and average balances increased by $191.1 million.
    
    Average interest-bearing deposits increased by $106.0 million while
yields increased 92 basis points in the second quarter of 2006 compared to the
similar period of 2005. Compared to the first quarter of 2006, yields on
interest-bearing deposits increased by 32 basis points, and average balances
increased $41.9 million. Most of this increase was in certificates of deposit.
Yields on average interest-bearing deposits increased 84 basis points in the first
six months of 2006 compared to the similar period in 2005, and average balances
increased by $82.4 million.
    
    Average interest-bearing demand deposit, money market, and savings
accounts decreased by $118.9 million for the second quarter of 2006 compared to June
30, 2005 and by $26.3 million compared to March 31, 2006. On a year-to-date basis,
average interest-bearing demand deposit, money market, and savings accounts
decreased by $121.6 million for the year compared to June 30, 2005. The Company
continues to focus its marketing efforts to increase core deposits to alleviate
margin pressure.
    
    The migration of demand deposit, interest-bearing demand deposit, money
market, and savings
 PAGE 23




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##### Table of Contents



accounts into certificates of deposit and the reliance on more
expensive wholesale funds
contributed to the increase in the cost of funds.
 
    
    Average borrowings increased by $49.9 million in the second quarter of
2006 while yields increased by 48 basis points to 4.60% compared to the second
quarter of 2005. Measured to the first quarter of 2006, yields on borrowings
increased by 32 basis points while average balances decreased by $40.7 million.
    
    The Company increased its FHLB borrowings by $50.0 million in the second
quarter of 2006. Average rates paid on FHLB borrowings for the second quarter of
2006 declined by 155 basis points to 3.84% compared to the second quarter of 2005.
Average rates paid also decreased by 139 basis points for the first six months of
2006 and average balances increased by $70.5 million when compared to the same
period in 2005.
    
    Average Federal funds and repurchase agreements decreased by $38.5
million, while average rates increased 167 basis points compared to the second
quarter of 2005. Average rates on Federal funds and repurchase agreements increased
151 basis points in the first six months of 2006 compared to the similar period in
2005, and average balances increased by $38.6 million.
    
    As part of the Royal American acquisition in the third
quarter of 2006, the Company paid
out $64.6 million
in cash that was held in a noninterest bearing account at the Bank.
An increase in funding costs is anticipated as a result of replacing these funds with more
expensive borrowings, which is expected to be offset by the
anticipated increase in net interest income resulting from the Royal
American
acquisition.
 Noninterest Income
  
    
    As part of its program of repositioning the maturities of its
borrowings, the Company recognized a gain on the extinguishment of debt of $625,000
in the second quarter of 2006 as a result of the assignment of a $50.0 million FHLB
advance and recognized another $625,000 gain in the first quarter of 2006 as a
result of the prepayment of a $28.0 million repurchase agreement.
    
    Insurance and brokerage commissions increased by $105,000 in the three
months ended June 30, 2006 compared to the similar period in 2005 as a result of
increased staff and brokerage activity. For similar reasons, insurance and
brokerage commission increased by $232,000 during the first six months of 2006
compared to the same period in 2005. When compared to the first quarter of 2006,
insurance and brokerage commission slightly decreased by 5.1%.
    
    Customer service fees increased by $110,000 to $1.4 million in the
second quarter of 2006 compared to the second quarter of 2005 and increased by
$212,000 compared to the first quarter of 2006. For the first six months of 2006,
customer service fees increased by $87,000 when
 PAGE 24




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##### Table of Contents



compared with the same period in
2005. This improvement is a result of the increase in the
number of deposit accounts, increased fees, and less waived fees.
    
    Gains on sales of loans increased during the second quarter of 2006 by
169.7% or $129,000 to $205,000 compared to the second quarter of 2005 and by
$114,000 or 125.3% when compared to the first quarter of 2006, due to a higher level
of mortgage refinancing volume. For the six months ended June 30, 2006, gains on
sales of loans more than doubled when compared to the same period in 2005.
    
    Increase in the cash surrender value of life insurance slightly
decreased by $8,000 to $534,000 during the three months ended June 30, 2006 compared
to the similar period in 2005, but was $44,000 higher compared to the first quarter
of 2006. For the first half of 2006, the increase in the cash surrender value of
life insurance was $136,000 higher than the first half of 2005. The Company made an
additional purchase of bank owned life insurance of $5.0 million in the first
quarter of 2006.
    
