##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2008
 Commission File Number: 001-13735
 MIDWEST BANC HOLDINGS, INC.
 (Exact name of Registrant as specified in its charter.)
 Delaware
    
    36-3252484(State or other jurisdiction of
    
    (I.R.S. Employer Identification Number)incorporation or organization)501 W. North Ave.Melrose Park, Illinois
    
    60160(Address of principal executive offices)
    
    (Zip code)
 (708) 865-1053  (Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Class
    
    
    Outstanding at November 10, 2008Common, par value $0.01
    
    
    27,858,752




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##### 



MIDWEST BANC HOLDINGS, INC.
 Form 10-Q
 Table of Contents
 Page NumberPART IItem 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    46Item 4. Controls and Procedures
    
    
    47PART IIItem 1. Legal Proceedings
    
    
    51Item 1A. Risk Factors
    
    
    51Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    53Item 3. Defaults upon Senior Securities
    
    
    53Item 4. Submission of Matters to a Vote of Security Holders
    
    
    53Item 5. Other Information
    
    
    53Item 6. Exhibits
    
    
    54Signature Page
    
    
    58EX-31.1EX-31.2EX-32.1




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except for share data)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCash
    
    $
    111,769
    
    
    $
    70,111Federal funds sold and other short-term investments
    
    
    1,674
    
    
    
    14,388Total cash and cash equivalents
    
    
    113,443
    
    
    
    84,499Securities available-for-sale (securities pledged to creditors:
$312,373 at September 30, 2008 and $295,710 at December 31, 2007)
    
    
    618,215
    
    
    
    710,881Securities held-to-maturity (fair value: $30,121 at September
30, 2008 and $36,912 at December 31, 2007)
    
    
    30,817
    
    
    
    37,601Total securities
    
    
    649,032
    
    
    
    748,482Federal Reserve Bank and Federal Home Loan Bank stock, at cost
    
    
    31,698
    
    
    
    29,264Loans
    
    
    2,494,225
    
    
    
    2,474,327Allowance for loan losses
    
    
    (39,428
    )
    
    
    (26,748
    )Net loans
    
    
    2,454,797
    
    
    
    2,447,579Cash surrender value of life insurance
    
    
    83,800
    
    
    
    81,166Premises and equipment, net
    
    
    38,216
    
    
    
    41,821Foreclosed properties
    
    
    8,025
    
    
    
    2,220Core deposit and other intangibles, net
    
    
    15,274
    
    
    
    17,044Goodwill
    
    
    78,862
    
    
    
    160,407Other assets
    
    
    110,230
    
    
    
    80,300Total assets
    
    $
    3,583,377
    
    
    $
    3,692,782LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesDepositsNoninterest-bearing
    
    $
    334,545
    
    
    $
    321,317Interest-bearing
    
    
    2,178,459
    
    
    
    2,136,831Total deposits
    
    
    2,513,004
    
    
    
    2,458,148Federal funds purchased and FRB discount window advances
    
    
    
    
    
    
    81,000Revolving note payable
    
    
    20,600
    
    
    
    2,500Securities sold under agreements to repurchase
    
    
    297,650
    
    
    
    283,400Advances from the Federal Home Loan Bank
    
    
    380,000
    
    
    
    323,439Junior subordinated debentures
    
    
    60,774
    
    
    
    60,724Subordinated debt
    
    
    15,000
    
    
    
    Term note payable
    
    
    55,000
    
    
    
    70,000Due to broker
    
    
    438
    
    
    
    1,539Other liabilities
    
    
    33,674
    
    
    
    36,868Total liabilities
    
    
    3,376,140
    
    
    
    3,317,618Commitments and contingencies (see note 8)Stockholders EquityPreferred stock, $0.01 par value, $2,500 liquidation preference,
1,000,000 shares authorized; 17,250 shares issued and outstanding
at September 30, 2008 and December 31, 2007
    
    
    
    
    
    
    Common stock, $0.01 par value, 64,000,000 shares authorized;
29,502,788 shares issued and 27,858,752 outstanding at
September 30, 2008 and 29,275,687 shares issued and 27,803,794
outstanding at December 31, 2007
    
    
    295
    
    
    
    293Additional paid-in capital
    
    
    303,221
    
    
    
    300,762Retained earnings
    
    
    (69,850
    )
    
    
    102,762Accumulated other comprehensive loss
    
    
    (11,693
    )
    
    
    (13,917
    )Treasury stock, at cost (shares at 1,644,036 September 30, 2008
and 1,471,893 shares at December 31, 2007)
    
    
    (14,736
    )
    
    
    (14,736
    )Total stockholders equity
    
    
    207,237
    
    
    
    375,164Total liabilities and stockholders equity
    
    $
    3,583,377
    
    
    $
    3,692,782
 See accompanying notes to unaudited consolidated financial statements.
 PAGE 1




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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Interest IncomeLoans
    
    $
    37,364
    
    
    $
    37,566
    
    
    $
    115,562
    
    
    $
    110,447Loans held for sale
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    89SecuritiesTaxable
    
    
    7,739
    
    
    
    8,609
    
    
    
    25,776
    
    
    
    24,901Exempt from federal income taxes
    
    
    574
    
    
    
    462
    
    
    
    1,765
    
    
    
    1,624Trading securities
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Dividends from Federal Reserve and Federal Home Loan Bank stock
    
    
    184
    
    
    
    227
    
    
    
    551
    
    
    
    681Federal funds sold and other short-term investments
    
    
    27
    
    
    
    297
    
    
    
    273
    
    
    
    688Total interest income
    
    
    45,888
    
    
    
    47,174
    
    
    
    143,927
    
    
    
    138,432Interest ExpenseDeposits
    
    
    15,301
    
    
    
    18,634
    
    
    
    50,501
    
    
    
    55,115Federal funds purchased and FRB discount window advances
    
    
    563
    
    
    
    64
    
    
    
    2,050
    
    
    
    1,156Revolving note payable
    
    
    96
    
    
    
    18
    
    
    
    270
    
    
    
    18Securities sold under agreements to repurchase
    
    
    3,338
    
    
    
    3,137
    
    
    
    9,998
    
    
    
    7,859Advances from the Federal Home Loan Bank
    
    
    2,779
    
    
    
    3,640
    
    
    
    8,698
    
    
    
    10,958Junior subordinated debentures
    
    
    864
    
    
    
    1,334
    
    
    
    2,785
    
    
    
    3,950Subordinated debt
    
    
    229
    
    
    
    
    
    
    
    464
    
    
    
    Term note payable
    
    
    565
    
    
    
    
    
    
    
    2,027
    
    
    
    Total interest expense
    
    
    23,735
    
    
    
    26,827
    
    
    
    76,793
    
    
    
    79,056Net interest income
    
    
    22,153
    
    
    
    20,347
    
    
    
    67,134
    
    
    
    59,376Provision for loan losses
    
    
    41,950
    
    
    
    1,800
    
    
    
    51,765
    
    
    
    3,481Net interest income after provision for loan losses
    
    
    (19,797
    )
    
    
    18,547
    
    
    
    15,369
    
    
    
    55,895Noninterest IncomeService charges on deposit accounts
    
    
    1,918
    
    
    
    1,535
    
    
    
    5,834
    
    
    
    4,744Net (losses) gains on securities transactions
    
    
    (16,652
    )
    
    
    6
    
    
    
    (16,596
    )
    
    
    23Impairment loss on securities
    
    
    (47,801
    )
    
    
    
    
    
    
    (65,387
    )
    
    
    (Losses) gains on sales of loans
    
    
    (75
    )
    
    
    41
    
    
    
    (75
    )
    
    
    441Insurance and brokerage commissions
    
    
    448
    
    
    
    685
    
    
    
    1,691
    
    
    
    1,799Trust
    
    
    451
    
    
    
    453
    
    
    
    1,382
    
    
    
    1,349Increase in cash surrender value of life insurance
    
    
    911
    
    
    
    736
    
    
    
    2,634
    
    
    
    2,192Gain on sale of property
    
    
    
    
    
    
    
    
    
    
    15,196
    
    
    
    Other
    
    
    288
    
    
    
    244
    
    
    
    993
    
    
    
    768Total noninterest income (loss)
    
    
    (60,512
    )
    
    
    3,700
    
    
    
    (54,328
    )
    
    
    11,316Noninterest ExpenseSalaries and employee benefits
    
    
    12,515
    
    
    
    9,740
    
    
    
    36,570
    
    
    
    30,550Occupancy and equipment
    
    
    3,211
    
    
    
    2,362
    
    
    
    9,203
    
    
    
    6,741Professional services
    
    
    2,016
    
    
    
    1,297
    
    
    
    5,350
    
    
    
    3,612Loss on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    7,121
    
    
    
    Marketing
    
    
    575
    
    
    
    538
    
    
    
    1,864
    
    
    
    1,696Foreclosed properties
    
    
    24
    
    
    
    4
    
    
    
    266
    
    
    
    36Amortization of intangible assets
    
    
    590
    
    
    
    351
    
    
    
    1,771
    
    
    
    1,099Merger related
    
    
    77
    
    
    
    
    
    
    
    271
    
    
    
    (21
    )Goodwill impairment
    
    
    80,000
    
    
    
    
    
    
    
    80,000
    
    
    
    Other
    
    
    4,288
    
    
    
    1,953
    
    
    
    9,857
    
    
    
    6,257Total noninterest expense
    
    
    103,296
    
    
    
    16,245
    
    
    
    152,273
    
    
    
    49,970Income (loss) before income taxes
    
    
    (183,605
    )
    
    
    6,002
    
    
    
    (191,232
    )
    
    
    17,241Provision (benefit) for income taxes
    
    
    (23,891
    )
    
    
    1,166
    
    
    
    (28,530
    )
    
    
    2,886Net income (loss)
    
    
    (159,714
    )
    
    
    4,836
    
    
    
    (162,702
    )
    
    
    14,355Preferred stock dividends
    
    
    835
    
    
    
    
    
    
    
    2,506
    
    
    
    Net income (loss) available to common stockholders
    
    $
    (160,549
    )
    
    $
    4,836
    
    
    $
    (165,208
    )
    
    $
    14,355Basic earnings per share
    
    $
    (5.76
    )
    
    $
    0.20
    
    
    $
    (5.93
    )
    
    $
    0.58Diluted earnings per share
    
    $
    (5.76
    )
    
    $
    0.20
    
    
    $
    (5.93
    )
    
    $
    0.58Cash dividends declared per common share
    
    $
    
    
    
    $
    0.13
    
    
    $
    0.26
    
    
    $
    0.39
 See accompanying notes to unaudited consolidated financial statements.
 PAGE 2




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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (Unaudited)
For the Nine Months Ended September 30, 2008 and 2007
(In thousands, except share and per share data)
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    TotalPreferred
    
    
    Common
    
    
    Paid in
    
    
    Retained
    
    
    Comprehensive
    
    
    Treasury
    
    
    StockholdersStock
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    Stock
    
    
    EquityBalance, December 31, 2006
    
    $
    
    
    
    $
    255
    
    
    $
    200,797
    
    
    $
    97,807
    
    
    $
    (6,273
    )
    
    $
    (5,344
    )
    
    $
    287,242Cash dividends declared ($0.39 per share)
on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,746
    )
    
    
    
    
    
    
    
    
    
    
    (9,746
    )Issuance of common stock upon
exercise of 27,443 stock options,
net of tax benefit
    
    
    
    
    
    
    
    
    
    
    321
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    321Purchase of 321,500 shares of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,963
    )
    
    
    (4,963
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    2,325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,325Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,355
    
    
    
    
    
    
    
    
    
    
    
    14,355Net decrease in fair value of
securities classified as available-
for-sale, net of income taxes and
reclassification adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,301
    )
    
    
    
    
    
    
    (4,301
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,054Balance, September 30, 2007
    
    $
    
    
    
    $
    255
    
    
    $
    203,443
    
    
    $
    102,416
    
    
    $
    (10,574
    )
    
    $
    (10,307
    )
    
    $
    285,233Balance, December 31, 2007
    
    $
    
    
    
    $
    293
    
    
    $
    300,762
    
    
    $
    102,762
    
    
    $
    (13,917
    )
    
    $
    (14,736
    )
    
    $
    375,164Cash dividends declared ($145.3125 per
share) on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,506
    )
    
    
    
    
    
    
    
    
    
    
    (2,506
    )Cash dividends declared ($0.26 per share)
on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,404
    )
    
    
    
    
    
    
    
    
    
    
    (7,404
    )Issuance of common stock upon
exercise of 16,500 stock options,
net of tax benefit
    
    
    
    
    
    
    
    
    
    
    178
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    178Issuance of shares restricted stock
    
    
    
    
    
    
    2
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    2,283
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,283Comprehensive incomeNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (162,702
    )
    
    
    
    
    
    
    
    
    
    
    (162,702
    )Prior service cost resulting from the
application of SFAS No. 87,
net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (449
    )
    
    
    
    
    
    
    (449
    )Net increase in fair value of
securities classified as available-
for-sale, net of income taxes and
reclassification adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,673
    
    
    
    
    
    
    
    2,673Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (160,478
    )Balance, September 30, 2008
    
    $
    
    
    
    $
    295
    
    
    $
    303,221
    
    
    $
    (69,850
    )
    
    $
    (11,693
    )
    
    $
    (14,736
    )
    
    $
    207,237
 See accompanying notes to unaudited consolidated financial statements.
 PAGE 3




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 2008 and 2007
(In thousands)
 2008
    
    
    2007Cash flows from operating activitiesNet (loss) income
    
    $
    (162,702
    )
    
    $
    14,355Adjustments to reconcile net (loss) income to net cash provided by operating activitiesDepreciation
    
    
    3,107
    
    
    
    2,332Provision for loan losses
    
    
    51,765
    
    
    
    3,481Amortization of core deposit and other intangibles
    
    
    630
    
    
    
    920Goodwill impairment charge
    
    
    80,000
    
    
    
    Amortization of premiums and discounts on securities, net
    
    
    431
    
    
    
    643Realized loss (gain) on sale of securities, net
    
    
    16,596
    
    
    
    (23
    )Impairment loss on securities
    
    
    65,387
    
    
    
    Net loss (gain) on sales of loans
    
    
    75
    
    
    
    (441
    )Originations of loans held for sale
    
    
    
    
    
    
    (40,800
    )Proceeds from sales of loans held for sale
    
    
    
    
    
    
    43,913Gain on sale of property
    
    
    (15,196
    )
    
    
    Loss on early extinguishment of debt
    
    
    7,121
    
    
    
    Increase in cash surrender value of life insurance
    
    
    (2,634
    )
    
    
    (2,192
    )Deferred income taxes
    
    
    (14,259
    )
    
    
    4,918Loss on disposition of foreclosed properties, net
    
    
    222
    
    
    
    12Amortization of deferred stock based compensation
    
    
    2,283
    
    
    
    2,267Change in other assets
    
    
    (16,774
    )
    
    
    (5,477
    )Change in other liabilities
    
    
    (436
    )
    
    
    (9,035
    )Net cash provided by operating activities
    
    
    15,616
    
    
    
    14,873Cash flows from investing activitiesSales of securities available-for-sale
    
    
    108,770
    
    
    
    97,571Sales of securities held-to-maturity
    
    
    4,443
    
    
    
    Redemption of Federal Home Loan Bank stock
    
    
    1,000
    
    
    
    Maturities of securities available-for-sale
    
    
    107,585
    
    
    
    20,592Principal payments on securities available-for-sale
    
    
    42,496
    
    
    
    56,019Principal payments on securities held-to-maturity
    
    
    2,430
    
    
    
    4,816Purchases of securities available-for-sale
    
    
    (244,043
    )
    
    
    (252,572
    )Purchases of Federal Reserve Bank and Federal Home Loan Bank stock
    
    
    (4,535
    )
    
    
    Loan originations and principal collections, net
    
    
    (68,969
    )
    
    
    (55,807
    )Purchase of mortgage loans
    
    
    
    
    
    
    (5,776
    )Sale of mortgage loans
    
    
    5,789
    
    
    
    Proceeds from sale of property
    
    
    18,259
    
    
    
