##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-K

x ANNUAL REPORT PURSUANT TO Section 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002


For the transition period from  to


Commission file number 001-13735

MIDWEST BANC HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)


|                         |  |                                        
|------------------------ |  | ---------------------------------------
|Delaware                 |  | 36-3252484                             
|(State of Incorporation) |  | (I.R.S. Employer Identification Number)

501 West North Avenue, Melrose Park, Illinois 60160
(Address of principal executive offices including ZIP Code)

(708) 865-1053
(Registrants telephone number including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

10.0% Cumulative Trust Preferred Securities, American Stock Exchange
(And Guarantee with Respect Thereto)

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value, Nasdaq National Market
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.

YES o      
  NO x

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by Reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

YES x        NO o

The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant on June 28, 2002, based on the last sales
price quoted on the Nasdaq National Market System on that date, the last
business day of the registrants most recently completed second fiscal quarter,
was approximately $183.0 million.

As of April 14, 2003, the number of shares outstanding of the registrants
common stock, par value $0.01 per share, was 17,798,118.

Documents Incorporated by Reference

Portions of the Companys Proxy Statement for the 2003 Annual Meeting of
Stockholders are incorporated by reference into Part III.





---

TABLE OF CONTENTS



|                                               |                                                                                                         |  |  |  |  |  |  | 
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                        
|                                               | ITEM 1. BUSINESS                                                                                       
|                                               | ITEM 2. PROPERTIES                                                                                     
|                                               | ITEM 3. LEGAL PROCEEDINGS                                                                              
|                                               | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS                                                
|PART II                                       
|                                               | ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                      
|                                               | ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                           
|                                               | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS          
|                                               | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                    
|                                               | ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                       
|                                               | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE           
|PART III                                      
|                                               | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                            
|                                               | ITEM 11. EXECUTIVE COMPENSATION                                                                        
|                                               | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|                                               | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                
|PART IV                                       
|                                               | ITEM 14. CONTROLS AND PROCEDURES                                                                       
|                                               | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                              
|SIGNATURES                                    
|CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER  
|Fifth Amendment and Waiver to Credit Agreement
|Sixth Amendment and Waiver to Credit Agreement
|Subsidiaries                                  
|Consent of Crowe Chizek and Company LLC       
|Certification of CEO                          
|Certification of CFO                          



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
FORM 10-K

INDEX

|         |  |                                                                                                 |  |         
|-------- |  | ----------------------------------------------------------------------------------------------- |  | --------
|         |  |                                                                                                 |  | Page No.
|         |  |                                                                                                 |  |         
|Part I   |  |                                                                                                 |  |         
|Item 1.  |  | Business                                                                                        |  | 1       
|Item 2.  |  | Properties                                                                                      |  | 23      
|Item 3.  |  | Legal Proceedings                                                                               |  | 25      
|Item 4.  |  | Submission of Matters to a Vote of Stockholders                                                 |  | 25      
|Part II  |  |                                                                                                 |  |         
|Item 5.  |  | Market for the Registrants Common Equity and Related Stockholder Matters                       |  | 26      
|Item 6.  |  | Selected Consolidated Financial Data                                                            |  | 28      
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations           |  | 29      
|Item 7A  |  | Quantitative and Qualitative Disclosures about Market Risk                                      |  | 54      
|Item 8.  |  | Consolidated Financial Statements and Supplementary Data                                        |  | 54      
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure            |  | 55      
|Part III |  |                                                                                                 |  |         
|Item 10. |  | Directors and Executive Officers of the Registrant                                              |  | 56      
|Item 11. |  | Executive Compensation                                                                          |  | 56      
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related
Stockholders Matters |  | 56      
|Item 13. |  | Certain Relationships and Related Transactions                                                  |  | 57      
|Part IV  |  |                                                                                                 |  |         
|Item 14. |  | Controls and Procedures                                                                         |  | 58      
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                 |  | 58      
|         |  | Signature(s) Page                                                                               |  | 62      
|         |  | Contents of Consolidated Financial Statements                                                   |  | F-1     





---



##### Table of Contents






PART I




ITEM 1. BUSINESS

The Company

Midwest Banc Holdings, Inc. (the Company) is a community-based bank
holding company headquartered in Melrose Park, Illinois. The Company, through
its wholly-owned banking subsidiaries, provides a wide range of services,
including traditional banking services, personal and corporate trust services,
residential mortgage services, insurance brokerage and retail securities
brokerage services. The Companys principal operating subsidiaries are two
Illinois community banks: Midwest Bank and Trust Company and Midwest Bank of
Western Illinois (collectively, the Banks). Each of the Banks is chartered
as an Illinois state bank.