    There were no gains or losses on securities for the second quarter of
2006. Net losses on securities transactions were $17.2 million in the second
quarter of 2005 as a result of the balance sheet repositioning and were $195,000
during the first quarter of 2006.
 Noninterest Expenses
    
    
    During the second quarter of 2005, a $13.1 million loss on the early
extinguishment of FHLB advances was recorded as a result of the balance sheet
repositioning consisting of $9.5 million in prepayment penalties and $3.6 million to
unwind the interest rate swaps associated with the advances.
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##### Table of Contents




    
    Reflected in the noninterest expenses also was the $2.4 million
write-down of the townhouse project held in other real estate owned taken in the
second quarter of 2005. The Company recognized $178,000 in expenses with the sale
of properties included in this townhouse project during the second quarter of 2006.
    
    Salaries and benefits expense increased by $772,000, or 11.3%, during
the second quarter of 2006 compared to the second quarter of 2005 and $136,000, or
1.8%, compared to the first quarter of 2006, reflecting the additions to management.
Similarly, salaries and benefits expense increased by $1.7 million, or 13.1%, to
$15.1 million for the first half of 2006 compared to the same period in 2005.
    
    Occupancy and equipment expense increased by $109,000 during the second
quarter of 2006 to $1.6 million compared to the similar period in 2005 and $191,000
compared to the first quarter of 2006. Occupancy and equipment expense increased
slightly by $88,000 to $3.1 million for the first half of 2006 compared to the same
period in 2005.
    
    Professional services expense rose by $79,000, or 6.7%, to $1.3 million
in the second quarter of 2006 compared to the second quarter of 2005 and $187,000,
or 17.3%, compared to the first quarter of 2006 due in the most part to new hire
placement fees. Professional services expense for the first half of 2006 increased
less than 1.0% compared to the six months ended June 30, 2005.
    
    Marketing expenses in the second quarter of 2006 were $69,000 higher
than in the second quarter of 2005, but increased by $134,000 compared to the first
quarter of 2006 as a result of launching a branding effort and a more consistent
marketing strategy. Marketing expenses for the first half of 2006 were at the same
level as the first half of 2005.
 Income Taxes
  Six Months EndedJune 30,2006
    
    
    2005(In thousands)Income taxes (benefit) computed at the statutory rate
    
    $
    3,991
    
    
    $
    (8,767
    )Tax-exempt interest income on securities and loans
    
    
    (556
    )
    
    
    (168
    )General business credits
    
    
    (60
    )
    
    
    (60
    )State income taxes, net of federal tax benefit
    
    
    (36
    )
    
    
    (1,188
    )Cash surrender value increase, net of premiums
    
    
    (359
    )
    
    
    (309
    )Dividends received deduction
    
    
    (445
    )
    
    
    (582
    )Other
    
    
    36
    
    
    
    196Total provision (benefit) for income taxes
    
    $
    2,571
    
    
    $
    (10,878
    )
 PAGE 26




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##### Table of Contents



Financial Condition
  
    
    Total assets increased $54.0 million to $2.4 billion at June 30, 2006 compared to year
end but decreased $164.6 million compared to June 30, 2005. The Company sold MBWI on
September 30, 2005, which had $282.5 million in assets at June 30, 2005. Excluding the
assets held for sale (or MBWI) at June 30, 2005, total assets grew by $117.9 million.
    
    Total loans grew 5.4%, or $72.8 million, to $1.4 billion at June 30, 2006 compared to
year end 2005 and rose 16.8%, or $205.0 million over the second quarter of 2005.
    
    Loan to deposit ratio increased to 89.82% from 88.62% at December 31, 2005, and was
higher than the 81.07% figure recorded at June 30, 2005.
    
    Deposits increased by 4.0% to $1.6 billion in the second quarter of 2006 compared to
year end and increased by 5.5% when compared to the period ended June 30, 2005.
Deposit growth was centered in certificates of deposit.
  
    
    Nonperforming assets declined to 0.68% of total assets from 0.83% at year end and 0.71%
recorded at June 30, 2005.
    
    In the second quarter of 2006, the Company benefited from the sale of properties
included in a townhouse project previously held in other real estate. As a result of this
sale, other real estate declined to $5.2 million at June 30, 2006 from $11.2 million at
December 31, 2005.
    
    The allowance for loan losses was 1.47% of total loans, versus 1.32% at year end and
1.43% at June 30, 2005.
    
    The allowance for loan losses decreased to 1.91 times nonaccruing loans compared to 2.25
times nonaccruing loans year end and 2.63 times nonaccruing loans at June 30, 2005.
    