    Proceeds from disposition of foreclosed properties
    
    
    244
    
    
    
    225Additions to property and equipment
    
    
    (2,694
    )
    
    
    (2,840
    )Net cash used in investing activities
    
    
    (29,225
    )
    
    
    (137,772
    )Cash flows from financing activitiesNet increase in deposits
    
    
    55,185
    
    
    
    36,488Proceeds from borrowings
    
    
    234,600
    
    
    
    102,500Repayments on borrowings
    
    
    (167,075
    )
    
    
    (100,000
    )Preferred cash dividends paid
    
    
    (2,506
    )
    
    
    Common cash dividends paid
    
    
    (11,076
    )
    
    
    (9,774
    )Change in federal funds purchased, FRB discount window advances, and securities sold under
agreements to repurchase
    
    
    (66,750
    )
    
    
    62,039Repurchase of common stock
    
    
    
    
    
    
    (4,963
    )Proceeds from issuance of common under stock and incentive plan
    
    
    175
    
    
    
    281Net cash provided by financing activities
    
    
    42,553
    
    
    
    86,571Increase (decrease) in cash and cash equivalents
    
    
    28,944
    
    
    
    (36,328
    )Cash and cash equivalents at beginning of period
    
    
    84,499
    
    
    
    100,532Cash and cash equivalents at end of period
    
    $
    113,443
    
    
    $
    64,204Supplemental disclosuresCash paid during period for:Interest
    
    $
    78,685
    
    
    $
    75,730Income taxes, net
    
    
    2,700
    
    
    
    6,219
 See accompanying notes to unaudited consolidated financial statements.
 PAGE 4




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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  BASIS OF PRESENTATION
   NOTE 2  NEW ACCOUNTING PRONOUNCEMENTS
   PAGE 5




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  NOTE 3  BUSINESS COMBINATIONS
    Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2007
    
    2007Net interest income
    
    $
    25,362
    
    
    $
    74,235Net income
    
    
    555
    
    
    
    13,115Basic earnings per share
    
    
    0.02
    
    
    
    0.46Diluted earnings per share
    
    
    0.02
    
    
    
    0.46
  PAGE 6




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 4  SECURITIES
  September 30, 2008Held-to-Maturity
    
    
    Available-for-Sale
    
    
    Total% ofAmortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    AmortizedCost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost(Dollars in thousands)Obligations of the U.S. Treasury and of
U.S. government-sponsored entities
    
    $
    
    
    
    $
    
    
    
    $
    267,101
    
    
    $
    264,762
    
    
    $
    267,101
    
    
    $
    264,762
    
    
    
    40.0
    %Obligations of states and political subdivisions
    
    
    1,252
    
    
    
    1,237
    
    
    
    57,475
    
    
    
    55,375
    
    
    
    58,727
    
    
    
    56,612
    
    
    
    8.8Mortgage-backed securities
    
    
    29,565
    
    
    
    28,884
    
    
    
    289,983
    
    
    
    286,283
    
    
    
    319,548
    
    
    
    315,167
    
    
    
    47.9Equity securities (1)
    
    
    
    
    
    
    
    
    
    
    2,749
    
    
    
    2,749
    
    
    
    2,749
    
    
    
    2,749
    
    
    
    0.4Other bonds
    
    
    
    
    
    
    
    
    
    
    19,214
    
    
    
    9,046
    
    
    
    19,214
    
    
    
    9,046
    
    
    
    2.9Total
    
    $
    30,817
    
    
    $
    30,121
    
    
    $
    636,522
    
    
    $
    618,215
    
    
    $
    667,339
    
    
    $
    648,336
    
    
    
    100.0
    %
 December 31, 2007Held-to-Maturity
    
    
    Available-for-Sale
    
    
    Total% ofAmortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    AmortizedCost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost(Dollars in thousands)Obligation of the U.S. Treasury and of
U.S. government-sponsored entities
    
    $
    
    
    
    $
    
    
    
    $
    181,983
    
    
    $
    183,613
    
    
    $
    181,983
    
    
    $
    183,613
    
    
    
    23.6
    %Obligations of states and political subdivisions
    
    
    1,254
    
    
    
    1,268
    
    
    
    60,985
    
    
    
    61,400
    
    
    
    62,239
    
    
    
    62,668
    
    
    
    8.1Mortgage-backed securities
    
    
    36,347
    
    
    
    35,644
    
    
    
    383,633
    
    
    
    379,040
    
    
    
    419,980
    
    
    
    414,684
    
    
    
    54.4Equity securities
    
    
    
    
    
    
    
    
    
    
    85,139
    
    
    
    65,979
    
    
    
    85,139
    
    
    
    65,979
    
    
    
    11.0Other bonds
    
    
    
    
    
    
    
    
    
    
    22,095
    
    
    
    20,849
    
    
    
    22,095
    
    
    
    20,849
    
    
    
    2.9Total
    
    $
    37,601
    
    
    $
    36,912
    
    
    $
    733,835
    
    
    $
    710,881
    
    
    $
    771,436
    
    
    $
    747,793
    
    
    
    100.0
    %
 
 (1)
    
    The Company recognized a $47.8 million impairment charge in the quarter ended
September 30, 2008 bringing the amortized cost and fair value to $2.7 million. PAGE 7




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  September 30, 2008Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses(In thousands)Securities available-for-sale:Obligations of U.S. Treasury and of U.S. government-
sponsored entities (1)
    
    $
    162,456
    
    
    $
    (2,603
    )
    
    $
    
    
    
    $
    
    
    
    $
    162,456
    
    
    $
    (2,603
    )Obligations of states and political subdivisions
    
    
    46,721
    
    
    
    (2,151
    )
    
    
    
    
    
    
    
    
    
    
    46,721
    
    
    
    (2,151
    )Mortgage-backed securities:U.S. government-sponsored entities (1)
    
    
    229,582
    
    
    
    (3,239
    )
    
    
    15,651
    
    
    
    (559
    )
    
    
    245,233
    
    
    
    (3,798
    )Corporate and other debt securities
    
    
    2,985
    
    
    
    (1,049
    )
    
    
    6,061
    
    
    
    (9,119
    )
    
    
    9,046
    
    
    
    (10,168
    )Total available-for-sale
    
    
    441,744
    
    
    
    (9,042
    )
    
    
    21,712
    
    
    
    (9,678
    )
    
    
    463,456
    
    
    
    (18,720
    )Securities held-to-maturity:Obligations of states and political subdivisions
    
    
    986
    
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    986
    
    
    
    (16
    )Mortgage-backed securities:U.S.
government agencies (2)
    
    
    7,363
    
    
    
    (81
    )
    
    
    
    
    
    
    
    
    
    
    7,363
    
    
    
    (81
    )U.S. government-sponsored entities (1)
    
    
    1,219
    
    
    
    (13
    )
    
    
    20,302
    
    
    
    (586
    )
    
    
    21,521
    
    
    
    (599
    )Total held-to-maturity
    
    
    9,568
    
    
    
    (110
    )
    
    
    20,302
    
    
    
    (586
    )
    
    
    29,870
    
    
    
    (696
    )Total temporarily impaired securities
    
    $
    451,312
    
    
    $
    (9,152
    )
    
    $
    42,014
    
    
    $
    (10,264
    )
    
    $
    493,326
    
    
    $
    (19,416
    )
 
 (1)
    
    Includes obligations of the Federal Home Loan Mortgage Corporation (FHLMC) and Federal
National Mortgage Association (FNMA).(2)
    
    Includes obligations of the Government National Mortgage Association (GNMA).  
    
    The unrealized loss for U.S. government-sponsored entities mortgage-backed securities
relate primarily to debt securities issued by FNMA and FHLMC and are rated AAA by Moodys
and S&P as of September 30, 2008; 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. These mortgage-backed securities are notes with a weighted
average maturity of approximately 19 years and a weighted average interest rate of 4.78%.
 
    
    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 as of September 30, 2008. These debt
securities have a weighted average maturity of approximately 24 years and a weighted average
interest rate of 5.13%.
 PAGE 8




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  NOTE 5  LOANS
  September 30,
    
    
    December 31,2008
    
    
    2007
(1)% of Gross
    
    
    
    
    
    
    % of GrossAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans(Dollars in thousands)Commercial
    
    $
    1,102,016
    
    
    
    44.2
    %
    
    $
    1,079,631
    
    
    
    43.6
    %Construction
    
    
    396,576
    
    
    
    15.9
    
    
    
    464,583
    
    
    
    18.8Commercial real estate
    
    
    691,961
    
    
    
    27.7
    
    
    
    627,928
    
    
    
    25.4Home equity
    
    
    169,905
    
    
    
    6.8
    
    
    
    142,158
    
    
    
    5.8Other consumer
    
    
    8,062
    
    
    
    0.3
    
    
    
    10,689
    
    
    
    0.4Residential mortgage
    
    
    126,079
    
    
    
    5.1
    
    
    
    149,703
    
    
    
    6.0Total loans, gross
    
    
    2,494,599
    
    
    
    100.0
    %
    
    
    2,474,692
    
    
    
    100.0
    %Net deferred fees
    
    
    (374
    )
    
    
    
    
    
    
    (365
    )Total loans, net
    
    $
    2,494,225
    
    
    
    
    
    
    $
    2,474,327
 
 (1)
    
    Amounts have been reclassified to conform to current period presentation.  PAGE 9




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  September 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Commercial
    
    $
    690
    
    
    $
    726Construction
    
    
    1
    
    
    
    211Commercial real estate
    
    
    
    
    
    
    2,736Residential mortgage
    
    
    249
    
    
    
    260Total carrying value
    
    $
    940
    
    
    $
    3,933
  (In thousands)Balance at beginning of period
    
    $
    249Accretion
    
    
    (206
    )Balance at end of period
    
    $
    43
  NOTE 6  ALLOWANCE FOR LOAN LOSSES
  Nine Months EndedSeptember 30,2008
    
    
    2007(In thousands)Balance at beginning of period
    
    $
    26,748
    
    
    $
    23,229Provision charged to operations
    
    
    51,765
    
    
    
    3,481Loans charged off
    
    
    (40,472
    )
    
    
    (3,183
    )Recoveries
    
    
    1,387
    
    
    
    1,352Net loans (charged off) recoveries
    
    
    (39,085
    )
    
    
    (1,831
    )Balance at end of period
    
    $
    39,428
    
    
    $
    24,879
  Nine Months EndedSeptember 30,2008(In thousands)Impaired loans for which no allowance for loan losses is allocated
    
    $
    16,897Impaired loans with an allocation of the allowance for loan losses
    
    
    47,507Total impaired loans
    
    $
    64,404Allowance for loan losses allocated to impaired loans
    
    $
    5,405Average impaired loans
    
    $
    55,081Interest income recognized on impaired loans on a cash basis
    
    
    703
 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
  September 30, 2008
    
    December 31, 2007Gross Carrying
    
    Accumulated
    
    Net Carrying
    
    Gross Carrying
    
    Accumulated
    
    Net CarryingAmount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    AmountAmortized intangible assets:Core deposit and other intangibles
    
    $
    21,091
    
    
    $
    (5,817
    )
    
    $
    15,274
    
    
    $
    21,091
    
    
    $
    (4,047
    )
    
    $
    17,044
   Core Depositand OtherGoodwill
    
    
    IntangiblesBalance at beginning of period
    
    $
    160,407
    
    
    $
    17,044Impairment
    
    
    (80,000
    )
    
    
    Amortization
    
    
    
    
    
    
    (1,770
    )Purchase price adjustments
    
    
    (1,545
    )
    
    
    Balance at end of period
    
    $
    78,862
    
    
    $
    15,274
  PAGE 11




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 8  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
    
    $
    133,144
    
    
    $
    16,285
    
    
    $
    5,244
    
    
    $
    
    
    
    $
    154,673Home equity
    
    
    28,031
    
    
    
    26,936
    
    
    
    36,124
    
    
    
    51,919
    
    
    
    143,010Consumer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,976
    
    
    
    1,976Commercial
    
    
    246,389
    
    
    
    10,185
    
    
    
    2,263
    
    
    
    3,096
    
    
    
    261,933Letters of credit
    
    
    42,404
    
    
    
    16,284
    
    
    
    3,755
    
    
    
    
    
    
    
    62,443Commitments to extend credit
    
    
    97,049
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,049Total commitments
    
    $
    547,017
    
    
    $
    69,690
    
    
    $
    47,386
    
    
    $
    56,991
    
    
    $
    721,084
   NOTE 9  FAIR VALUE
  
    
    Level 1:Quoted prices (unadjusted) for identical assets or liabilities in active
markets that the entity has the ability to access as of the measurement date.
    
    Level 2:Significant other observable inputs other than Level 1 prices, such as
quoted prices for similar assets or liabilities, quoted prices in markets that are not
active, and other inputs that are observable or can be corroborated by observable
market data.
    
    Level 3:Significant unobservable inputs that reflect a companys own assumptions
about the assumptions that market participants would use in pricing an asset or
liability.
 PAGE 12




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Total
    
    Quoted Prices or
    
    Significant
    
    SignificantFair Value
    
    Identical Assets in
    
    Other Observable
    
    Unobservableat September 30,
    
    Active Markets
    
    Inputs
    
    Inputs2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)(In thousands)Assets:Available-for-sale securities
    
    $
    618,215
    
    
    $
    2,749
    
    
    $
    612,616
    
    
    $
    2,850
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2008
    
    
    2008(In thousands)Beginning balance
    
    $
    9,286
    
    
    $
    10,479Total gains or losses (realized/unrealized):Included in earnings
    
    
    
    
    
    
    Included in other comprehensive income
    
    
    (6,436
    )
    
    
    (7,629
    )Ending balance
    
    $
    2,850
    
    
    $
    2,850
 PAGE 13




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   Quoted Prices or
    
    Significant
    
    SignificantIdentical Assets in
    
    Other Observable
    
    UnobservableSeptember 30,
    
    Active Markets
    
    Inputs
    
    Inputs2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)(In thousands)Assets:Impaired loans
    
    $
    40,177
    
    
    $
    
    
    
    $
    
    
    
    $
    40,177
  NOTE 10  STOCK COMPENSATION AND RESTRICTED STOCK AWARDS
   PAGE 14




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Weighted Average
    
    Weighted AverageNumber of
    
    Exercise Price
    
    Grant- Date FairOptions
    
    Per Share
    
    Value Per ShareOutstanding at December 31, 2007
    
    
    479,152
    
    
    $
    14.03
    
    
    $
    4.63Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    (16,500
    )
    
    
    10.61
    
    
    
    3.01Forfeited
    
    
    (41,330
    )
    
    
    14.74
    
    
    
    4.40Outstanding at September 30, 2008
    
    
    421,322
    
    
    
    14.10
    
    
    
    4.71
     Number of
    
    Weighted AverageRestricted
    
    Grant-Date Fair ValueShares
    
    Per ShareOutstanding at December 31, 2007
    
    
    448,394
    
    
    $
    20.87Granted
    
    
    248,324
    
    
    
    10.42Vested
    
    
    (38,458
    )
    
    
    17.73Forfeited
    
    
    (42,623
    )
    
    
    18.45Outstanding at September 30, 2008
    
    
    615,637
    
    
    
    17.02
 PAGE 15




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 11  SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
    September 30,2008(In thousands)Beginning balance
    
    $
    3,477Service cost
    
    
    407Interest cost
    
    
    150Prior service cost
    
    
    776Distributions
    
    
    (5
    )Pre-application of SFAS No. 87 expense
    
    
    742Ending balance
    
    $
    5,547
  PAGE 16




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 12  INCOME TAXES
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Income taxes computed at the statutory rate
    
    $
    (64,262
    )
    
    
    35.0
    %
    
    $
    2,101
    
    
    
    35.0
    %
    
    $
    (66,931
    )
    
    
    35.0
    %
    
    $
    6,034
    
    
    
    35.0
    %Tax-exempt interest income on securities and loans
    
    
    (213
    )
    
    
    0.1
    
    
    
    (166
    )
    
    
    (2.8
    )
    
    
    (617
    )
    
    
    0.3
    
    
    
    (550
    )
    
    
    (3.2
    )General business credits
    
    
    (168
    )
    