The Banks are community-oriented, full-service commercial banks, providing
traditional banking services to individuals, small-to-medium-sized businesses,
government and public entities and not-for-profit organizations. The Banks
operate out of 21 locations, with 15 banking centers in the greater Chicago
metropolitan area and six banking centers in Western Illinois. Porter
Insurance Agency, Inc., a subsidiary of Midwest Bank of Western Illinois, acts
as an insurance agency for individuals and corporations. Midwest Financial and
Investment Services, Inc., a subsidiary of the Company, provides securities
brokerage services to customers of each of the Banks. Midwest Bank Insurance
Services, L.L.C., a subsidiary of Midwest Bank and Trust Company, acts as an
insurance agency for individuals and corporations.

The Company focuses on establishing and maintaining long-term
relationships with customers and is committed to serving the financial services
needs of the communities it serves. In particular, the Company has emphasized
in the past and intends to continue to emphasize its relationships with
individual customers and small-to-medium-sized businesses. The Company
actively evaluates the credit needs of its markets, including low- and
moderate-income areas, and offers products that are responsive to the needs of
its customer base. The markets served by the Company provide a mix of real
estate, commercial and consumer lending opportunities, as well as a stable core
deposit base.

The Company is a Delaware corporation. The Company was founded in 1983 as
a bank holding company under the Bank Holding Company Act of 1956, as amended,
for Midwest Bank and Trust Company.

1



---



##### Table of Contents



Certain information with respect to the Banks and the Companys nonbank
subsidiaries as of December 31, 2002, is set forth below:

|                                                |  |                  |  |                                                                                                                                         |  |                   
|----------------------------------------------- |  | ---------------- |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------
|                                                |  |                  |  |                                                                                                                                         |  | Number of Banking 
|Company Subsidiaries                            |  | Headquarters     |  | Market Area                                                                                                                             |  | Centers or Offices
|                                                |  |                  |  |                                                                                                                                         |  |                   
|Banks:                                          |  |                  |  |                                                                                                                                         |  |                   
|                                                |  |                  |  |                                                                                                                                         |  |                   
|Midwest Bank and Trust Company                  |  | Elmwood Park, IL |  | Algonquin, Chicago,
Downers Grove,
Elmwood Park,
Hinsdale, Island
Lake, Long Grove,
Melrose Park,
McHenry, Norridge,
Roselle, and Union |  | 15                
|                                                |  |                  |  |                                                                                                                                         |  |                   
|Midwest Bank of Western Illinois                |  | Monmouth, IL     |  | Monmouth,
Galesburg, Oquawka,
Kirkwood,
and Aledo                                                                                       |  | 6                 
|                                                |  |                  |  |                                                                                                                                         |  |                   
|Nonbanks:                                       |  |                  |  |                                                                                                                                         |  |                   
|                                                |  |                  |  |                                                                                                                                         |  |                   
|Porter Insurance Agency, Inc.                   |  | Alexis, IL       |  | Western Illinois                                                                                                                        |  | 2                 
|                                                |  |                  |  |                                                                                                                                         |  |                   
|Midwest Bank Insurance Services, L.L.C          |  | Algonquin, IL    |  | *                                                                                                                                       |  | 1                 
|                                                |  |                  |  |                                                                                                                                         |  |                   
|MBTC Investment Company                         |  | Las Vegas, NV    |  | **                                                                                                                                      |  | 2                 
|                                                |  |                  |  |                                                                                                                                         |  |                   
|MBHI Capital Trust I                            |  | Melrose Park, IL |  | ***                                                                                                                                     |  |                  
|                                                |  |                  |  |                                                                                                                                         |  |                   
|MBHI Capital Trust II                           |  | Melrose Park, IL |  | ***                                                                                                                                     |  |                  
|                                                |  |                  |  |                                                                                                                                         |  |                   
|Midwest Financial and Investment
Services, Inc. |  | Elmwood Park, IL |  | ****                                                                                                                                    |  | 4                 



---

|*    |  | Provides fixed annuity products to individuals.                                         
|---- |  | ----------------------------------------------------------------------------------------
|    
|**   |  | Provides additional investment portfolio management to Midwest Bank and
Trust Company.  
|    
|***  |  | The trust is a statutory business trust formed as a financing subsidiary
of the Company.
|    
|**** |  | Provides securities brokerage services to individuals and commercial
business.          