    Nonaccruing loans increased to 0.77% of total loans from 0.59% at year end and 0.54% at
June 30, 2005.
    
    The Company downgraded $15.3 million of a loan relationship to substandard in the second
quarter of 2006; $5.0 million of this loan relationship is on a
nonaccrual status. Additional portions of this loan relationship may
be placed on nonaccrual status depending on many variables. Additional
loan proceeds may also be provided as part of the loan workout
strategy.
 PAGE 27




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##### Table of Contents



Loans
  June 30,
    
    
    December 31,2006
    
    
    2005% of
    
    
    
    
    
    
    % ofGross
    
    
    
    
    
    
    GrossAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans(Dollars in thousands)Commercial
    
    $
    205,536
    
    
    
    14.4
    %
    
    $
    201,284
    
    
    
    14.9
    %Construction
    
    
    416,996
    
    
    
    29.3
    
    
    
    358,785
    
    
    
    26.6Commercial real estate
    
    
    502,057
    
    
    
    35.4
    
    
    
    496,819
    
    
    
    36.8ConsumerHome equity
    
    
    109,918
    
    
    
    7.7
    
    
    
    115,429
    
    
    
    8.5Other consumer
    
    
    4,766
    
    
    
    0.3
    
    
    
    4,273
    
    
    
    0.3Total consumer
    
    
    114,684
    
    
    
    8.0
    
    
    
    119,702
    
    
    
    8.8Residential mortgage
    
    
    184,130
    
    
    
    12.9
    
    
    
    174,184
    
    
    
    12.9Total loans, gross
    
    
    1,423,403
    
    
    
    100.0
    %
    
    
    1,350,774
    
    
    
    100.0
    %Net deferred fees
    
    
    (573
    )
    
    
    
    
    
    
    (778
    )Total loans, net
    
    $
    1,422,830
    
    
    
    
    
    
    $
    1,349,996Loans held for sale
    
    $
    3,639
    
    
    
    
    
    
    $
    1,912
  
    
    Commercial loans increased $4.3 million to $205.5 million as of June 30, 2006 from
$201.3 million as of December 31, 2005.
    
    Construction loans increased by $58.2 million to $417.0 million as of June 30, 2006 from
$358.8 million at December 31, 2005.
    
    Commercial real estate loans rose to $502.1 million at June 30, 2006 compared to $496.8
million at December 31, 2005.
    
    Consumer loans decreased to $114.7 million as of June 30, 2006 compared to $119.7
million at December 31, 2005.
    
    Residential mortgage loans increased $9.9 million to $184.1 million as of June 30, 2006
from $174.2 million as of December 31, 2005.
   
    
    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.
 PAGE 28




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##### Table of Contents




    
    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
   2006
    
    
    2005(In thousands)Balance, January 1
    
    $
    17,760
    
    
    $
    16,217Provision charged to operations
    
    
    5,000
    
    
    
    1,627Loans charged off
    
    
    (2,288
    )
    
    
    (687
    )Recoveries
    
    
    402
    
    
    
    262Balance, June 30
    
    $
    20,874
    
    
    $
    17,419
    PAGE 29




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##### Table of Contents



June 30,
    
    December 31,
    
    June 30,2006
    
    2005
    
    2005Net loans charged off to average loans during quarter
    
    
    0.53
    %
    
    
    0.12
    %
    
    
    0.13
    %Provision for loan losses to total loans
    
    
    1.41
    
    
    
    0.04
    
    
    
    0.27Allowance for loan losses to total loans
    
    
    1.47
    
    
    
    1.32
    
    
    
    1.43Allowance to nonaccruing loans
    
    
    1.91
    x
    
    
    2.25
    x
    
    
    2.63
    x
  PAGE 30




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##### Table of Contents



Nonaccruing Loans and Nonperforming Assets
    June 30,
    
    
    December 31,2006
    
    
    2005(Dollars in thousands)Impaired and other loans 90 days past due
and accruing
    
    $
    14
    
    
    $
    4Nonaccrual and impaired loans not accruing
    
    $
    10,925
    
    
    $
    7,905Other real estate
    
    
    5,237
    
    
    
    11,154Total nonperforming assets
    
    $
    16,162
    
    
    $
    19,059Total nonaccruing loans to total loans
    
    
    0.77
    %
    
    
    0.59
    %Total nonperforming assets to total loans
and other real estate
    
    
    1.13
    
    
    
    1.40Total nonperforming assets to total assets
    
    
    0.68
    
    
    