    
    0.1
    
    
    
    (289
    )
    
    
    (4.8
    )
    
    
    (445
    )
    
    
    0.2
    
    
    
    (509
    )
    
    
    (3.0
    )State income taxes, net of federal tax benefit
due to state operating loss
    
    
    (2,137
    )
    
    
    1.2
    
    
    
    (323
    )
    
    
    (5.4
    )
    
    
    (2,898
    )
    
    
    1.5
    
    
    
    (840
    )
    
    
    (4.9
    )Life insurance cash surrender value increase, net of premiums
    
    
    (319
    )
    
    
    0.2
    
    
    
    (258
    )
    
    
    (4.3
    )
    
    
    (922
    )
    
    
    0.5
    
    
    
    (767
    )
    
    
    (4.4
    )Dividends received deduction
    
    
    (47
    )
    
    
    
    
    
    
    (301
    )
    
    
    (5.0
    )
    
    
    (649
    )
    
    
    0.3
    
    
    
    (913
    )
    
    
    (5.3
    )Goodwill impairment
    
    
    28,000
    
    
    
    (15.3
    )
    
    
    
    
    
    
    
    
    
    
    28,000
    
    
    
    (14.6
    )
    
    
    
    
    
    
    Valuation on FNMA and FHLMC preferred stock losses
    
    
    14,851
    
    
    
    (8.1
    )
    
    
    
    
    
    
    
    
    
    
    14,851
    
    
    
    (7.8
    )
    
    
    
    
    
    
    Nondeductible costs and other, net
    
    
    404
    
    
    
    (0.2
    )
    
    
    402
    
    
    
    6.7
    
    
    
    1,081
    
    
    
    (0.5
    )
    
    
    431
    
    
    
    2.5(Benefit) provision for income taxes
    
    $
    (23,891
    )
    
    
    13.0
    %
    
    $
    1,166
    
    
    
    19.4
    %
    
    $
    (28,530
    )
    
    
    14.9
    %
    
    $
    2,886
    
    
    
    16.7
    %
     PAGE 17




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 13  SALE OF BRANCH PROPERTY
  NOTE 14  EARNINGS PER SHARE
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except per share data)Net income (loss)
    
    $
    (159,714
    )
    
    $
    4,836
    
    
    $
    (162,702
    )
    
    $
    14,355Preferred stock dividends
    
    
    835
    
    
    
    
    
    
    
    2,506
    
    
    
    Net income (loss) available to common stockholders
    
    $
    (160,549
    )
    
    $
    4,836
    
    
    $
    (165,208
    )
    
    $
    14,355BasicWeighted average common shares outstanding
    
    
    27,859
    
    
    
    24,454
    
    
    
    27,851
    
    
    
    24,594Basic earnings per share
    
    $
    (5.76
    )
    
    $
    0.20
    
    
    $
    (5.93
    )
    
    $
    0.58DilutedWeighted average common shares outstanding
    
    
    27,859
    
    
    
    24,454
    
    
    
    27,851
    
    
    
    24,594Dilutive effect of stock options (1)
    
    
    
    
    
    
    85
    
    
    
    
    
    
    
    117Dilutive effect of restricted stock (1)
    
    
    
    
    
    
    108
    
    
    
    
    
    
    
    110Diluted average common shares
    
    
    27,859
    
    
    
    24,647
    
    
    
    27,851
    
    
    
    24,821Diluted earnings per share
    
    $
    (5.76
    )
    
    $
    0.20
    
    
    $
    (5.93
    )
    
    $
    0.58
 
 (1)
    
    No shares of stock options or restricted stock were included in the computation of
diluted earnings per share for any period there was a loss.  PAGE 18




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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 NOTE 15  SUBSEQUENT EVENT
  PAGE 19




---



##### 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
  Recent Economic Developments
        PAGE 20




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##### Table of Contents



Selected Consolidated Financial Data
  At or For the Three Months Ended
    
    
    At or For the Nine Months EndedSeptember 30,
    
    
    June 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2008
    
    
    2007(Dollars in thousands, except per share data)Statement of Income Data:Total interest income
    
    $
    45,888
    
    
    $
    47,174
    
    
    $
    47,244
    
    
    $
    143,927
    
    
    $
    138,432Total interest expense
    
    
    23,735
    
    
    
    26,827
    
    
    
    24,479
    
    
    
    76,793
    
    
    
    79,056Net interest income
    
    
    22,153
    
    
    
    20,347
    
    
    
    22,765
    
    
    
    67,134
    
    
    
    59,376Provision for loan losses
    
    
    41,950
    
    
    
    1,800
    
    
    
    4,415
    
    
    
    51,765
    
    
    
    3,481Noninterest
(loss) income
    
    
    (60,512
    )
    
    
    3,700
    
    
    
    4,394
    
    
    
    (54,328
    )
    
    
    11,316Noninterest expenses
    
    
    103,296
    
    
    
    16,245
    
    
    
    20,368
    
    
    
    152,273
    
    
    
    49,970(Loss) income before income taxes
    
    
    (183,605
    )
    
    
    6,002
    
    
    
    2,376
    
    
    
    (191,232
    )
    
    
    17,241(Benefit) provision for income taxes
    
    
    (23,891
    )
    
    
    1,166
    
    
    
    (52
    )
    
    
    (28,530
    )
    
    
    2,886Net (loss) income
    
    
    (159,714
    )
    
    
    4,836
    
    
    
    2,428
    
    
    
    (162,702
    )
    
    
    14,355Preferred stock dividends
    
    
    835
    
    
    
    
    
    
    
    836
    
    
    
    2,506
    
    
    
    Net (loss) income available to common stockholders
    
    $
    (160,549
    )
    
    $
    4,836
    
    
    $
    1,592
    
    
    $
    (165,208
    )
    
    $
    14,355Per Share Data:Earnings per share (basic)
    
    $
    (5.76
    )
    
    $
    0.20
    
    
    $
    0.06
    
    
    $
    (5.93
    )
    
    $
    0.58Earnings per share (diluted)
    
    
    (5.76
    )
    
    
    0.20
    
    
    
    0.06
    
    
    
    (5.93
    )
    
    
    0.58Cash dividends declared on common stock
    
    
    
    
    
    
    0.13
    
    
    
    0.13
    
    
    
    0.26
    
    
    
    0.39Book value
    
    
    5.89
    
    
    
    11.69
    
    
    
    11.76
    
    
    
    5.89
    
    
    
    11.69Tangible book value (non-GAAP measure) (9)
    
    
    2.51
    
    
    
    8.02
    
    
    
    5.48
    
    
    
    2.51
    
    
    
    8.02Selected Financial Ratios:Return on average assets (1)
    
    
    (17.25
    )%
    
    
    0.64
    %
    
    
    0.26
    %
    
    
    (5.90
    )%
    
    
    0.64
    %Return on average equity (2)
    
    
    (181.60
    )
    
    
    6.75
    
    
    
    2.57
    
    
    
    (58.64
    )
    
    
    6.67Dividend payout ratio
    
    
    
    
    
    
    66.79
    
    
    
    232.60
    
    
    
    N/M
    
    
    
    67.89Average equity to average assets
    
    
    9.50
    
    
    
    9.41
    
    
    
    10.30
    
    
    
    10.06
    
    
    
    9.59Tier 1 risk-based capital
    
    
    6.26
    
    
    
    11.42
    
    
    
    9.09
    
    
    
    6.26
    
    
    
    11.42Total risk-based capital
    
    
    8.04
    
    
    
    12.51
    
    
    
    10.43
    
    
    
    8.04
    
    
    
    12.51Net interest margin (tax equivalent) (3)(4)
    
    
    2.77
    
    
    
    3.10
    
    
    
    2.89
    
    
    
    2.83
    
    
    
    3.05Loan to deposit ratio
    
    
    99.25
    
    
    
    100.63
    
    
    
    106.88
    
    
    
    99.25
    
    
    
    100.63Net overhead expense to average assets (5)
    
    
    10.73
    
    
    
    1.65
    
    
    
    1.75
    
    
    
    4.52
    
    
    
    1.72Efficiency ratio (6)
    
    
    386.61
    
    
    
    63.64
    
    
    
    69.60
    
    
    
    154.70
    
    
    
    66.37Loan Quality Ratios:Allowance for loan losses to total loans
    
    
    1.58
    
    
    
    1.24
    
    
    
    0.90
    
    
    
    1.58
    
    
    
    1.24Provision for loan losses to total loans
    
    
    6.69
    
    
    
    0.36
    
    
    
    0.71
    
    
    
    2.77
    
    
    
    0.23Net loans charged off to average total loans
    
    
    3.98
    
    
    
    0.13
    
    
    
    0.35
    
    
    
    2.11
    
    
    
    0.12Nonaccrual loans to total loans
    
    
    2.42
    
    
    
    2.23
    
    
    
    1.64
    
    
    
    2.42
    
    
    
    2.23Nonperforming assets to total assets (7)
    
    
    1.91
    
    
    
    1.55
    
    
    
    1.16
    
    
    
    1.91
    
    
    
    1.55Allowance for loan losses to nonaccrual loans
    
    
    0.65
    x
    
    
    0.56
    x
    
    
    0.55
    x
    
    
    0.65
    x
    
    
    0.56
    xBalance Sheet Data:Total assets
    
    $
    3,583,377
    
    
    $
    3,032,565
    
    
    $
    3,726,720
    
    
    $
    3,583,377
    
    
    $
    3,032,565Total earning assets
    
    
    3,176,629
    
    
    
    2,750,334
    
    
    
    3,275,580
    
    
    
    3,176,629
    
    
    
    2,750,334Average assets
    
    
    3,682,449
    
    
    
    3,020,254
    
    
    
    3,686,350
    
    
    
    3,685,013
    
    
    
    2,999,877Loans
    
    
    2,494,225
    
    
    
    2,007,446
    
    
    
    2,501,082
    
    
    
    2,494,225
    
    
    
    2,007,446Allowance for loan losses
    
    
    39,428
    
    
    
    24,879
    
    
    
    22,606
    
    
    
    39,428
    
    
    
    24,879Deposits
    
    
    2,513,004
    
    
    
    1,994,927
    
    
    
    2,340,043
    
    
    
    2,513,004
    
    
    
    1,994,927Borrowings
    
    
    829,024
    
    
    
    717,404
    
    
    
    974,007
    
    
    
    829,024
    
    
    
    717,404Stockholders equity
    
    
    207,237
    
    
    
    285,233
    
    
    
    370,698
    
    
    
    207,237
    
    
    
    285,233Tangible stockholders equity (non-GAAP measure) (8)
    
    
    113,101
    
    
    
    195,790
    
    
    
    195,751
    
    
    
    113,101
    
    
    
    195,790
 
 (1)
    
    Net income divided by average assets.(2)
    
    Net income divided by average equity.(3)
    
    Net interest income, on a fully tax-equivalent basis, divided by average earning assets.(4)
    
    The following table reconciles reported net interest income on a fully tax-equivalent basis for the periods presented: Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    June 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2008
    
    
    2007Net interest income
    
    $
    22,153
    
    
    $
    20,347
    
    
    $
    22,765
    
    
    $
    67,134
    
    
    $
    59,376Tax-equivalent adjustment to net interest income
    
    
    457
    
    
    
    837
    
    
    
    909
    
    
    
    2,258
    
    
    
    2,652Net interest income, fully tax-equivalent basis
    
    $
    22,610
    
    
    $
    21,184
    
    
    $
    23,674
    
    
    $
    69,392
    
    
    $
    62,028
 PAGE 21




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##### Table of Contents



(5)
    
    Noninterest expense less noninterest income, excluding security gains or losses, divided by average assets.(6)
    
    Noninterest income, excluding security gains or losses, plus net interest income on a fully tax-equivalent
basis divided by noninterest expense excluding amortization and other real estate expense.(7)
    
    Includes total nonaccrual and foreclosed properties.(8)
    
    Stockholders equity less goodwill, core deposits and other intangible assets. The following table
reconciles reported stockholders equity to tangible stockholders equity for the periods presented: At September 30,
    
    
    At June 30,2008
    
    
    2007
    
    
    2008Stockholders equity
    
    $
    207,237
    
    
    $
    285,233
    
    
    $
    370,698Core deposit intangible and other intangibles, net
    
    
    15,274
    
    
    
    9,586
    
    
    
    15,864Goodwill
    
    
    78,862
    
    
    
    79,857
    
    
    
    159,083Tangible stockholders equity
    
    $
    113,101
    
    
    $
    195,790
    
    
    $
    195,751
 Results of Operations  Three and Nine Months Ended
September 30, 2008 and 2007
    
    
    Basic and diluted loss per share for the three months ended September 30, 2008 was
$5.76 compared to earnings of $0.20 for the comparable period in 2007
and earnings of
$0.06 for the second quarter of 2008.
    
    Net loss for the third quarter of 2008 was $159.7 million compared to net income of
$4.8 million and $2.4 million in the third quarter of 2007 and second quarter of 2008,
respectively.
    
    Net interest income increased 8.9% to $22.2 million in the third quarter of 2008
compared to
 PAGE 22




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##### Table of Contents



$20.3 million in the third quarter of 2007 but was $612,000 lower than the second quarter
of 2008, as a result of the lost dividend on the FHLMC preferred equity securities and
the increase in nonaccrual loans. The net interest margin decreased to 2.77% in the third
quarter of 2008 compared to 2.89% in the second quarter of 2008 for the reasons noted
above. The net interest margin was 3.10% in the third quarter of 2007.
    
    The provision for loan losses was $42.0 million in the third quarter of 2008
compared to $1.8 million for the comparable period in 2007 and $4.4 million in the
second quarter of 2008.
    
    Noninterest loss was $60.5 million in the third quarter of 2008 compared to income
of $3.7 million in the third quarter of 2007 and $4.4 million in the second quarter of
2008. Excluding the losses on securities, noninterest income for the third quarter of
2008 increased by $247,000 compared to the same period in 2007 but was down when
compared to the second quarter of 2008 by $409,000.
    
    Noninterest expenses, excluding the $80.0 million goodwill impairment charge, were
$23.3 million in the third quarter of 2008 compared to $16.2 million in the third
quarter of 2007 and $20.4 million in the second quarter of 2008.
  
    
    Basic and diluted loss per share for the nine months ended September 30, 2008 were
$5.93 compared to earnings of $0.58 per basic and diluted share for the same period in
2007.
    
    Net interest income increased 13.1% to $67.1 million in the first nine months of
2008 compared to $59.4 million in the first nine months of 2007, as a result of the
Northwest Suburban acquisition and the decrease in rates on deposits even though
balances increased. The net interest margin was 2.83% for the nine months ended
September 30, 2008 compared to 3.05% for the similar period of 2007 due to the lost
dividend on the FHLMC preferred equity securities and the increase in nonaccrual loans.
    
    The provision for loan losses was $51.8 million in the first nine months of 2008
compared to $3.5 million for the comparable period in 2007.
    
    Noninterest loss was $54.3 million in the first nine months of 2008 compared to
income of $11.3 million in the same period of 2007. Excluding the gain on sale of real
estate and losses on securities, noninterest income for the first nine months of 2008
increased by $1.2 million compared to the same period in 2007.
    