2



---



##### Table of Contents



History

The Banks

Midwest Bank and Trust Company was established in 1959 in Elmwood Park,
Illinois to provide community and commercial banking services to individuals
and businesses in the neighboring western suburbs of Chicago. Midwest Bank and
Trust Company grew in the 1960s and 1970s with the economic development and
population expansion of Elmwood Park, Melrose Park, Forest Park, River Grove,
Franklin Park, and, to a lesser extent, River Forest and Oak Park.

Midwest Bank and Trust Companys original facility was located at the
corner of North and Harlem Avenues in Elmwood Park, a central point for
residential traffic and commercial business. As state banking regulations
permitted, Midwest Bank and Trust Company established a drive-up facility at
the corner of North and Fifth Avenues in Melrose Park in 1978. This facility
provided a convenient location to serve business customers, which were an
increasingly important part of the economic development of Melrose Park at that
time. In 1987, this location and surrounding acreage were developed into
Midwest Centre, a commercial office building with a full-service banking center
of Midwest Bank and Trust Company located on its main floor. Midwest Centre is
the Companys current headquarters.

The Company pursued growth opportunities through acquisitions beginning in
the mid-to-late 1980s. Illinois State Bank of Chicago was acquired in 1986,
providing the Company with a prime downtown Chicago location on South Michigan
Avenue. Illinois State Bank of Chicago was merged into Midwest Bank and Trust
Company in 1991 and is operated as a full-service banking center.

Midwest Bank and Trust Company added two additional banking centers in
Northwest Chicago on Pulaski Road in 1993 and Addison Street in 1996. Midwest
Bank and Trust Company currently has a network of eight full-service banking
centers in diverse markets within Cook County, Illinois.

The Company acquired the State Bank of Union in McHenry County in 1987 and
changed its name to Midwest Bank of Union in 1991. This acquisition
represented the first bank location for the Company outside of Cook County.
The bank was renamed Midwest Bank of McHenry County in 1994 and opened a
full-service banking center in Algonquin in southeastern McHenry County in
August 1994. New banking centers were opened in Island Lake in 1998 and
McHenry in 1999.

The Company established Midwest Bank of DuPage County in 1991 in Hinsdale.
Midwest Bank of DuPage County was created to develop markets through the
opening of a new banking center. The bank was subsequently renamed Midwest
Bank of Hinsdale in 1991. Midwest Bank of Hinsdale opened a convenience
banking center in 1996 in Downers Grove, Illinois, which has been expanded into
a full-service banking center. A third banking center, in Roselle, Illinois,
opened in February 2000.

In an effort to diversify the Companys core deposit base and develop
profitable growth opportunities at a reasonable cost of market entry, the
Company began an expansion program in West Central Illinois in the early 1990s.
The Company acquired the Bank of Oquawka in Henderson County in 1991 and The
National Bank of Monmouth via a merger with West Central Illinois Bancorp in
1993. Subsequently, the Bank of Oquawka was merged into The National Bank of
Monmouth in 1994. A new full-service banking center was opened in Galesburg in
Knox County in 1996. In 1998, The National Bank of Monmouth converted from a
national bank to an Illinois state chartered bank and changed its name to
Midwest Bank of Western Illinois. On December 18, 1999, Midwest Bank of
Western Illinois acquired the deposits and fixed assets of the Aledo Banking
Center of Associated Bank-Illinois. In January 2001, Midwest Bank of Western
Illinois opened a full service banking center in a grocery store in Monmouth.

3



---



##### Table of Contents



Midwest Bank of Western Illinois currently has a network of six banking centers
in Monmouth, Galesburg, Oquawka, Kirkwood, and Aledo.

Effective August 19, 2002, Midwest Bank of Hinsdale and Midwest Bank of
McHenry County merged into Midwest Bank and Trust Company. Immediately
following the merger, the Company contributed to Midwest Bank and Trust
Company 100% of the capital stock of First Midwest Data Corp., and thereafter,
First Midwest Data Corp. was liquidated. This internal reorganization was the
final phase of a multi-phase effort to consolidate backroom functions, reduce
duplicative processes, streamline customer service, and enhance marketing
efforts and product delivery. Management believes that this merger will assist
the Company in meeting its revenue growth expectations and controlling its
overhead costs.