    0.83
 Securities
  PAGE 31




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##### Table of Contents



June 30, 2006Held-to-Maturity
    
    
    Available-for-Sale
    
    
    TotalAmortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    % ofCost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Portfolio(Dollars in thousands)Obligations of states and
political subdivisions
    
    $
    4,103
    
    
    $
    4,099
    
    
    $
    95,774
    
    
    $
    92,906
    
    
    $
    99,877
    
    
    $
    97,005
    
    
    
    14.21
    %Mortgage-backed securities
    
    
    48,260
    
    
    
    45,530
    
    
    
    480,286
    
    
    
    459,332
    
    
    
    528,546
    
    
    
    504,862
    
    
    
    75.18Equity securities
    
    
    
    
    
    
    
    
    
    
    63,574
    
    
    
    60,995
    
    
    
    63,574
    
    
    
    60,995
    
    
    
    9.04Other bonds
    
    
    
    
    
    
    
    
    
    
    11,044
    
    
    
    9,989
    
    
    
    11,044
    
    
    
    9,989
    
    
    
    1.57Total
    
    $
    52,363
    
    
    $
    49,629
    
    
    $
    650,678
    
    
    $
    623,222
    
    
    $
    703,041
    
    
    $
    672,851
    
    
    
    100.00
    %
   
    
    Cash flow from principal payments of $46.2 million received on mortgage-backed
securities in the available-for-sale and held-to-maturity portfolios were used to fund loan
growth during the first half of 2006.
    
    U.S. government agency and government-sponsored entity mortgage-backed securities
decreased 10.2%, or $52.0 million, from $511.3 million at December 31, 2005 to $459.3
million at June 30, 2006.
    
    Equity securities decreased $1.9 million to $61.0 million at June 30, 2006 from December
31, 2005 as a result of the decrease in fair value. Equity securities included capital
securities of U.S. government-sponsored entities.
    
    Obligations of state and political subdivisions increased $14.6 million to $92.9 million
at June 30, 2006 from December 31, 2005. The Company continued to build its tax-exempt
municipal bond position in the securities portfolio.
    
    Other bonds decreased $637,000 to $10.0 million at June 30, 2006 compared to $10.6
million at December 31, 2005. Other bonds include high grade corporate bonds primarily
issued by financial institutions.
    PAGE 32




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##### Table of Contents



Other Assets
  Deposits and Borrowed Funds
  
    
    Noninterest-bearing deposits were $165.8 million at June 30, 2006, $7.4
million more than the $158.4 million level at December 31, 2005.
Noninterest-bearing deposits increased by $4.3 million when compared to March 31,
2006.
    
    Over the same period, interest-bearing deposits grew $53.3 million to
$1.4 billion at June 30, 2006 compared to December 31, 2005.
    
    Core deposits, which include demand deposit, interest-bearing demand
deposit, money market, and savings accounts, decreased $55.1 million to $566.0
million at June 30, 2006 from $621.0 million at December 31, 2005.
    
    Certificates of deposit under $100,000 increased $5.1 million from
December 31, 2005 to $757.1 million at June 30, 2006.
    
    Certificates of deposit over $100,000 and public funds increased $110.7
million from December 31, 2005 to $261.0 million at June 30, 2006. The majority of
the increase was a result of increased brokered certificates of deposit coupled with
the migration of balances in core deposits to certificates of deposits as a result
of the increase in rates. Interest rates on brokered certificates of deposit, in
many instances, are less than advertised interest rates for retail certificates of
deposit in the market.
  PAGE 33




---



##### Table of Contents



2006
    
    
    2005(In thousands)Federal funds purchased
    
    $
    
    
    
    $
    68,000Securities sold under agreements to
repurchase
    
    
    221,603
    
    
    
    264,808Federal Home Loan Bank advances
    
    
    250,000
    
    
    
    150,000Junior subordinated debt owed to
unconsolidated trusts
    
    
    55,672
    
    
    
    55,672Total
    
    $
    527,275
    
    
    $
    538,480
    Capital Resources
    PAGE 34




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##### Table of Contents



At June 30, 2006Minimum Required
    
    Minimum RequiredActual
    
    for Capital Adequacy
    
    to be Well CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)Total capital to risk-weighted assets
Company
    
    $
    299,303
    
    
    
    17.4
    %
    
    $
    137,341
    
    
    
    8.0
    %
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    218,997    
    
    
    12.8
    
    
    
    136,556
    
    
    
    8.0
    
    
    $
    170,695
    
    
    