    Noninterest expenses increased to $152.3 million in the first nine months of 2008
compared to $50.0 million in the same period of 2007, mainly as a result of the $80.0
million goodwill impairment, the $7.2 million loss on early extinguishment of debt, and
increased salaries and occupancy expenses as a result of the Northwest Suburban
acquisition.
 PAGE 23




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##### Table of Contents



Net Interest Income
  For the Three Months EndedSeptember 30, 2008
    
    
    September 30, 2007
    
    
    June 30, 2008Average
    
    
    
    
    
    
    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
    
    $
    6,005
    
    
    
    27
    
    
    
    1.80
    %
    
    $
    23,996
    
    
    
    297
    
    
    
    4.95
    %
    
    $
    22,696
    
    
    
    98
    
    
    
    1.73
    %Securities:Taxable(1)
    
    
    654,531
    
    
    
    7,823
    
    
    
    4.78
    
    
    
    650,776
    
    
    
    9,128
    
    
    
    5.61
    
    
    
    701,254
    
    
    
    9,512
    
    
    
    5.43Exempt from federal income taxes(1)
    
    
    60,688
    
    
    
    883
    
    
    
    5.82
    
    
    
    47,765
    
    
    
    711
    
    
    
    5.95
    
    
    
    61,635
    
    
    
    912
    
    
    
    5.92Total securities
    
    
    715,219
    
    
    
    8,706
    
    
    
    4.87
    
    
    
    698,541
    
    
    
    9,839
    
    
    
    5.63
    
    
    
    762,889
    
    
    
    10,424
    
    
    
    5.47FRB and FHLB stock
    
    
    29,694
    
    
    
    184
    
    
    
    2.48
    
    
    
    23,683
    
    
    
    227
    
    
    
    3.83
    
    
    
    29,264
    
    
    
    184
    
    
    
    2.52Loans held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    815
    
    
    
    11
    
    
    
    5.40
    
    
    
    
    
    
    
    
    
    
    
    Loans:Commercial loans(1)(3)(4)
    
    
    544,013
    
    
    
    8,145
    
    
    
    5.99
    
    
    
    426,366
    
    
    
    8,461
    
    
    
    7.94
    
    
    
    486,794
    
    
    
    7,360
    
    
    
    6.05Commercial real estate
loans(1)(3)(4)(6)
    
    
    1,639,444
    
    
    
    24,919
    
    
    
    6.08
    
    
    
    1,272,773
    
    
    
    24,293
    
    
    
    7.63
    
    
    
    1,642,838
    
    
    
    25,702
    
    
    
    6.26Agricultural loans(3)(4)
    
    
    6,531
    
    
    
    103
    
    
    
    6.31
    
    
    
    3,172
    
    
    
    64
    
    
    
    8.07
    
    
    
    6,139
    
    
    
    95
    
    
    
    6.19Consumer real estate loans(3)(4)(6)
    
    
    314,377
    
    
    
    4,119
    
    
    
    5.24
    
    
    
    277,164
    
    
    
    4,632
    
    
    
    6.68
    
    
    
    313,556
    
    
    
    4,120
    
    
    
    5.26Consumer installment loans(3)(4)
    
    
    8,288
    
    
    
    142
    
    
    
    6.85
    
    
    
    9,644
    
    
    
    187
    
    
    
    7.76
    
    
    
    10,159
    
    
    
    170
    
    
    
    6.69Total loans
    
    
    2,512,653
    
    
    
    37,428
    
    
    
    5.96
    
    
    
    1,989,119
    
    
    
    37,637
    
    
    
    7.57
    
    
    
    2,459,486
    
    
    
    37,447
    
    
    
    6.09Total interest-earning assets
    
    $
    3,263,571
    
    
    $
    46,345
    
    
    
    5.68
    %
    
    $
    2,736,154
    
    
    $
    48,011
    
    
    
    7.00
    %
    
    $
    3,274,335
    
    
    $
    48,153
    
    
    
    5.88
    %Noninterest-Earning Assets:Cash
    
    $
    57,463
    
    
    
    
    
    
    
    
    
    
    $
    51,487
    
    
    
    
    
    
    
    
    
    
    $
    52,693Premises and equipment, net
    
    
    38,412
    
    
    
    
    
    
    
    
    
    
    
    22,404
    
    
    
    
    
    
    
    
    
    
    
    38,144Allowance for loan losses
    
    
    (23,059
    )
    
    
    
    
    
    
    
    
    
    
    (24,255
    )
    
    
    
    
    
    
    
    
    
    
    (20,412
    )Other assets
    
    
    346,062
    
    
    
    
    
    
    
    
    
    
    
    234,464
    
    
    
    
    
    
    
    
    
    
    
    341,590Total noninterest-earning assets
    
    
    418,878
    
    
    
    
    
    
    
    
    
    
    
    284,100
    
    
    
    
    
    
    
    
    
    
    
    412,015Total assets
    
    $
    3,682,449
    
    
    
    
    
    
    
    
    
    
    $
    3,020,254
    
    
    
    
    
    
    
    
    
    
    $
    3,686,350Interest-Bearing Liabilities:Deposits:Interest-bearing demand deposits
    
    $
    194,416
    
    
    $
    422
    
    
    
    0.87
    %
    
    $
    175,582
    
    
    $
    862
    
    
    
    1.96
    %
    
    $
    215,076
    
    
    $
    492
    
    
    
    0.92
    %Money-market demand and savings accounts
    
    
    393,745
    
    
    
    1,184
    
    
    
    1.20
    
    
    
    365,985
    
    
    
    2,394
    
    
    
    2.62
    
    
    
    399,380
    
    
    
    1,197
    
    
    
    1.20Time deposits
    
    
    1,487,827
    
    
    
    13,695
    
    
    
    3.68
    
    
    
    1,224,836
    
    
    
    15,378
    
    
    
    5.02
    
    
    
    1,448,198
    
    
    
    14,422
    
    
    
    3.98Total interest-bearing deposits
    
    
    2,075,988
    
    
    
    15,301
    
    
    
    2.95
    
    
    
    1,766,403
    
    
    
    18,634
    
    
    
    4.22
    
    
    
    2,062,654
    
    
    
    16,111
    
    
    
    3.12Borrowings:Federal funds purchased, FRB discount
window advances, and repurchase agreements
    
    
    403,025
    
    
    
    3,901
    
    
    
    3.87
    
    
    
    307,843
    
    
    
    3,201
    
    
    
    4.16
    
    
    
    451,351
    
    
    
    4,154
    
    
    
    3.68FHLB advances
    
    
    348,315
    
    
    
    2,779
    
    
    
    3.19
    
    
    
    307,418
    
    
    
    3,640
    
    
    
    4.74
    
    
    
    296,044
    
    
    
    2,437
    
    
    
    3.29Junior subordinated debentures
    
    
    60,766
    
    
    
    864
    
    
    
    5.69
    
    
    
    65,854
    
    
    
    1,334
    
    
    
    8.10
    
    
    
    60,749
    
    
    
    876
    
    
    
    5.77Subordinated debt
    
    
    15,000
    
    
    
    229
    
    
    
    6.11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    232
    
    
    
    6.19Revolving note payable
    
    
    9,404
    
    
    
    96
    
    
    
    4.08
    
    
    
    1,440
    
    
    
    18
    
    
    
    5.00
    
    
    
    8,896
    
    
    
    94
    
    
    
    4.23Term note payable
    
    
    55,000
    
    
    
    565
    
    
    
    4.11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,000
    
    
    
    575
    
    
    
    4.18Total borrowings
    
    
    891,510
    
    
    
    8,434
    
    
    
    3.78
    
    
    
    682,555
    
    
    
    8,193
    
    
    
    4.80
    
    
    
    887,040
    
    
    
    8,368
    
    
    
    3.77Total interest-bearing liabilities
    
    $
    2,967,498
    
    
    $
    23,735
    
    
    
    3.20
    %
    
    $
    2,448,958
    
    
    $
    26,827
    
    
    
    4.40
    %
    
    $
    2,949,694
    
    
    $
    24,479
    
    
    
    3.32
    %Noninterest-Bearing Liabilities:Noninterest-bearing demand deposits
    
    $
    335,025
    
    
    
    
    
    
    
    
    
    
    $
    256,306
    
    
    
    
    
    
    
    
    
    
    $
    322,110Other liabilities
    
    
    30,048
    
    
    
    
    
    
    
    
    
    
    
    30,759
    
    
    
    
    
    
    
    
    
    
    
    34,869Total
noninterest-bearing liabilities
    
    
    365,073
    
    
    
    
    
    
    
    
    
    
    
    287,065
    
    
    
    
    
    
    
    
    
    
    
    356,979Stockholders equity
    
    
    349,878
    
    
    
    
    
    
    
    
    
    
    
    284,231
    
    
    
    
    
    
    
    
    
    
    
    379,677Total liabilities and stockholders equity
    
    $
    3,682,449
    
    
    
    
    
    
    
    
    
    
    $
    3,020,254
    
    
    
    
    
    
    
    
    
    
    $
    3,686,350Net interest income (tax
equivalent)(1)(5)
    
    
    
    
    
    $
    22,610
    
    
    
    2.48
    %
    
    
    
    
    
    $
    21,184
    
    
    
    2.60
    %
    
    
    
    
    
    $
    23,674
    
    
    
    2.56
    %Net interest margin (tax
    
    
    
    
    
    
    
    
    
    
    2.77
    %
    
    
    
    
    
    
    
    
    
    
    3.10
    %
    
    
    
    
    
    
    
    
    
    
    2.89
    %equivalent)(1)Net interest income(2)(5)
    
    
    
    
    
    $
    22,153
    
    
    
    
    
    
    
    
    
    
    $
    20,347
    
    
    
    
    
    
    
    
    
    
    $
    22,765Net interest margin(2)
    
    
    
    
    
    
    
    
    
    
    2.72
    %
    
    
    
    
    
    
    
    
    
    
    2.97
    %
    
    
    
    
    
    
    
    
    
    
    2.78
    %
 
 (1)
    
    Adjusted for 35% tax rate and adjusted for the dividends-received deduction where applicable.(2)
    
    Not adjusted for 35% tax rate or for the dividends-received deduction.(3)
    
    Nonaccrual loans are included in the average balance; however, these loans are not earning
any interest. PAGE 24




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##### Table of Contents



(4)
    
    Includes loan fees of $900, $766, and $773 for the three months ended September 30, 2008,
September 30, 2007, and June 30, 2008, respectively.(5)
    
    The following table reconciles reported net interest income on a tax equivalent basis for the
periods presented: For the three months ended,September 30,
    
    
    September 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008Net interest income
    
    $
    22,153
    
    
    $
    20,347
    
    
    $
    22,765Tax equivalent adjustment to net interest income
    
    
    457
    
    
    
    837
    
    
    
    909Net interest income, tax equivalent basis
    
    $
    22,610
    
    
    $
    21,184
    
    
    $
    23,674
  For the Nine Months EndedSeptember 30, 2008
    
    
    September 30, 2007Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Interest-Earning Assets:Federal funds sold and interest-bearing
deposits due from banks
    
    $
    16,840
    
    
    $
    273
    
    
    
    2.16
    %
    
    $
    18,976
    
    
    $
    688
    
    
    
    4.83
    %Securities:Taxable(1)
    
    
    686,517
    
    
    
    26,901
    
    
    
    5.22
    
    
    
    644,567
    
    
    
    26,496
    
    
    
    5.48Exempt from federal income taxes(1)
    
    
    61,388
    
    
    
    2,715
    
    
    
    5.90
    
    
    
    56,211
    
    
    
    2,498
    
    
    
    5.93Total securities
    
    
    747,905
    
    
    
    29,616
    
    
    
    5.28
    
    
    
    700,778
    
    
    
    28,994
    
    
    
    5.52FRB and FHLB stock
    
    
    29,397
    
    
    
    551
    
    
    
    2.50
    
    
    
    23,648
    
    
    
    681
    
    
    
    3.84Loans held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,939
    
    
    
    89
    
    
    
    6.12Loans:Commercial loans(1)(3)(4)
    
    
    510,213
    
    
    
    24,282
    
    
    
    6.35
    
    
    
    411,034
    
    
    
    24,272
    
    
    
    7.87Commercial real estate loans(1)(3)(4)(6)
    
    
    1,638,120
    
    
    
    77,716
    
    
    
    6.33
    
    
    
    1,264,709
    
    
    
    71,573
    
    
    
    7.55Agricultural loans(3)(4)
    
    
    6,029
    
    
    
    290
    
    
    
    6.41
    
    
    
    3,187
    
    
    
    191
    
    
    
    7.99Consumer real estate loans(3)(4)(6)
    
    
    313,247
    
    
    
    12,950
    
    
    
    5.51
    
    
    
    277,092
    
    
    
    14,037
    
    
    
    6.75Consumer installment loans(3)(4)
    
    
    9,843
    
    
    
    507
    
    
    
    6.87
    
    
    
    9,806
    
    
    
    559
    
    
    
    7.60Total loans
    
    
    2,477,452
    
    
    
    115,745
    
    
    
    6.23
    
    
    
    1,965,828
    
    
    
    110,632
    
    
    
    7.50Total interest-earning assets
    
    $
    3,271,594
    
    
    $
    146,185
    
    
    
    5.96
    %
    
    $
    2,711,169
    
    
    $
    141,084
    
    
    
    6.93
    %Noninterest-Earning Assets:Cash
    
    $
    55,272
    
    
    
    
    
    
    
    
    
    
    $
    57,220Premises and equipment, net
    
    
    39,290
    
    
    
    
    
    
    
    
    
    
    
    22,231Allowance for loan losses
    
    
    (23,584
    )
    
    
    
    
    
    
    
    
    
    
    (24,321
    )Other assets
    
    
    342,441
    
    
    
    
    
    
    
    
    
    
    
    233,578Total noninterest-earning assets
    
    
    413,419
    
    
    
    
    
    
    
    
    
    
    
    288,708Total assets
    
    $
    3,685,013
    
    
    
    
    
    
    
    
    
    
    $
    2,999,877Interest-Bearing Liabilities:Deposits:Interest-bearing demand deposits
    
    $
    208,949
    
    
    $
    1,660
    
    
    
    1.06
    %
    
    $
    170,166
    
    
    $
    2,384
    
    
    
    1.87
    %Money-market demand and savings accounts
    
    
    401,377
    
    
    
    4,209
    
    
    
    1.40
    
    
    
    368,861
    
    
    
    7,220
    
    
    
    2.61Time deposits
    
    
    1,468,836
    
    
    
    44,632
    
    
    
    4.05
    
    
    
    1,218,495
    
    
    
    45,511
    
    
    
    4.98Total interest-bearing deposits
    
    
    2,079,162
    
    
    
    50,501
    
    
    
    3.24
    
    
    
    1,757,522
    
    
    
    55,115
    
    
    
    4.18Borrowings:Federal funds purchased, FRB discount
window advances and repurchase agreements
    
    
    418,992
    
    
    
    12,048
    
    
    
    3.83
    
    
    
    282,768
    
    
    
    9,015
    
    
    
    4.25FHLB advances
    
    
    319,943
    
    
    
    8,698
    
    
    
    3.62
    
    
    
    315,142
    
    
    
    10,958
    
    
    
    4.64Junior subordinated debentures
    
    
    60,749
    
    
    
    2,785
    
    
    
    6.11
    
    
    
    65,837
    
    
    
    3,950
    
    
    
    8.00Subordinated debt
    
    
    10,073
    
    
    
    464
    
    
    
    6.14
    
    
    
    
    
    
    
    
    
    
    
    Revolving note payable
    
    
    8,227
    
    
    
    270
    
    
    
    4.38
    
    
    
    485
    
    
    
    18
    
    
    
    4.95Term note payable
    
    
    59,927
    
    
    
    2,027
    
    
    
    4.51
    
    
    
    
    
    
    
    
    
    
    
    Total borrowings
    
    
    877,911
    
    
    
    26,292
    
    
    
    3.99
    
    
    
    664,232
    
    
    
    23,941
    
    
    
    4.81Total interest-bearing liabilities
    
    $
    2,957,073
    
    
    $
    76,793
    
    
    
    3.46
    %
    
    $
    2,421,754
    
    
    $
    79,056
    
    
    
    4.35
    %Noninterest-Bearing Liabilities:Noninterest-bearing demand deposits
    
    $
    324,586
    
    
    
    
    
    
    
    
    
    
    $
    255,805Other liabilities
    
    
    32,711
    
    
    
    
    
    
    
    
    
    
    
    34,743Total noninterest-bearing liabilities
    
    
    357,297
    
    
    
    
    
    
    
    
    
    
    
    290,548Stockholders equity
    
    
    370,643
    
    
    
    
    
    
    
    
    
    
    
    287,575Total liabilities and stockholders equity
    
    $
    3,685,013
    
    
    
    
    
    
    
    
    
    
    $
    2,999,877Net interest income (tax
equivalent)(1)(5)
    
    
    
    
    
    $
    69,392
    
    
    
    2.50
    %
    
    
    
    
    
    $
    62,028
    
    
    
    2.59
    %Net interest margin (tax
equivalent)(1)
    
    
    
    
    
    
    
    
    
    
    2.83
    %
    
    
    
    
    
    
    
    
    
    
    3.05
    %Net interest income(2)(5)
    
    
    
    
    
    $
    67,134
    
    
    
    
    
    
    
    
    
    
    $
    59,376Net interest margin(2)
    
    
    
    
    
    
    
    
    
    
    2.74
    %
    
    
    
    
    
    
    
    
    
    
    2.92
    %
 PAGE 25




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##### Table of Contents



(1)
    
    Adjusted for 35% tax rate and adjusted for the dividends-received deduction where applicable.(2)
    
    Not adjusted for 35% tax rate or for the dividends-received deduction.(3)
    
    Nonaccrual loans are included in the average balance; however, these loans are not earning
any interest.(4)
    
    Includes loan fees of $2,288 and $1,966 for the nine months ended September 30, 2008 and
2007, respectively.(5)
    
    The following table reconciles reported net interest income on a tax equivalent basis for the
periods presented: For the nine months ended,September 30,2008
    
    
    2007Net interest income
    
    $
    67,134
    
    
    $
    59,376Tax equivalent adjustment to net interest income
    
    
    2,258
    
    
    
    2,652Net interest income, tax equivalent basis
    
    $
    69,392
    
    
    $
    62,028
      
    
    Yields on average earning assets decreased by 132 basis points in the third
quarter of 2008 compared to the third quarter of 2007, while average balances on
earning assets increased by $527.4 million. Yields on average earning assets
decreased by 20 basis points compared to the second quarter of 2008. Yields on
average earning assets decreased 97 basis points in the first nine months of 2008
compared to the similar period in 2007, while average balances increased by $560.4
million.
    