    10.0
    %Tier I capital to risk-weighted assets
Company
    
    
    278,429
    
    
    
    16.2
    
    
    
    68,671
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    198,123
    
    
    
    11.6
    
    
    
    68,278
    
    
    
    4.0
    
    
    
    102,417
    
    
    
    6.0Tier I capital to average assets
Company
    
    
    278,429
    
    
    
    12.0
    
    
    
    92,789
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    198,123
    
    
    
    8.6
    
    
    
    92,255
    
    
    
    4.0
    
    
    
    115,319
    
    
    
    5.0
 At December 31, 2005Minimum Required
    
    Minimum RequiredActual
    
    for Capital Adequacy
    
    to be Well CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)Total capital to risk-weighted assets
Company
    
    $
    292,168
    
    
    
    18.1
    %
    
    $
    129,381
    
    
    
    8.0
    %
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    205,866
    
    
    
    12.8
    
    
    
    128,844
    
    
    
    8.0
    
    
    $
    161,055
    
    
    
    10.0
    %Tier I capital to risk-weighted assets
Company
    
    
    274,408
    
    
    
    17.0
    
    
    
    64,691
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    188,106
    
    
    
    11.7
    
    
    
    64,422
    
    
    
    4.0
    
    
    
    96,633
    
    
    
    6.0Tier I capital to average assets
Company
    
    
    274,408
    
    
    
    12.2
    
    
    
    90,083
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    188,106
    
    
    
    8.4
    
    
    
    89,635
    
    
    
    4.0
    
    
    
    112,044
    
    
    
    5.0
 Liquidity
   PAGE 35




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PAGE 36




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ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
 Interest Rate Sensitivity Analysis
  Change in Net Interest Income Over One Year HorizonJune 30, 2006
    
    December 31, 2005
    
    GuidelineMaximumDollar
    
    %
    
    Dollar
    
    %
    
    %Change
    
    Change
    
    Change
    
    Change
    
    Change(Dollars in thousands)+200 bp
    
    $
    (719
    )
    
    
    (1.08
    )%
    
    $
    167
    
    
    
    0.26
    %
    
    
    (15.0
    )%+100 bp
    
    
    (228
    )
    
    
    (0.34
    )
    
    
    99
    
    
    
    0.15
    
    
    
    (15.0
    )-100 bp
    
    
    1,456
    
    
    
    2.19
    
    
    
    696
    
    
    
    1.09
    
    
    
    (15.0
    )-200 bp
    
    
    (148
    )
    
    
    (0.22
    )
    
    
    (3,481
    )
    
    
    (5.44
    )
    
    
    (15.0
    )
    PAGE 37




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##### Table of Contents



ITEM 4  CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls Over Financial Reporting
  PAGE 38




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##### Table of Contents



SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
     
    
    Managements ability to reduce and effectively manage interest rate risk and the impact
of interest rates in general on the volatility of the Companys net interest income;
    
    Fluctuations in the value of the Companys investment securities;
    
    The ability to attract and retain senior management experienced in banking and financial services;
    
    The sufficiency of 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 Banks loan portfolio and individual large loans;
    
    The effects of competition from other commercial banks, thrifts, mortgage banking firms,
consumer
 PAGE 39




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##### Table of Contents




    
    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;
    
    The ability to successfully acquire low cost deposits or funding;
    
    The ability to successfully execute strategies to increase noninterest income;
    
    The ability to successfully to grow non-commercial real estate loans;
    
    The ability of the Company to successfully integrate the Royal American Corporation acquisition;
    
    The ability of the Company to fully realize expected cost savings and revenues in
connection with the Royal American Corporation acquisition, or the ability to realize them
on a timely basis;
    
    The risk of borrower, depositor, and other customer attrition after the Royal American
Corporation acquisition is completed;
    
    Changes in the economic environment, competition, or other factors that may influence the
anticipated growth rate of loans and deposits, the quality of the loan portfolio and loan
and deposit pricing, and the Companys ability to successfully pursue acquisition and
expansion strategies and integrate any acquired companies;
    
    The impact from liabilities arising from legal or administrative proceedings on the
financial condition of the Company;
    
    Possible administrative or enforcement actions of banking regulators in connection with
any material failure of the Bank to comply with banking laws, rules or regulations;
    
    Possible administrative or enforcement actions of the Securities and Exchange Commission
(the SEC) in connection with the SEC inquiry of the restatement of the Companys September
30, 2002 financial statements;
    
    Governmental monetary and fiscal policies, as well as legislative and regulatory changes,
that may result in the imposition of costs and constraints on the Company through higher
FDIC insurance premiums, significant fluctuations in market interest rates, increases in
capital requirements, and operational limitations;
    
    Changes in general economic or industry conditions, nationally or in the communities in
which the Company conducts business;
 PAGE 40




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##### Table of Contents




    
    Changes in accounting principles, policies, or guidelines affecting the businesses
conducted by the Company;
    
    Acts of war or terrorism; and
    
    Other economic, competitive, governmental, regulatory, and technical factors affecting
the Companys operations, products, services, and prices.
   PAGE 41




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##### Table of Contents



PART II
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
   Nominee
    
    For
    
    WithheldE.V. Silveri
    
    
    18,061,663
    
    
    
    863,866James J. Giancola
    
    
    18,101,909
    
    
    
    823,620Angelo DiPaolo
    
    
    17,573,072
    
    
    
    1,352,457Barry I. Forrester, CFA
    
    
    18,306,971
    
    
    
    618,558Robert J. Genetski, PhD
    
    
    18,020,401
    
    
    
    905,128Gerald F. Hartley, CPA
    
    
    18,133,251
    
    
    
    792,278Homer J. Livingston, Jr.
    
    
    18,169,547
    
    
    
    755,982Joseph Rizza
    
    
    14,817,812
    
    
    
    4,107,717Kenneth Velo
    
    
    18,264,419
    
    
    
    661,110Leon Wolin
    
    
    17,884,032
    
    
    
    1,041,497
  Votes For:
    
    
    11,346,498Against:
    
    
    3,934,153Abstain:
    
    
    173,742Nonvotes:
    
    
    3,471,136
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##### Table of Contents



Votes For:
    
    
    17,717,681Against:
    
    
    1,176,099Abstain:
    
    
    31,749
  Votes For:
    
    
    18,892,015Against:
    
    
    16,087Abstain:
    
    
    17,427
 
 Item 5. Other Information
  
 Item 6. Exhibits
  2.1
    
    Stock Purchase Agreement between Western Illinois Bancshares, Inc. and
Midwest Banc Holdings, Inc. (incorporated by reference to Registrants
Report on Form 8-K filed June 1, 2005, File No. 001-13735).2.2
    
    Amendment to Stock Purchase Agreement between Western Illinois
Bancshares, Inc. and Midwest Banc Holdings, Inc. (incorporated by
reference to Registrants Form 10-Q for the quarter ended June 30,
2005, File No. 001-13735).2.3
    
    Second Amendment to Stock Purchase Agreement between Western Illinois
Bancshares, Inc. and Midwest Banc Holdings, Inc. (incorporated by
reference to Registrants Report on Form 8-K filed August 29, 2005,
File No. 001-13735).2.4
    
    Third Amendment to Stock Purchase Agreement between Western Illinois
Bancshares, Inc. and Midwest Banc Holdings, Inc. (incorporated by
reference to Registrants Report on Form 8-K filed October 5, 2005,
File No. 001-13735).2.5
    
    Fourth Amendment to Stock Purchase Agreement between Western Illinois
Bancshares, Inc. and Midwest Banc Holdings, Inc. (incorporated by
reference to Registrants Report on Form 8-K filed November 3, 2005,
File No. 001-13735).2.6
    
    Agreement and Plan of Merger, dated as of February 8, 2006, by and
between Midwest Banc Holdings, Inc. and Royal American Corporation
(incorporated by reference to Registrants Report on Form 8-K filed
February 8, 2006, File No. 001-13735).2.7
    
    Form of Stockholder Voting Agreement, dated as of February 8, 2006, by
and among Midwest Banc Holdings, Inc. and certain stockholders of
Royal American Corporation (incorporated by reference to Registrants
Report on Form 8-K filed February 8, 2006, File No. 001-13735).3.1
    
    Amended and Restated Certificate of Incorporation, as amended.3.2
    
    Amended and Restated By-laws, filed September 27, 2005 (incorporated
by reference to Registrants Report on Form 8-K filed September 27,
2005, File No. 001-13735).
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##### Table of Contents



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.*10.4
    
    Form of Transitional Employment Agreements (incorporated by
reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).10.5
    
    Lease dated as of December 24, 1958, between Western National Bank
of Cicero and Midwest Bank and Trust Company, as amended
(incorporated by reference to Registrants Registration Statement
on Form S-1, Registration No. 333-42827).10.6
    