    Average yields earned on loans for the third quarter of 2008 decreased by 13
basis points to 5.96% compared to the second quarter of 2008 and were 161 basis
points lower compared to the same period in 2007. For the first nine months of
2008, average yields earned on loans decreased by 127 basis points to 6.23% compared
to the first nine months of 2007. This decline in yields was primarily due to the
re-pricing of the variable rate loans resulting from decreases
 PAGE 26




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##### Table of Contents



in the prime rate as well as the increase in nonaccrual loans. Average loans
increased by $523.5 million in the quarter ended September 30, 2008 compared to the
same period in 2007 and increased by $53.2 million compared to the second quarter of
2008. Average loans increased by $511.6 million in the first nine of 2008 compared to
the same period in 2007.
    
    Yields on average securities decreased in the third quarter of 2008 compared to
the prior quarter and the same period in 2007 as a result of the lost dividend on
the FHLMC preferred equity securities held in the Companys portfolio. Average
securities increased by $16.7 million in the third quarter of 2008 compared to the
similar period in 2007 but decreased by $47.7 million compared to the second quarter
of 2008 mainly as a result of the impairment charge taken on the FNMA and FHLMC
preferred equity securities. Yields on average securities were 24 basis points
lower in the first nine months of 2008 compared to the similar period in 2007, while
average balances increased by $47.1 million.
  
    
    The Companys cost of funds decreased by 12 basis points on a linked-quarter
basis as a result of decreased rates paid on interest-bearing deposits. Average
interest-bearing liabilities increased by $17.8 million during the third quarter of
2008 compared to the prior quarter. Yields on average interest-bearing liabilities
decreased by 120 basis points, while average balances increased $518.5 million in
the third quarter of 2008 compared to the similar period in 2007. When compared to
the first nine months of 2007, the cost of funds decreased by 89 basis points to
3.46% for the first nine months of 2008, while average interest-bearing liabilities
increased $535.3 million.
    
    Average interest-bearing deposits increased by $309.6 million, while average
rates decreased 127 basis points in the third quarter of 2008 compared to the
similar period of 2007. Average rates paid on interest-bearing deposits decreased
by 17 basis points to 2.95% for the third quarter of 2008 compared to the second
quarter of 2008, and average balances increased by $13.3 million. Yields on average
interest-bearing deposits decreased by 94 basis points in the first nine months of
2008 compared to the similar period in 2007, and average balances increased by
$321.6 million.
    
    Average interest-bearing demand deposit, money market, and savings accounts
increased by $46.6 million for the third quarter of 2008 compared to September 30,
2007 but decreased by $26.3 million compared to June 30, 2008. On a year-to-date
basis, average interest-bearing demand deposit, money market, and savings accounts
increased by $71.3 million compared to 2007. The Company continues to focus its
marketing efforts on increasing core deposits to alleviate margin pressure.
    
    The decrease in average rates paid on interest-bearing deposits was complemented
by the decrease in costs of average borrowings of 102 basis points in the third
quarter of 2008 compared to the third quarter of 2007, while average balances
increased by $209.0 million. Average borrowings increased by $4.5 million in the
third quarter of 2008 while average rates remained flat compared to the second
quarter of 2008. On a year-to-date basis, average borrowings increased by $213.7
million compared to September 30, 2007 and average rates paid decreased by 82 basis
points. Borrowings increased by $75.0 million as a result of the Northwest Suburban
acquisition.
 PAGE 27




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##### Table of Contents



Noninterest Income
  
    
    Noninterest income was $(60.5) million for the three months ended September 30,
2008, a decrease of $64.2 million, over the comparable period in 2007, and was $64.9
million lower than the second quarter of 2008. The Company recognized an impairment
charge on securities of $17.6 million in the first quarter of 2008. The Company
recognized another impairment charge on securities of $47.8 million and had net
losses on securities transactions of $16.7 million in the third quarter of 2008,
mainly from the sale of FHLMC preferred stock.
    
    The annualized noninterest income to average assets ratio was (6.54)% for the
three months ended September 30, 2008 compared to 0.49% for the same period in 2007
and 0.48% for the three months ended June 30, 2008. Excluding the impairment charge
and net losses on securities, the annualized noninterest income to average assets
ratio was 0.43% for the third quarter of 2008; which was down from the second quarter of 2008
due to the decrease in insurance and brokerage commissions, trust fees, and service
charges on deposits.
    
    Service charges on deposits increased by $383,000, or 25.0%, to $1.9 million in
the third quarter of 2008 compared to the third quarter of 2007, mainly as a result
of the increased deposit base from the Northwest Suburban acquisition, but decreased
by $35,000 compared to the second quarter of 2008.
    
    Insurance and brokerage commissions for the three months ended September 30, 2008
decreased by $237,000 and $235,000 when compared to the third quarter of 2007 and
second quarter of 2008, respectively.
    
    Trust income decreased by $31,000 in the third quarter of 2008 compared to the
second quarter of 2008 but remained flat compared to the third quarter of 2007.
    
    Income from the increase in the cash surrender value of life insurance increased
by $175,000 to $911,000 during the three months ended September 30, 2008 compared to
the similar period in 2007, reflecting the addition of $12.9 million of such
insurance acquired from Northwest Suburban, and was $46,000 higher compared to the
second quarter of 2008.
    
    There was a loss on one loan sale transaction of $75,000 during the third quarter
of 2008 compared with $41,000 gains in the third quarter of 2007.
  
    
    Noninterest income was $(54.3) million for the nine months ended September 30,
2008, a decrease of $65.6 million over the comparable period in 2007. The Company
recognized an impairment charge on securities of $17.6 million and a gain on the
sale of property of $15.2 million in the first quarter of 2008. The Company
recognized another impairment charge on securities of $47.8 million and had net
losses on securities transactions of $16.7 million in the
 PAGE 28




---



##### Table of Contents



third quarter of 2008, mainly from the sale of FHLMC preferred stock.
    
    Excluding the impairment charges and net losses on securities and the gain on the
sale of property, noninterest income increased by $1.2 million, or 10.3%, to $12.5
million in the first nine months of 2008 compared to the same period in 2007.
    
    The annualized noninterest income to average assets ratio was (1.97)% for the
nine months ended September 30, 2008 compared to 0.50% for the same period in 2007.
Excluding the impairment charges and net losses on securities and the gain on the
sale of property, the annualized noninterest income to average assets ratio was
0.45% for the first nine months of 2008 down from the same period in 2007 due to the
increase in average assets as a result of the Northwest Suburban acquistion.
    
    Insurance and brokerage commissions for the nine months ended September 30, 2008
decreased by $108,000 when compared to the first nine months of 2007.
    
    Trust income increased by $33,000 in the first nine months of 2008 compared to
the same period in 2007.
    
    Income from the increase in the cash surrender value of life insurance increased
by $442,000 to $2.6 million during the nine months ended September 30, 2008 compared
to the similar period in 2007, reflecting the addition of $12.9 million of such
insurance acquired from Northwest Suburban.
    
    There was a loss on one loan sale transaction of $75,000 during the first nine
months of 2008 compared with gains of $441,000 in the same period in 2007 from an
active mortgage-banking operation. Also, the Company began outsourcing the
residential mortgage origination operations in the third quarter of 2007.
 Noninterest Expenses
  
    
    Total noninterest expenses increased by $87.1 million, to $103.3 million during
the third quarter of 2008 compared to $16.2 million for the similar period in 2007.
In comparison to the second quarter of 2008, total noninterest expenses increased by
$82.9 million. The Company recognized an $80.0 million impairment charge on its
goodwill. Excluding this goodwill impairment charge, total noninterest expense
increased by $2.9 million compared to the second quarter of 2008 mainly from the
increase in salaries and benefits expense.
    
    The annualized noninterest expenses to average assets ratio was 11.16% for the
three months ended September 30, 2008 compared to 2.13% for the same period in 2007
and 2.22% for the three months ended June 30, 2008. Excluding the goodwill
impairment charge, the annualized noninterest expenses to average assets ratio was
2.52% for the third quarter of 2008.
 PAGE 29




---



##### Table of Contents




    
    Salaries and benefits expense increased by $2.8 million, or 28.5%, during the
third quarter of 2008 compared to the third quarter of 2007, mostly reflecting
additions from the Northwest Suburban acquisition. Salaries and benefits expense
increased by $1.5 million, or 13.6%, compared to the second quarter of 2008,
reflecting a $1.3 million decrease in the second quarter 2008 incentive accruals
based upon financial results.
    
    Occupancy and equipment expense increased by $849,000, or 35.9%, during the third
quarter of 2008 to $3.2 million compared to the similar period in 2007, reflecting
the costs associated with the additional five branch properties acquired in the
Northwest Suburban acquisition, and by $118,000, or 3.8%, compared to the second
quarter of 2008, mainly due to an increase in utilities expense.
    
    Professional services expense rose by $719,000, or 55.4%, to $2.0 million in the
third quarter of 2008 compared to the third quarter of 2007. Professional services
expense increased by $220,000, or 12.3%, compared to the second quarter of 2008.
Both increases were mainly due to higher consulting and tax consulting expenses.
    
    Marketing expenses in the third quarter of 2008 were $37,000 higher than in the
third quarter of 2007 but lower by $138,000 compared to the second quarter of 2008
due to increased media campaigns including an enhanced web site re-design in the
June 2008 quarter.
    
    Foreclosed properties expense increased in the third quarter of 2008 by $20,000
compared to the third quarter of 2007 but decreased by $213,000 compared to the
second quarter of 2008, which included $222,000 in writedowns on two foreclosed
properties.
    
    Amortization expense was $239,000 higher in the third quarter of 2008 compared to
the same period of 2007 as a result of the core deposit intangible asset acquired
through the Northwest Suburban acquisition and flat compared to the second quarter
of 2008.
  
    
    Total noninterest expenses increased $102.3 million, to $152.3 million during the
first nine months of 2008 compared to $50.0 million for the similar period in 2007
mainly attributable to the goodwill impairment charge, loss on early extinguishment
of debt, and Northwest Suburban acquisition. Excluding the loss on the early
extinguishment of debt and the goodwill impairment charge, total noninterest expense
increased $15.2 million to $65.2 million compared to the first nine months of 2007.
    
    The annualized noninterest expenses to average assets ratio was 5.52% for the
nine months ended September 30, 2008 compared to 2.23% for the same period in 2007.
Excluding the loss on the early extinguishment of debt and goodwill impairment
charge, the annualized noninterest expenses to average assets ratio was 2.36% for
the first nine months of 2008.
    
    Salaries and benefits expense increased by $6.0 million, or 19.7%, during the
first nine months of 2008 compared to the same period in 2007, reflecting additions
to management and the addition of employees from Northwest Suburban.
    
    Occupancy and equipment expense increased by $2.5 million, or 36.5%, during the
nine months
 PAGE 30




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##### Table of Contents



ended September 30, 2008 to $9.2 million compared to the similar period in 2007 mostly
reflecting the costs associated with the five additional branch properties acquired
from Northwest Suburban.
    
    Professional services expense rose by $1.7 million, or 48.1%, to $5.4 million in
the first nine months of 2008 compared to the same period in 2007 due to higher
legal, including legal expenses related to problem loan workouts, tax consulting,
and consulting expenses.
    
    Marketing expenses for the nine months ended September 30, 2008 were $1.9
million, or 9.9% higher than in the same period in 2007 due to increased media
campaigns including an enhanced web site re-design.
    
    Foreclosed properties expense increased in the first nine months of 2008 by
$230,000 compared to the same period in 2007, mainly due to the $222,000 in
writedowns on two foreclosed properties.
    
    Amortization expense was $672,000 higher in the first nine months of 2008
compared to the same period of 2007 as a result of the core deposit intangible asset
acquired through the Northwest Suburban acquisition.
 Income Taxes
    Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Income taxes computed at the statutory rate
    
    $
    (64,262
    )
    
    
    35.0
    %
    
    $
    2,101
    
    
    
    35.0
    %
    
    $
    (66,931
    )
    
    
    35.0
    %
    
    $
    6,034
    
    
    
    35.0
    %Tax-exempt interest income on securities and loans
    
    
    (213
    )
    
    
    0.1
    
    
    
    (166
    )
    
    
    (2.8
    )
    
    
    (617
    )
    
    
    0.3
    
    
    
    (550
    )
    
    
    (3.2
    )General business credits
    
    
    (168
    )
    
    
    0.1
    
    
    
    (289
    )
    
    
    (4.8
    )
    
    
    (445
    )
    
    
    0.2
    
    
    
    (509
    )
    
    
    (3.0
    )State income taxes, net of federal tax benefit
due to state operating loss
    
    
    (2,137
    )
    
    
    1.2
    
    
    
    (323
    )
    
    
    (5.4
    )
    
    
    (2,898
    )
    
    
    1.5
    
    
    
    (840
    )
    
    
    (4.9
    )Life insurance cash surrender value increase, net of premiums
    
    
    (319
    )
    
    
    0.2
    
    
    
    (258
    )
    
    
    (4.3
    )
    
    
    (922
    )
    
    
    0.5
    
    
    
    (767
    )
    
    
    (4.4
    )Dividends received deduction
    
    
    (47
    )
    
    
    
    
    
    
    (301
    )
    
    
    (5.0
    )
    
    
    (649
    )
    
    
    0.3
    
    
    
    (913
    )
    
    
    (5.3
    )Goodwill impairment
    
    
    28,000
    
    
    
    (15.3
    )
    
    
    
    
    
    
    
    
    
    
    28,000
    
    
    
    (14.6
    )
    
    
    
    
    
    
    Valuation on FNMA and FHLMC preferred stock losses
    
    
    14,851
    
    
    
    (8.1
    )
    
    
    
    
    
    
    
    
    
    
    14,851
    
    
    
    (7.8
    )
    
    
    
    
    
    
    Nondeductible costs and other, net
    
    
    404
    
    
    
    (0.2
    )
    
    
    402
    
    
    
    6.7
    
    
    
    1,081
    
    
    
    (0.5
    )
    
    
    431
    
    
    
    2.5(Benefit) provision for income taxes
    
    $
    (23,891
    )
    
    
    13.0
    %
    
    $
    1,166
    
    
    
    19.4
    %
    
    $
    (28,530
    )
    
    
    14.9
    %
    
    $
    2,886
    
    
    
    16.7
    %
  PAGE 31




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##### Table of Contents



Financial Condition
  September 30,
    
    
    
    
    
    
    Northwest
    
    
    Excluding NorthwestSuburban
    
    
    Suburban Acquisition2008
    
    
    2007
    
    
    $ Change
    
    
    Acquisition(1)
    
    
    $ Change
    
    
    % Change(Dollars in thousands)AssetsCash and cash equivalents(2)
    
    $
    113,443
    
    
    $
    64,204
    
    
    $
    49,239
    
    
    $
    3,342
    
    
    $
    45,897
    
    
    
    72
    %Securities available-for-sale
    
    
    618,215
    
    
    
    660,986
    
    
    
    (42,771
    )
    
    
    57,597
    
    
    
    (100,368
    )
    
    
    (15
    )Securities held-to-maturity
    
    
    30,817
    
    
    
    40,978
    
    
    
    (10,161
    )
    
    
    
    
    
    
    (10,161
    )
    
    
    (25
    )Total securities
    
    
    649,032
    
    
    
    701,964
    
    
    
    (52,932
    )
    
    
    57,597
    
    
    
    (110,529
    )
    
    
    (16
    )FRB and FHLB stock, at cost
    
    
    31,698
    
    
    
    23,683
    
    
    
    8,015
    
    
    
    1,503
    
    
    
    6,512
    
    
    
    28Loans
    
    
    2,494,225
    
    
    
    2,007,446
    
    
    
    486,779
    
    
    
    439,249
    
    
    
    47,530
    
    
    
    2Allowance for loan loss
    
    
    (39,428
    )
    
    
    (24,879
    )
    
    
    (14,549
    )
    
    
    (2,767
    )
    
    
    (11,782
    )
    
    
    (47
    )Net loans
    
    
    2,454,797
    
    
    
    1,982,567
    
    
    
    472,230
    
    
    
    436,482
    
    
    
    35,748
    
    
    
    2Cash surrender value of life insurance
    
    
    83,800
    
    
    
    67,412
    
    
    
    16,388
    
    
    
    12,884
    
    
    
    3,504
    
    
    
    5Premises and equipment
    
    
    38,216
    
    
    
    22,468
    
    
    
    15,748
    
    
    
    19,279
    
    
    
    (3,531
    )
    
    
    (16
    )Foreclosed properties
    
    
    8,025
    
    
    
    2,246
    
    
    
    5,779
    
    
    
    
    
    
    
    5,779
    
    
    
    257Core deposit and other intangibles, net
    
    
    15,274
    
    
    
    9,586
    
    
    
    5,688
    
    
    
    8,061
    
    
    
    (2,373
    )
    
    
    (25
    )Goodwill
    
    
    78,862
    
    
    
    79,857
    
    
    
    (995
    )
    
    
    80,550
    
    
    
    (81,545
    )
    
    
    (102
    )Other
    
    
    110,230
    
    
    
    78,578
    
    
    
    31,652
    
    
    
    7,914
    
    
    
    23,738
    
    
    
    (30
    )Total assets
    
    $
    3,583,377
    
    
    $
    3,032,565
    
    
    $
    550,812
    
    
    $
    627,612
    
    
    $
    (76,800
    )
    
    
    (3
    )%Liabilities and Stockholders EquityLiabilitiesNoninterest-bearing
    
    $
    334,545
    
    
    $
    246,153
    
    
    $
    88,392
    
    
    $
    65,299
    
    
    $
    23,093
    
    
    
    9
    %Interest-bearing
    
    
    2,178,459
    
    
    
    1,748,774
    
    
    
    429,685
    
    
    
    405,361
    
    
    
    24,324
    
    
    
    1Total deposits
    
    
    2,513,004
    
    
    
    1,994,927
    
    
    
    518,077
    
    
    
    470,660
    
    
    
    47,417
    
    
    
    2Federal funds purchased and FRB discount
window advances
    
    
    
    
    
    
    12,000
    
    
    
    (12,000
    )
    
    
    6,170
    
    
    
    (18,170
    )
    
    
    (151
    )Securities sold under agreements to repurchase
    
    
    297,650
    
    
    
    317,118
    
    
    
    (19,468
    )
    
    
    
    
    
    
    (19,468
    )
    
    
    (6
    )FHLB advances
    
    
    380,000
    
    
    
    319,925
    
    
    
    60,075
    
    
    
    3,500
    
    
    
    56,575
    
    
    
    18Junior subordinated debentures
    
    
    60,774
    
    
    
    65,861
    
    
    
    (5,087
    )
    
    
    10,310
    
    
    
    (15,397
    )
    
    
    (23
    )Subordinated debt
    
    
    15,000
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    15,000
    
    
    
    100Revolving note payable
    
    
    20,600
    
    
    
    2,500
    
    
    
    18,100
    
    
    
    
    
    
    
    18,100
    
    
    
    724Term note payable
    
    
    55,000
    
    
    
    
    
    
    
    55,000
    
    
    
    75,000
    
    
    
    (20,000
    )
    
    
    (100
    )Other
    
    
    34,112
    
    
    
    35,001
    
    
    
    (889
    )
    
    
    6,982
    
    
    
    (7,871
    )
    
    
    (22
    )Total liabilities
    
    
    3,376,140
    
    
    
    2,747,332
    
    
    
    628,808
    
    
    
    572,622
    
    
    
    56,186
    
    
    
    2Stockholders EquityTotal stockholders equity
    
    
    207,237
    
    
    
    285,233
    
    
    
    (77,996
    )
    
    
    54,990
    
    
    
    (132,986
    )
    
    
    (47
    )Total liabilities and stockholders equity
    
    $
    3,583,377
    
    
    $
    3,032,565
    
    
    $
    550,812
    
    
    $
    627,612
    
    
    $
    (76,800
    )
    
    
    (3
    )%
 PAGE 32




---



##### Table of Contents



(1)
    
    Includes fair value adjustments.(2)
    
    The Northwest Suburban Acquisition column includes cash and cash
equivalents acquired through Northwest Suburban of $10,066 less cash
paid for the acquisition of $81,163, capitalized costs of $414, costs
relating to the registration statement of $147, and $75,000 borrowing.  
    
    Total assets decreased $109.4 million to $3.6 billion, or 3.0%, at September 30, 2008
compared to year end 2007 and were up $550.8 million compared to September 30, 2007.
    
    Total loans increased $19.9 million to $2.5 billion at September 30, 2008 compared to
year end 2007 and increased $486.8 million over the third quarter of 2007.
    
    The loan to deposit ratio decreased to 99.3% from 100.7% at December 31, 2007, and was
lower than the 100.6% figure recorded at September 30, 2007.
    
    Deposits increased by $54.9 million to $2.5 billion at September 30, 2008 compared to
year end 2007 and increased by $518.1 million when compared to September 30, 2007.
Noninterest bearing deposits increased by $13.2 million to $334.5 million at September 30,
2008 when compared to year end 2007.
  
    
    Following a charge off of $10.8 million in the first quarter, the balances related to
the Large Problem Credit (described in prior period reports) decreased by a net $5.7
million in the second quarter of 2008 through the sale of assets. In July 2008, the
Company took title of a substantial piece of real estate increasing foreclosed properties
and bringing the loan balance down by $5.3 million.
    
    Nonaccrual loans were 2.42% of total loans at September 30, 2008, up from 1.99% of total
loans at year end and 2.23% at September 30, 2007.
    
    Foreclosed properties were $8.0 million as of September 30, 2008 compared to $2.2
million at year end mainly as a result of the $5.3 million addition of the real estate
acquired in connection with the Large Problem Credit in July 2008.
    
    Loan delinquencies 30-89 days were 0.99% of loans at September 30, 2008, up from 0.48%
at December 31, 2007 and 0.49% at September 30, 2007.
    
    Nonperforming assets were 1.91% of total assets at September 30, 2008, up from 1.39% at
year end and 1.55% at September 30, 2007.
    
    The Company recorded a $51.8 million provision for loan losses for the first nine months
of 2008 compared to $3.5 million for the first nine months of 2007, reflecting managements
updated assessments of impaired loans and concerns about the effects of continued
deterioration of economic conditions on the Companys borrowing customers.
    
    The allowance for loan losses was 1.58% of total loans as of September 30, 2008, versus
1.08% at year end 2007 and 1.24% at September 30, 2007.
 PAGE 33




---



##### Table of Contents




    
    The allowance for loan losses was 0.65 times nonaccrual loans at September 30, 2008,
0.54 at year end and 0.56 times at September 30, 2007.
 Loans
  September 30,
    
    
    December 31,2008
    
    
    2007
(1)% of Gross
    
    
    
    
    
    
    % of GrossAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans(Dollars in thousands)Commercial
    
    $
    1,102,016
    
    
    
    44.2
    %
    
    $
    1,079,631
    
    
    
    43.6
    %Construction
    
    
    396,576
    
    
    
    15.9
    
    
    
    464,583
    
    
    
    18.8Commercial real estate
    
    
    691,961
    
    
    
    27.7
    
    
    
    627,928
    
    
    
    25.4Home equity
    
    
    169,905
    
    
    
    6.8
    
    
    
    142,158
    
    
    
    5.8Other consumer
    
    
    8,062
    
    
    
    0.3
    
    
    
    10,689
    
    
    
    0.4Residential mortgage
    
    
    126,079
    
    
    
    5.1
    
    
    
    149,703
    
    
    
    6.0Total loans, gross
    
    
    2,494,599
    
    
    
    100.0
    %
    
    
    2,474,692
    
    
    
    100.0
    %Net deferred fees
    
    
    (374
    )
    
    
    
    
    
    
    (365
    )Total loans, net
    
    $
    2,494,225
    
    
    
    
    
    
    $
    2,474,327
 
 (1)
    
    Amounts have been reclassified to conform to current period presentation.   
    
    Commercial loans increased $22.4 million from December 31, 2007 to $1.1 billion, or
44.2% of the loan portfolio, as of September 30, 2008.
    
    Construction loans decreased by $68.0 million from $464.6 million at December 31, 2007
to $396.6 million, or 15.9% of the loan portfolio, as of September 30, 2008.
    
    The change in loan mix from construction lending to commercial and industrial lending continued
during the third quarter of 2008, as commercial loans increased by $12.0 million compared
to the second quarter of 2008 while construction loans decreased $25.2 million.
    
    Commercial real estate loans increased by $64.0 million from $627.9 million at year end
to $692.0 million, or 27.7% of the loan portfolio, as of September 30, 2008.
 PAGE 34




---



##### Table of Contents




    
    Home equity loans increased by $27.7 million to $170.0 million, or 6.8% of the loan
portfolio, as of September 30, 2008 from $142.2 million at year end.
    
    Residential mortgage loans decreased $23.6 million to $126.1 million as of September 30,
2008 from $149.7 million as of December 31, 2007.
    
    The Company does not hold any sub-prime loans in its portfolio.
 Allowance for Loan Losses
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Balance, at beginning of period
    
    $
    22,606
    
    
    $
    23,724
    
    
    $
    26,748
    
    
    $
    23,229Provision charged to operations
    
    
    41,950
    
    
    
    1,800
    
    
    
    51,765
    
    
    
    3,481Loans charged off
    
    
    (25,224
    )
    
    
    (1,159
    )
    
    
    (40,472
    )
    
    
    (3,183
    )Recoveries
    
    
    96
    
    
    
    514
    
    
    
    1,387
    
    
    
    1,352Net loans charged off
    
    
    (25,128
    )
    
    
    (645
    )
    
    
    (39,085
    )
    
    
    (1,831
    )Balance, at end of period
    
    $
    39,428
    
    
    $
    24,879
    
    
    $
    39,428
    
    
    $
    24,879
    PAGE 35




---



##### Table of Contents



September 30,
    
    December 31,
    
    September 30,2008
    
    2007
    
    2007Net loans charged off to average loans during quarter
    
    
    3.98
    %
    
    
    0.37
    %
    
    
    0.13
    %Provision for loan losses to total loans
    
    
    6.69
    
    
    
    0.23
    
    
    
    0.36Allowance for loan losses to total loans
    
    
    1.58
    
    
    
    1.08
    
    
    
    1.24Allowance to nonaccrual loans
    
    
    0.65
    x
    
    
    0.54
    x
    
    
    0.56
    x
      PAGE 36




---



##### Table of Contents



Nonaccrual Loans and Nonperforming Assets
    September 30,
    
    
    December 31,
    
    
    September 30,2008
    
    
    2007
    
    
    2007(Dollars in thousands)Impaired and other loans 90 days past due
and accruing
    
    $
    
    
    
    $
    
    
    
    $
    Nonaccrual loans
    
    $
    60,474
    
    
    $
    49,173
    
    
    $
    44,681Foreclosed properties
    
    
    8,025
    
    
    
    2,220
    
    
    
    2,246Total nonperforming assets
    
    $
    68,499
    
    
    $
    51,393
    
    
    $
    46,927Nonaccrual loans to loans
    
    
    2.42
    %
    
    
    1.99
    %
    
    
    2.23
    %Nonperforming assets to loans
and foreclosed properties
    
    
    2.74
    
    
    
    2.08
    
    
    
    2.34Nonperforming assets to assets
    
    
    1.91
    
    
    
    1.39
    
    
    
    1.55
 PAGE 37




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##### Table of Contents



Securities
  September 30, 2008Held-to-Maturity
    
    
    Available-for-Sale
    
    
    Total% ofAmortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    Amortized
    
    
    Fair
    
    
    AmortizedCost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Cost(Dollars in thousands)Obligations of the U.S. Treasury and of
U.S. government-sponsored entities
    
    $
    
    
    
    $
    
    
    
    $
    267,101
    
    
    $
    264,762
    
    
    $
    267,101
    
    
    $
    264,762
    
    
    
    40.0
    %Obligations of states and political subdivisions
    
    
    1,252
    
    
    
    1,237
    
    
    
    57,475
    
    
    
    55,375
    
    
    
    58,727
    
    
    
    56,612
    
    
    
    8.8Mortgage-backed securities
    
    
    29,565
    
    
    
    28,884
    
    
    
    289,983
    
    
    
    286,283
    
    
    
    319,548
    
    
    
    315,167
    
    
    
    47.9Equity securities (1)
    
    
    
    
    
    
    
    
    
    
    2,749
    
    
    
    2,749
    
    
    
    2,749
    
    
    
    2,749
    
    
    
    0.4Other bonds
    
    
    
    
    
    
    
    
    
    
    19,214
    
    
    
    9,046
    
    
    
    19,214
    
    
    
    9,046
    
    
    
    2.9Total
    
    $
    30,817
    
    
    $
    30,121
    
    
    $
    636,522
    
    
    $
    618,215
    
    
    $
    667,339
    
    
    $
    648,336
    
    
    
    100.0
    %
 
 (1)
    
    The Company recognized a $47.8 impairment charge in the quarter ended September 30,
2008 bringing the amortized cost and fair value to $2.7 million.    
    
    U.S. Treasury and obligations of U.S. government-sponsored entities increased by $81.1
million to $264.8 million, or 40.0% of the portfolio, at September 30, 2008 compared to
$183.6 million at year end. At September 30, 2008, obligations of U.S.
government-sponsored entities included $262.7 million of callable debentures with
maturities ranging from approximately one to ten years and call dates ranging from one to
eleven months.
    
    U.S. government agency and government-sponsored entity mortgage-backed securities
decreased 24.5%, or $92.8 million, from $379.0 million at December 31, 2007 to
$286.3 million at September 30, 2008.
    
    As noted above, the Company recognized an impairment charge of $17.6 million on the
FHLMC and FNMA preferred equities in the first quarter of 2008 and an additional impairment
charge of $47.8
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##### Table of Contents



million in the third quarter of 2008 bringing the balance down to $2.7 million. During the
third quarter of 2008, $16.9 million in equity securities were sold at a loss of $16.7
million.
    
    Other bonds decreased by $11.8 million, or 56.6%, to $9.0 million at September 30, 2008
from $20.8 million at December 31, 2007 as a result of the decline in fair market value.
    