    Britannica Centre Lease, dated as of May 1, 1994, between Chicago
Title and Trust Company, as Trustee under Trust Agreement dated
November 2, 1977 and known as Trust No. 1070932 and Midwest Bank
and Trust Company (incorporated by reference to Registrants
Registration Statement on Form S-1, Registration No. 333-42827).10.7
    
    Lease dated as of March 20, 1996 between Grove Lodge No. 824
Ancient Free and Accepted Masons and Midwest Bank of Hinsdale
(incorporated by reference to Registrants Registration Statement
on Form S-1, Registration No. 333-42827).10.8
    
    Office Lease, undated, between Grove Lodge No. 824 Ancient Free and
Accepted Masons and Midwest Bank of Hinsdale (incorporated by
reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).*10.15
    
    Form of Supplemental Executive Retirement Agreement (incorporated
by reference to Registrants Form 10-Q for the quarter ended
September 30, 2001, File No. 001-13735).*10.16
    
    Form of Transitional Employment Agreement (Executive Officer Group)
(incorporated by reference to Registrants Form 10-Q for the
quarter ended September 30, 2001, File No. 001-13735).10.17
    
    Form of Restricted Stock Award Agreement for Officers, Restricted
Stock Grant Notice for Officers, Incentive and Nonqualified Stock
Options Award Agreements, and Stock Option Grant Notice for
Officers (incorporated by reference to Registrants Report on Form
8-K filed August 29, 2005, File No. 001-13735).*10.18
    
    Form of Supplemental Executive Retirement Agreement and First
Amendment to the Form of Supplemental Executive Retirement
Agreement (incorporated by reference to Registrants Report on Form
8-K filed October 28, 2005, File No. 001-13735).10.19
    
    Form of Restricted Stock Award Agreement for Non-employee Directors
and Restricted Stock Grant Notice for Non-employee Directors
(incorporated by reference to Registrants Report on Form 8-K filed
October 28, 2005, File No. 001-13735).10.21
    
    Lease dated as of April 29, 1976, between 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).
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##### Table of Contents



10.24
    
    Loan Agreement as of March 24, 2006, between the Company and M&I
Marshall & Ilsley Bank (incorporated by reference to Registrants
Report on Form 8-K filed March 24, 2006, 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 Report on Form 8-K dated
June 28, 2005, File No. 001-13735).10.29
    
    Midwest Banc Holdings, Inc. Directors Deferred Compensation Plan
(incorporated by reference to Registrants Report on Form 8-K filed
December 16, 2005, File No. 001-13735).10.30
    
    Amendment to Employment Agreement as of September 28, 2004 between
the Company and the Chief Executive Officer (incorporated by
reference to Registrants Report on Form 8-K filed March 24, 2006,
File No. 001-13735).*10.31
    
    Amended and Restated Employment Agreement dated February 8, 2006 by
and between Royal American Bank and Jay Fritz, assumed by the
Company as of July 1, 2006 (incorporated by reference to
Registrants Report on Form 8-K filed July 7, 2006, File No.
001-13735).31.1
    
    Rule 13a-14(a) Certification of Principal Executive Officer.31.2
    
    Rule 13a-14(a) Certification of Principal Financial Officer.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from the
Companys Chief Executive Officer and Chief Financial Officer.
 
 *
    
    Indicates management contracts or compensatory plans or arrangements required to be filed as
an exhibit. PAGE 45




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##### Table of Contents



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



2.1
    
    Stock Purchase Agreement between Western Illinois Bancshares, Inc.
and Midwest Banc Holdings, Inc. (incorporated by reference to
Registrants Report on Form 8-K filed June 1, 2005, File No.
001-13735).2.2
    
    Amendment to Stock Purchase Agreement between Western Illinois
Bancshares, Inc. and Midwest Banc Holdings, Inc. (incorporated by
reference to Registrants Form 10-Q for the quarter ended June 30,
2005, File No. 001-13735).2.3
    
    Second Amendment to Stock Purchase Agreement between Western
Illinois Bancshares, Inc. and Midwest Banc Holdings, Inc.
(incorporated by reference to Registrants Report on Form 8-K filed
August 29, 2005, File No. 001-13735).2.4
    
    Third Amendment to Stock Purchase Agreement between Western Illinois
Bancshares, Inc. and Midwest Banc Holdings, Inc. (incorporated by
reference to Registrants Report on Form 8-K filed October 5, 2005,
File No. 001-13735).2.5
    