    The securities portfolio does not contain any sub-prime or Alt-A mortgage-backed
securities.
   Federal Home Loan Bank Stock
  Cash Surrender Value of Life Insurance
  PAGE 39




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Deposits and Borrowed Funds
  September 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Noninterest-bearing demand
    
    $
    334,545
    
    
    $
    321,317Interest-bearing demand
    
    
    172,003
    
    
    
    226,225Money-market
    
    
    224,486
    
    
    
    291,501Savings
    
    
    129,889
    
    
    
    129,476Time deposits less than $100,000
    
    
    682,294
    
    
    
    633,022Time deposits of $100,000 or more
    
    
    457,653
    
    
    
    511,743Brokered certificates of deposit
    
    
    512,134
    
    
    
    344,864Total interest-bearing deposits
    
    
    2,178,459
    
    
    
    2,136,831Total
    
    $
    2,513,004
    
    
    $
    2,458,148Total core deposits (1)
    
    $
    860,923
    
    
    $
    968,519
 
 (1)
    
    Includes noninterest-bearing and interest-bearing demand, money market, and savings.  
    
    Noninterest-bearing deposits were $334.5 million at September 30, 2008, $13.2
million more than the $321.3 million level at December 31, 2007.
    
    Over the same period, interest-bearing deposits increased 1.9%, or $41.6 million
to $2.2 billion at September 30, 2008 compared to December 31, 2007.
    
    Total core deposits, which include demand deposit, interest-bearing demand
deposit, money market, and savings accounts, decreased $107.6 million to $860.9
million at September 30, 2008 from $968.5 million at December 31, 2007.
    
    Certificates of deposit under $100,000 increased $49.3 million from December 31,
2007 to $682.3 million at September 30, 2008.
    
    Certificates of deposit over $100,000 decreased by $54.1 million from December
31, 2007 to $457.7 million at September 30, 2008.
    
    Brokered certificates of deposit increased by $167.3 million from December 31,
2007 to $512.1 million at September 30, 2008. The Company purchased brokered
certificates of deposit in order to move away from purchasing Federal
funds during the financial system disruption. The underlying
certificates of deposits of the brokered certificates of deposit are
in denominations of less than $100,000.
  PAGE 40




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September 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Federal funds purchased and FRB discount window advances
    
    $
    
    
    
    $
    81,000Revolving note payable
    
    
    20,600
    
    
    
    2,500Securities sold under agreements to repurchase
    
    
    297,650
    
    
    
    283,400Federal Home Loan Bank advances
    
    
    380,000
    
    
    
    323,439Junior subordinated debentures
    
    
    60,774
    
    
    
    60,724Subordinated debt
    
    
    15,000
    
    
    
    Term note payable
    
    
    55,000
    
    
    
    70,000Total
    
    $
    829,024
    
    
    $
    821,063
      PAGE 41




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Capital Resources
       PAGE 42




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##### Table of Contents



September 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Risk-weighted assets
    
    $
    2,826,140
    
    
    $
    2,811,423Average assets
    
    
    3,682,449
    
    
    
    3,721,444Capital components:Stockholders equity
    
    $
    207,237
    
    
    $
    375,164Plus: Guaranteed trust preferred securities
    
    
    59,000
    
    
    
    59,000Less: Core deposit and other intangibles, net
    
    
    (15,274
    )
    
    
    (17,044
    )Less: Goodwill
    
    
    (78,862
    )
    
    
    (160,407
    )Less: Disallowed tax assets
    
    
    (23,382
    )
    
    
    Less: Unrealized (gains) losses on securities, net of tax
    
    
    11,244
    
    
    
    13,917Plus: Unrealized losses on equity securities, net of tax
    
    
    
    
    
    
    (11,768
    )Plus: Other additions to Tier I capital
    
    
    16,865
    
    
    
    Tier I capital
    
    
    176,828
    
    
    
    258,862Allowance for loan losses
    
    
    39,428
    
    
    
    26,748Reserve for unfunded commitments
    
    
    793
    
    
    
    233Disallowed allowance
    
    
    (4,834
    )
    
    
    Qualifying subordinated debt
    
    
    15,000
    
    
    
    Total risk-based capital
    
    $
    227,215
    
    
    $
    285,843
  At September 30, 2008Minimum 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
    
    $
    227,215
    
    
    
    8.0
    %
    
    $
    226,091
    
    
    
    8.0
    %
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    288,660
    
    
    
    10.3
    
    
    
    224,943
    
    
    
    8.0
    
    
    $
    281,179
    
    
    
    10.0
    %Tier I capital to risk-weighted assets
Company
    
    
    176,828
    
    
    
    6.3
    
    
    
    113,046
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    253,450
    
    
    
    9.0
    
    
    
    112,471
    
    
    
    4.0
    
    
    
    168,707
    
    
    
    6.0Tier I capital to average assets
Company
    
    
    176,828
    
    
    
    4.8
    
    
    
    147,298
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    253,450
    
    
    
    6.9
    
    
    
    146,726
    
    
    
    4.0
    
    
    
    183,407
    
    
    
    5.0
 PAGE 43




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##### Table of Contents



At December 31, 2007Minimum Required
    
    Minimum RequiredActual
    
    for Capital Adequacy
    
    to be Well CapitalizedAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)Total capital to risk-weighted assets
Company
    
    $
    285,843
    
    
    
    10.2
    %
    
    $
    224,814
    
    
    
    8.0
    %
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    351,352
    
    
    
    12.6
    
    
    
    223,959
    
    
    
    8.0
    
    
    $
    279,949
    
    
    
    10.0
    %Tier I capital to risk-weighted assets
Company
    
    
    258,862
    
    
    
    9.2
    
    
    
    112,457
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    324,370
    
    
    
    11.6
    
    
    
    111,980
    
    
    
    4.0
    
    
    
    167,969
    
    
    
    6.0Tier I capital to average assets
Company
    
    
    258,862
    
    
    
    7.0
    
    
    
    148,858
    
    
    
    4.0
    
    
    
    n/a
    
    
    
    n/aMidwest Bank and Trust Company
    
    
    324,370
    
    
    
    8.7
    
    
    
    148,407
    
    
    
    4.0
    
    
    
    185,508
    
    
    
    5.0
 Liquidity
     PAGE 44




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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 HorizonGuidelineSeptember 30, 2008
    
    December 31, 2007
    
    MaximumDollar
    
    %
    
    Dollar
    
    %
    
    %Change
    
    Change
    
    Change
    
    Change
    
    Change(Dollars in thousands)+200 bp
    
    $
    7,814
    
    
    
    11.32
    %
    
    $
    (2,161
    )
    
    
    (2.36
    )%
    
    
    (10.0
    )%+100 bp
    
    
    3,824
    
    
    
    5.54
    
    
    
    694
    
    
    
    0.76
    
    
    
    -100 bp
    
    
    (3,072
    )
    
    
    (4.45
    )
    
    
    (225
    )
    
    
    (0.25
    )
    
    
    
   PAGE 46




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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 47




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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
     
    
    Managements ability to effectively manage interest rate risk and the impact of interest
rates in general on the volatility of the Companys net interest income;
    
    Fluctuations in the value of the Companys investment securities;
    
    The ability to attract and retain senior management experienced in banking and financial
services;
    
    The sufficiency of the allowance for loan losses to absorb the amount of actual losses
inherent in the existing portfolio of loans;
    
    The ability to ultimately collect on the Large Problem Credit;
    
    The Companys ability to adapt successfully to technological changes to compete
effectively in the marketplace;
    
    Credit risks and risks from concentrations (by geographic area and by industry) within
the Banks loan portfolio and individual large loans;
 PAGE 48




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##### Table of Contents




    
    The effects of competition from other commercial banks, thrifts, mortgage banking firms,
consumer finance companies, credit unions, securities brokerage firms, insurance companies,
money market and other mutual funds, and other financial institutions operating in the
Companys market or elsewhere or providing similar services;
    
    The failure of assumptions underlying the establishment of the allowance for loan losses
and estimation of values of collateral or cash flow projections and various financial assets
and liabilities;
    
    Volatility of rate sensitive deposits;
    
    Operational risks, including data processing system failures or fraud;
    
    Liquidity risks;
    
    The ability to sell our preferred stock and warrants to the
U.S. Treasury;
    
    The failure of the holders of the Series A preferred stock to
approve the issuance of the Companys preferred stock to the
U.S. Treasury;
    
    The ability of the Company to raise additional capital in
order to obtain the waiver of its lender of the covenant violation;
    
    The ability to successfully acquire low cost deposits or funding;
    
    The ability to successfully execute strategies to increase noninterest income;
    
    The ability of the Company to fully realize expected cost savings and revenues in
connection with acquisitions, or the ability to realize them on a timely basis;
    
    The risk of borrower, depositor, and other customer attrition after acquisitions are
completed;
    
    Changes in the economic environment, competition, or other factors that may influence the
anticipated growth rate of loans and deposits, the quality of the loan portfolio and loan
and deposit pricing, and the Companys ability to successfully pursue acquisition and
expansion strategies and integrate any acquired companies;
    
    The impact from changes in federal and state tax laws relating to certain tax structures
of the Company including an 80/20 company which holds a portion of the Companys securities
portfolio and a real estate investment trust which holds certain real estate loans
previously held by the Bank;
    
    The impact from liabilities arising from legal or administrative proceedings on the
financial condition of the Company;
    
    The ability of the Bank to pay dividends to the Company;
    
    The Companys ability to pay cash dividends on its
common stock;
    
    Possible administrative or enforcement actions of banking regulators in connection with
any material failure of the Company or the Bank to comply with banking laws, rules or
regulations;
    
    Possible administrative or enforcement actions of the 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 49




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##### Table of Contents




    
    Changes in accounting principles, policies, or guidelines affecting the business
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 50




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##### Table of Contents



PART II
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 Conditions
in the financial markets may limit the Companys access to
additional funding to meet its
liquidity needs.
      PAGE 51




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##### Table of Contents



If the Company is required to write down goodwill and other intangible assets or if it is required
to mark-to-market certain of its assets or reduce its deferred tax assets by a valuation allowance,
its financial condition and results of operations would be negatively affected.
     
    
    Significant adverse change in business climate;
    
    Significant unanticipated loss of clients/assets under management;
    
    Unanticipated loss of key personnel;
    
    Sustained periods of poor investment performance;
    
    Significant loss of deposits or loans;
    
    Significant reductions in profitability; or
    
    Significant changes in loan credit quality.
     The Companys cost of funds for banking operations may increase as a result of general economic
conditions, interest rates and competitive pressures.
   A large percentage of the Companys loans are collateralized by real estate, including its
construction loans, and an adverse change in the real estate market may result in losses and
adversely affect its profitability.
     While the Company attempts to manage the risk from changes in market interest rates, interest rate
risk management techniques are not exact. In addition, the Company may not be able to economically
hedge its interest rate risk. A rapid or substantial increase or decrease in interest rates could
adversely affect its net interest income and results of operations.
   PAGE 52




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##### Table of Contents



As a bank holding company that conducts substantially all of the Companys operations through its
subsidiaries, its ability to pay dividends, repurchase its shares or to repay its indebtedness
depends upon liquid assets held by the bank holding company and the results of operations of the
Companys subsidiaries.
   The widespread effect of falling housing prices on financial markets could adversely affect the
Companys profitability, liquidity, and financial condition.
  The
Company needs the permission of the holders of two-thirds of our
Series A depositary shares in order to be able to issue $85.5 million
of Series T Preferred Stock to the U.S. Treasury.
   th
 
 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
  
 Item 5. Other Information
  PAGE 53




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##### Table of Contents



Item 6. Exhibits
  2.1
    
    Agreement and Plan of Merger, dated as of March 22, 2007, by and between Midwest Banc
Holdings, Inc. and Northwest Suburban Bancorp., Inc. (incorporated by reference to
Registrants Report on Form 8-K filed March 23, 2007, File No. 001-13735).3.1
    
    Amended and Restated Certificate of Incorporation, as amended (incorporated by
reference to Registrants Form 10-Q for the quarter ended September 30, 2007, File
No. 001-13735).3.1.1
    
    Certificate of Designation for the Series A Preferred Stock (incorporated by
reference to Registrants Report on Form 8-K filed December 7, 2007, File
No. 001-13735).3.1.2
    
    Deposit Agreement, dated December 5, 2007, among the Registrant, Illinois Stock
Transfer Company and the holders from time to time of the Depositary Receipts issued
pursuant to the Deposit Agreement (incorporated by reference to Registrants Report
on Form 8-K filed December 7, 2007, File No. 001-13735).3.2
    
    Amended and Restated By-laws, filed September 27, 2005 (incorporated by reference to
Registrants Report on Form 8-K filed December 14, 2007, 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).4.1.1
    
    Form of Certificate for the Preferred Stock (incorporated by reference to
Registrants Report on Form 8-K filed December 7, 2007, File No. 001-13735).4.1.2
    
    Form of Depositary Receipt for the Depositary Shares (incorporated by reference to
Registrants Report on Form 8-K filed December 7, 2007, File No. 001-13735).4.2
    
    Certain instruments defining the rights of the holders of long-term debt of the
Company and certain of its subsidiaries, none of which authorize a total amount of
indebtedness in excess of 10% of the total assets of the Company and its subsidiaries
on a consolidated basis, have not been filed as Exhibits. The Company hereby agrees
to furnish a copy of any of these agreements to the SEC upon request.*10.1
    
    Midwest Banc Holdings, Inc. Stock and Incentive Plan (incorporated by reference to
Registrants Form 10-K for the year ended December 31, 2006, File No. 001-13735).*10.4
    
    Form of Transitional Employment Agreements (incorporated by reference to Registrants
Registration Statement on Form S-1, Registration No. 333-42827).10.5
    
    Lease dated as of December 24, 1958, between Western National Bank of Cicero and
Midwest Bank and Trust Company, as amended (incorporated by reference to Registrants
Registration Statement on Form S-1, Registration No. 333-42827).10.6
    
    Britannica Centre Lease, dated as of May 1, 1994, between Chicago Title and
Trust Company, as Trustee under Trust Agreement dated November 2, 1977 and known as
Trust No. 1070932 and Midwest Bank and Trust Company (incorporated by reference to
Registrants Registration Statement on Form S-1, Registration No. 333-42827).10.7
    
    Lease dated as of March 20, 1996 between Grove Lodge No. 824 Ancient Free and
Accepted Masons and Midwest Bank of Hinsdale (incorporated by reference to
Registrants Registration Statement on Form S-1, Registration No. 333-42827)10.8
    
    Office Lease, undated, between Grove Lodge No. 824 Ancient Free and Accepted Masons
and Midwest Bank of Hinsdale (incorporated by reference to Registrants Registration
Statement on Form S-1, Registration No. 333-42827).*10.15
    
    Form of 2008 Supplemental Executive Retirement Agreement.
 PAGE 54




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##### Table of Contents



*10.16
    
    Form of Transitional Employment Agreement (Executive Officer Group) (incorporated by
reference to Registrants Form 10-Q for the quarter ended September 30, 2001, File
No. 001-13735).*10.17
    
    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).*10.19
    
    Form of Restricted Stock Award Agreement for Non-employee Directors and Restricted
Stock Grant Notice for Non-employee Directors (incorporated by reference to
Registrants Report on Form 8-K filed October 28, 2005, File No. 001-13735).10.21
    
    Lease dated as of April 29, 1976, between Joseph C. and Grace Ann Sanfilippo and
Fairfield Savings and Loan Association, as amended (incorporated by reference to
Registrants Form 10-K for the year ended December 31, 2003, File No. 001-13735).10.22
    
    Lease dated as of August 28, 2002 between Glen Oak Plaza and Midwest Bank and
Trust Company (incorporated by reference to Registrants Form 10-K for the year ended
December 31, 2003, File No. 001-13735).*10.25
    
    Employment Agreement as of September 28, 2004 between the Company and the Chief
Executive Officer (incorporated by reference to Registrants Form 10-Q for the
quarter ended September 30, 2004, File No. 001-13735).*10.27
    
    Midwest Banc Holdings, Inc. Severance Policy Amended and Restated as of June 24, 2008.10.29
    
    Midwest Banc Holdings, Inc. Directors Deferred Compensation Plan (incorporated by
reference to Registrants Report on Form 8-K filed December 16, 2005, File
No. 001-13735).*10.30
    
    Amendment to Employment Agreement as of September 28, 2004 between the Company and
the Chief Executive Officer (incorporated by reference to Registrants Report on
Form 8-K filed March 24, 2006, File No. 001-13735).*10.31
    
    Amended and Restated Employment Agreement dated February 8, 2006 by and between Royal
American Bank and Jay Fritz, assumed by the Company as of July 1, 2006 (incorporated
by reference to Registrants Report on Form 8-K filed July 7, 2006, File
No. 001-13735).10.32
    
    Lease dated April 1, 1993, by and between Royal American Bank and LaSalle National
Trust, N.A., as amended, assumed by the Company as of July 1, 2006 (incorporated by
reference to Registrants Form 10-Q for the quarter ended September 30, 2006, File
No. 001-13735).10.33
    
    Lease dated April 19, 1993 by and between Royal American Bank and Hamilton Forsythe
1000 Tower Lane LLC, successor-in-interest to Bensenville Office Venture, as amended,
assumed by the Company as of July 1, 2006 (incorporated by reference to Registrants
Form 10-Q for the quarter ended September 30, 2006, File No. 001-13735).10.34
    
    Sublease dated January 31, 2006 by and between Royal American Bank and JPMorgan Chase
Bank, National Association, assumed by the Company as of July 1, 2006 (incorporated
by reference to Registrants Form 10-Q for the quarter ended September 30, 2006, File
No. 001-13735).10.35
    
    Lease dated January 20, 2006 by and between Royal American Bank and MEG Associates
Limited Partnership, assumed by the Company as of July 1, 2006 (incorporated by
reference to Registrants Form 10-Q for the quarter ended September 30, 2006, File
No. 001-13735).10.36
    
    Lease dated October 28, 1996 by and between Royal American Bank and Tiffany Pointe,
Inc./Marquette Bank, as amended, assumed by the Company as of July 1, 2006
(incorporated by reference to Registrants Form 10-Q for the quarter ended
September 30, 2006, File No. 001-13735).10.37
    
    Lease dated September 24, 1999, by and between Royal American Bank and Moats Office
Properties, Inc., as amended, assumed by the Company as of July 1, 2006 (incorporated
by reference to Registrants Form 10-Q for the quarter ended September 30, 2006, File
No. 001-13735).
 PAGE 55




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##### Table of Contents



10.38
    
    Lease dated July 14, 2006 by and between Midwest Bank and Trust Company and William
C. Moran (incorporated by reference to Registrants Form 10-Q for the quarter ended
September 30, 2006, File No. 001-13735).10.43
    
    Lease dated November 9, 2005 by and between Midwest Bank and Trust Company and
Crossings Commercial, LLC (incorporated by reference to Registrants Form 10-Q for
the quarter ended September 30, 2006, File No. 001-13735).10.44
    
    Lease dated August 17, 2005 by and between Royal American Bank and L.F.A.J.J.
Partners, LLC, assumed by the Company as of July 1, 2006 (incorporated by reference
to Registrants Form 10-Q for the quarter ended March 31, 2007, File No. 001-13735).*10.46
    
    Form of 2007 Transitional Employment Agreement (incorporated by reference to
Registrants Report on Form 8-K filed October 1, 2007, File No. 001-13735).*10.48
    
    First Amendment to the Midwest Banc Holdings, Inc. Stock and Incentive Plan
(incorporated by reference to Registrants Report on Form 8-K filed October 1, 2007,
File No. 001-13735).10.49
    
    Lease dated December 27, 2007 by and between Midwest Bank and Trust Company and
George Garner and Barbara Garner (incorporated by reference to Registrants Form 10-K
for the year ended December 31, 2007, File No. 001-13735).*10.50
    
    Mutual Agreement RE Severance and Retirement dated January 14, 2008 between the
Company and John Eilering (incorporated by reference to Registrants Form 10-K for
the year ended December 31, 2007, File No. 001-13735).*10.51
    
    Second amendment to 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 March 31, 2008, File No. 001-13735).*10.52
    
    Second amendment to the 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 Form 10-Q for the quarter
ended March 31, 2008, File No. 001-13735).10.53
    
    Agreement of Purchase and Sale as of March 10, 2008 between the Company and PGG, LLC
(incorporated by reference to Registrants Form 10-Q for the quarter ended March 31,
2008, File No. 001-13735).10.54
    
    First Amendment to Real Estate Purchase Agreement as of March 26, 2008 between the
Company and PGG, LLC (incorporated by reference to Registrants Form 10-Q for the
quarter ended March 31, 2008, File No. 001-13735).10.55
    
    Post-closing Occupancy Agreement as of March 28, 2008 between the Company and NMD
Investments, LLC (incorporated by reference to Registrants Form 10-Q for the quarter
ended March 31, 2008, File No. 001-13735).10.56
    
    Amendment to Loan Agreement dated as of September 28, 2007 and Loan Agreement dated
March 31, 2008, between the Company and M&I Marshall & Ilsley Bank (incorporated by
reference to Registrants Form 10-Q for the quarter ended March 31, 2008, File
No. 001-13735).10.57
    
    Second Amendment of Loan Agreement dated April 4, 2007, between the Company and M&I
Marshall & Ilsley Bank (incorporated by reference to Registrants Form 10-Q for the
quarter ended March 31, 2008, File No. 001-13735).*10.58
    
    Midwest Banc Holdings, Inc. Management Incentive Plan (incorporated by reference to
Registrants Form 10-Q for the quarter ended March 31, 2008, File No. 001-13735).*10.59
    
    Midwest Banc Holdings, Inc. Employee Stock Purchase Plan (incorporated by reference
to Registrants Proxy Statement filed April 7, 2008, File No. 001-13735).31.1
    
    Rule 13a-14(a) Certification of Principal Executive Officer.
 PAGE 56




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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 Accounting Officer.
 
 *
    
    Indicates management contracts or compensatory plans or arrangements
required to be filed as an exhibit. PAGE 57




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SIGNATURES
   MIDWEST BANC HOLDINGS, INC.
(Registrant)By:
    /s/ James J. GiancolaJames J. Giancola,President and Chief Executive OfficerBy:
    /s/ JoAnn Sannasardo LilekJoAnn Sannasardo Lilek,Executive Vice President and
Chief Financial Officer PAGE 58




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2.1
    
    Agreement and Plan of Merger, dated as of March 22, 2007, by and
between Midwest Banc Holdings, Inc. and Northwest Suburban
Bancorp., Inc. (incorporated by reference to Registrants Report on
Form 8-K filed March 23, 2007, File No. 001-13735).3.1
    
    Amended and Restated Certificate of Incorporation, as amended
(incorporated by reference to Registrants Form 10-Q for the
quarter ended September 30, 2007, File No. 001-13735).3.1.1
    
    Certificate of Designation for the Series A Preferred Stock
(incorporated by reference to Registrants Report on Form 8-K filed
December 7, 2007, File No. 001-13735).3.1.2
    
    Deposit Agreement, dated December 5, 2007, among the Registrant,
Illinois Stock Transfer Company and the holders from time to time
of the Depositary Receipts issued pursuant to the Deposit Agreement
(incorporated by reference to Registrants Report on Form 8-K filed
December 7, 2007, File No. 001-13735).3.2
    
    Amended and Restated By-laws, filed September 27, 2005
(incorporated by reference to Registrants Report on Form 8-K filed
December 14, 2007, 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).4.1.1
    
    Form of Certificate for the Preferred Stock (incorporated by
reference to Registrants Report on Form 8-K filed December 7,
2007, File No. 001-13735).4.1.2
    
    Form of Depositary Receipt for the Depositary Shares (incorporated
by reference to Registrants Report on Form 8-K filed December 7,
2007, File No. 001-13735).4.2
    
    Certain instruments defining the rights of the holders of long-term
debt of the Company and certain of its subsidiaries, none of which
authorize a total amount of indebtedness in excess of 10% of the
total assets of the Company and its subsidiaries on a consolidated
basis, have not been filed as Exhibits. The Company hereby agrees
to furnish a copy of any of these agreements to the SEC upon
request.*10.1
    
    Midwest Banc Holdings, Inc. Stock and Incentive Plan (incorporated
by reference to Registrants Form 10-K for the year ended
December 31, 2006, File No. 001-13735).*10.4
    
    Form of Transitional Employment Agreements (incorporated by
reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).10.5
    
    Lease dated as of December 24, 1958, between Western National Bank
of Cicero and Midwest Bank and Trust Company, as amended
(incorporated by reference to Registrants Registration Statement
on Form S-1, Registration No. 333-42827).10.6
    
    Britannica Centre Lease, dated as of May 1, 1994, between Chicago
Title and Trust Company, as Trustee under Trust Agreement dated
November 2, 1977 and known as Trust No. 1070932 and Midwest Bank
and Trust Company (incorporated by reference to Registrants
Registration Statement on Form S-1, Registration No. 333-42827).10.7
    
    Lease dated as of March 20, 1996 between Grove Lodge No. 824
Ancient Free and Accepted Masons and Midwest Bank of Hinsdale
(incorporated by reference to Registrants Registration Statement
on Form S-1, Registration No. 333-42827)10.8
    
    Office Lease, undated, between Grove Lodge No. 824 Ancient Free and
Accepted Masons and Midwest Bank of Hinsdale (incorporated by
reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).*10.15
    
    Form of 2008 Supplemental Executive Retirement Agreement.*10.16
    
    Form of Transitional Employment Agreement (Executive Officer Group)
(incorporated by




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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).*10.19
    
    Form of Restricted Stock Award Agreement for Non-employee Directors
and Restricted Stock Grant Notice for Non-employee Directors
(incorporated by reference to Registrants Report on Form 8-K filed
October 28, 2005, File No. 001-13735).10.21
    
    Lease dated as of April 29, 1976, between Joseph C. and Grace Ann
Sanfilippo and Fairfield Savings and Loan Association, as amended
(incorporated by reference to Registrants Form 10-K for the year
ended December 31, 2003, File No. 001-13735).10.22
    
    Lease dated as of August 28, 2002 between Glen Oak Plaza and
Midwest Bank and Trust Company (incorporated by reference to
Registrants Form 10-K for the year ended December 31, 2003, File
No. 001-13735).*10.25
    
    Employment Agreement as of September 28, 2004 between the Company
and the Chief Executive Officer (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30, 2004,
File No. 001-13735).*10.27
    
    Midwest Banc Holdings, Inc. Severance Policy Amended and Restated
as of June 24, 2008.10.29
    
    Midwest Banc Holdings, Inc. Directors Deferred Compensation Plan
(incorporated by reference to Registrants Report on Form 8-K filed
December 16, 2005, File No. 001-13735).*10.30
    
    Amendment to Employment Agreement as of September 28, 2004 between
the Company and the Chief Executive Officer (incorporated by
reference to Registrants Report on Form 8-K filed March 24, 2006,
File No. 001-13735).*10.31
    
    Amended and Restated Employment Agreement dated February 8, 2006 by
and between Royal American Bank and Jay Fritz, assumed by the
Company as of July 1, 2006 (incorporated by reference to
Registrants Report on Form 8-K filed July 7, 2006, File
No. 001-13735).10.32
    
    Lease dated April 1, 1993, by and between Royal American Bank and
LaSalle National Trust, N.A., as amended, assumed by the Company as
of July 1, 2006 (incorporated by reference to Registrants
Form 10-Q for the quarter ended September 30, 2006, File
No. 001-13735).10.33
    
    Lease dated April 19, 1993 by and between Royal American Bank and
Hamilton Forsythe 1000 Tower Lane LLC, successor-in-interest to
Bensenville Office Venture, as amended, assumed by the Company as
of July 1, 2006 (incorporated by reference to Registrants
Form 10-Q for the quarter ended September 30, 2006, File
No. 001-13735).10.34
    
    Sublease dated January 31, 2006 by and between Royal American Bank
and JPMorgan Chase Bank, National Association, assumed by the
Company as of July 1, 2006 (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30, 2006,
File No. 001-13735).10.35
    
    Lease dated January 20, 2006 by and between Royal American Bank and
MEG Associates Limited Partnership, assumed by the Company as of
July 1, 2006 (incorporated by reference to Registrants Form 10-Q
for the quarter ended September 30, 2006, File No. 001-13735).10.36
    
    Lease dated October 28, 1996 by and between Royal American Bank and
Tiffany Pointe, Inc./Marquette Bank, as amended, assumed by the
Company as of July 1, 2006 (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30,




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##### Table of Contents



2006, File No. 001-13735).10.37
    
    Lease dated September 24, 1999, by and between Royal American Bank
and Moats Office Properties, Inc., as amended, assumed by the
Company as of July 1, 2006 (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30, 2006,
File No. 001-13735).10.38
    
    Lease dated July 14, 2006 by and between Midwest Bank and
Trust Company and William C. Moran (incorporated by reference to
Registrants Form 10-Q for the quarter ended September 30, 2006,
File No. 001-13735).10.43
    
    Lease dated November 9, 2005 by and between Midwest Bank and
Trust Company and Crossings Commercial, LLC (incorporated by
reference to Registrants Form 10-Q for the quarter ended
September 30, 2006, File No. 001-13735).10.44
    
    Lease dated August 17, 2005 by and between Royal American Bank and
L.F.A.J.J. Partners, LLC, assumed by the Company as of July 1, 2006
(incorporated by reference to Registrants Form 10-Q for the
quarter ended March 31, 2007, File No. 001-13735).*10.46
    
    Form of 2007 Transitional Employment Agreement (incorporated by
reference to Registrants Report on Form 8-K filed October 1, 2007,
File No. 001-13735).*10.48
    
    First Amendment to the Midwest Banc Holdings, Inc. Stock and
Incentive Plan (incorporated by reference to Registrants Report on
Form 8-K filed October 1, 2007, File No. 001-13735).10.49
    
    Lease dated December 27, 2007 by and between Midwest Bank and
Trust Company and George Garner and Barbara Garner (incorporated by
reference to Registrants Form 10-K for the year ended December 31,
2007, File No. 001-13735).*10.50
    
    Mutual Agreement RE Severance and Retirement dated January 14, 2008
between the Company and John Eilering (incorporated by reference to
Registrants Form 10-K for the year ended December 31, 2007, File
No. 001-13735).*10.51
    
    Second amendment to 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
March 31, 2008, File No. 001-13735).*10.52
    
    Second amendment to the 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 Form 10-Q for the quarter ended March 31,
2008, File No. 001-13735).10.53
    
    Agreement of Purchase and Sale as of March 10, 2008 between the
Company and PGG, LLC (incorporated by reference to Registrants
Form 10-Q for the quarter ended March 31, 2008, File
No. 001-13735).10.54
    
    First Amendment to Real Estate Purchase Agreement as of March 26,
2008 between the Company and PGG, LLC (incorporated by reference to
Registrants Form 10-Q for the quarter ended March 31, 2008, File
No. 001-13735).10.55
    
    Post-closing Occupancy Agreement as of March 28, 2008 between the
Company and NMD Investments, LLC (incorporated by reference to
Registrants Form 10-Q for the quarter ended March 31, 2008, File
No. 001-13735).10.56
    
    Amendment to Loan Agreement dated as of September 28, 2007 and Loan
Agreement dated March 31, 2008, between the Company and M&I
Marshall & Ilsley Bank (incorporated by reference to Registrants
Form 10-Q for the quarter ended March 31, 2008, File
No. 001-13735).10.57
    
    Second Amendment of Loan Agreement dated April 4, 2007, between the
Company and




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##### Table of Contents



M&I Marshall & Ilsley Bank (incorporated by reference
to Registrants Form 10-Q for the quarter ended March 31, 2008,
File No. 001-13735).*10.58
    
    Midwest Banc Holdings, Inc. Management Incentive Plan (incorporated
by reference to Registrants Form 10-Q for the quarter ended
March 31, 2008, File No. 001-13735).*10.59
    
    Midwest Banc Holdings, Inc. Employee Stock Purchase Plan
(incorporated by reference to Registrants Proxy Statement filed
April 7, 2008, 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 Accounting Officer.
 
 *
    
    Indicates management contracts or compensatory plans or arrangements
required to be filed as an exhibit.