    Fourth Amendment to Stock Purchase Agreement between Western
Illinois Bancshares, Inc. and Midwest Banc Holdings, Inc.
(incorporated by reference to Registrants Report on Form 8-K filed
November 3, 2005, File No. 001-13735).2.6
    
    Agreement and Plan of Merger, dated as of February 8, 2006, by and
between Midwest Banc Holdings, Inc. and Royal American Corporation
(incorporated by reference to Registrants Report on Form 8-K filed
February 8, 2006, File No. 001-13735).2.7
    
    Form of Stockholder Voting Agreement, dated as of February 8, 2006,
by and among Midwest Banc Holdings, Inc. and certain stockholders of
Royal American Corporation (incorporated by reference to
Registrants Report on Form 8-K filed February 8, 2006, File No.
001-13735).3.1
    
    Amended and Restated Certificate of Incorporation, as amended.3.2
    
    Amended and Restated By-laws, filed September 27, 2005 (incorporated
by reference to Registrants Report on Form 8-K filed September 27,
2005, File No. 001-13735).4.1
    
    Specimen Common Stock Certificate (incorporated by reference to
Registrants Registration Statement on Form S-1, Registration No.
333-42827).4.2
    
    Certain instruments defining the rights of the holders of long-term
debt of the Company and certain of its subsidiaries, none of which
authorize a total amount of indebtedness in excess of 10% of the
total assets of the Company and its subsidiaries on a consolidated
basis, have not been filed as Exhibits. The Company hereby agrees to
furnish a copy of any of these agreements to the SEC upon request.*10.1
    
    Midwest Banc Holdings, Inc. Stock and Incentive Plan.*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).




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##### Table of Contents



10.6
    
    Britannica Centre Lease, dated as of May 1, 1994, between Chicago
Title and Trust Company, as Trustee under Trust Agreement dated
November 2, 1977 and known as Trust No. 1070932 and Midwest Bank
and Trust Company (incorporated by reference to Registrants
Registration Statement on Form S-1, Registration No. 333-42827).10.7
    
    Lease dated as of March 20, 1996 between Grove Lodge No. 824
Ancient Free and Accepted Masons and Midwest Bank of Hinsdale
(incorporated by reference to Registrants Registration Statement
on Form S-1, Registration No. 333-42827).10.8
    
    Office Lease, undated, between Grove Lodge No. 824 Ancient Free and
Accepted Masons and Midwest Bank of Hinsdale (incorporated by
reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).*10.15
    
    Form of Supplemental Executive Retirement Agreement (incorporated
by reference to Registrants Form 10-Q for the quarter ended
September 30, 2001, File No. 001-13735).*10.16
    
    Form of Transitional Employment Agreement (Executive Officer Group)
(incorporated by reference to Registrants Form 10-Q for the
quarter ended September 30, 2001, File No. 001-13735).10.17
    
    Form of Restricted Stock Award Agreement for Officers, Restricted
Stock Grant Notice for Officers, Incentive and Nonqualified Stock
Options Award Agreements, and Stock Option Grant Notice for
Officers (incorporated by reference to Registrants Report on Form
8-K filed August 29, 2005, File No. 001-13735).*10.18
    
    Form of Supplemental Executive Retirement Agreement and First
Amendment to the Form of Supplemental Executive Retirement
Agreement (incorporated by reference to Registrants Report on Form
8-K filed October 28, 2005, File No. 001-13735).10.19
    
    Form of Restricted Stock Award Agreement for Non-employee Directors
and Restricted Stock Grant Notice for Non-employee Directors
(incorporated by reference to Registrants Report on Form 8-K filed
October 28, 2005, File No. 001-13735).10.21
    
    Lease dated as of April 29, 1976, between 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 March 24, 2006, between the Company and M&I
Marshall & Ilsley Bank (incorporated by reference to Registrants
Report on Form 8-K filed March 24, 2006, 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




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10.29
    
    Midwest Banc Holdings, Inc. Directors Deferred Compensation Plan
(incorporated by reference to Registrants Report on Form 8-K filed
December 16, 2005, File No. 001-13735).10.30
    
    Amendment to Employment Agreement as of September 28, 2004 between
the Company and the Chief Executive Officer (incorporated by
reference to Registrants Report on Form 8-K filed March 24, 2006,
File No. 001-13735).*10.31
    
    Amended and Restated Employment Agreement dated February 8, 2006 by
and between Royal American Bank and Jay Fritz, assumed by the
Company as of July 1, 2006 (incorporated by reference to
Registrants Report on Form 8-K filed July 7, 2006, File No.
001-13735).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.