On July 22, 2002, the Company jointly announced with Big Foot Financial
Corp. (BFFC), the execution of a definitive agreement providing for the
acquisition of BFFC by the Company in a stock merger. All regulatory and
shareholder approvals were received in the fourth quarter of 2002 and the
transaction closed on January 3, 2003. BFFC was the holding company for
Fairfield Savings Bank, F.S.B. (Fairfield) with approximately $200 million in
total assets at June 30, 2002, and three locations in the Chicago area. The
transaction expanded the Companys existing branch network in the metropolitan
Chicago area by merging Fairfield, with banking centers in Chicago, Long Grove,
and Norridge, into Midwest Bank and Trust Company. The Company issued a total
of 1,599,088 shares in the transaction.

On November 1, 2002, the Company jointly announced with CoVest Bancshares,
Inc. (CoVest), the parent company of CoVest Banc, N.A., the execution a
definitive agreement providing for the acquisition of CoVest in a stock and
cash merger transaction. The transaction will expand the Companys existing
branch network into the three suburban northwest Chicago metropolitan areas of
Des Plaines, Arlington Heights, and Schaumburg. The Company will issue 0.925
shares of its stock and $10.25 in cash for each share of CoVest outstanding on
the effective date, resulting in a purchase price of $27.61 or $105.2 million
in aggregate, including the cash-out of options, based on the Companys closing
price of $18.77 on October 31, 2002. The per share consideration paid to CoVest
shareholders will be approximately 62.9% in the form of stock and 37.1% in the
form of cash. CoVest had 3,481,434 shares and 641,789 options outstanding as
of September 30, 2002. The exchange ratio is fixed and CoVest has the right to
terminate the transaction if the Companys stock underperforms a peer group of
other bank holding company stocks by more than 17.5%, subject to certain
provisions. Because of delays in the regulatory approval process for this
acquisition, on March 7, 2003, the Board of Directors of CoVest decided to
cancel the special meeting of its shareholders scheduled for March 17, 2003 at
which those shareholders were to vote whether to approve the merger. At this
time, CoVest has not re-scheduled the meeting. The agreement with CoVest
contemplates that the transaction must close by June 30, 2003, unless extended
by mutual agreement of the parties. Consummation of the merger remains subject
to CoVest shareholder approval as well as regulatory approval and fulfillment
of the other conditions set forth in the agreements between the parties. The
regulators have not yet acted on the merger application and have indicated that
they do not intend to do so until the regularly scheduled examination of
the Banks as discussed later in this document is complete. If the Company is unable
to obtain the necessary regulatory approval, or, as a result of delays in
consummating the transaction the other conditions to closing cannot be
satisfied, the merger will not occur.

Nonbank Subsidiaries

The Companys nonbank subsidiaries were created to support the core retail
and commercial banking activities of the Company and the Banks.

4



---



##### Table of Contents



Porter Insurance Agency, Inc. was acquired by Midwest Bank of Western
Illinois in 1998 to provide insurance services to customers of the bank. This
subsidiary also maintains an independent customer base that represents more
than 85% of its current premiums and commissions.

Midwest Bank Insurance Services, L.L.C. is an independent insurance agency
established by Midwest Bank and Trust Company in 1998. This subsidiary
concentrates in commercial insurance products and fixed rate annuities.

In May 2000, the Company formed MBHI Capital Trust I (the Trust). The
Trust is a statutory business trust formed under the laws of the State of
Delaware and is wholly owned by the Company. In June 2000, the Trust issued
10.0% preferred securities with an aggregate liquidation amount of $20,000,000
($25 per preferred security) to third-party investors in an underwritten public
offering.

In March 2002, the Company acquired the assets of Service 1st Financial
Corp. through its newly formed subsidiary, Midwest Financial and Investment
Services, Inc. This subsidiary provides securities brokerage services to both
bank and nonbank customers.

In August 2002, Midwest Bank and Trust Company established MBTC Investment
Company. This subsidiary was capitalized through the transfer of investment
securities from the Bank and was formed to diversify management of that portion
of the Companys investment portfolio.

In October 2002, the Company formed MBHI Capital Trust II (the Trust), a
statutory trust formed under the laws of the State of Delaware and a
wholly-owned financing subsidiary of the Company. In October 2002, the Trust
issued $15,000,000 in aggregate liquidation amount of floating rate trust
preferred securities in a private placement offering.

The Banks

The Company operates two banks with centralized planning and staff support
functions performed at the holding company level. Each Bank faces different
levels and varied types of competition, which are addressed by the local,
decentralized nature of each Bank. The Banks maintain full responsibility for
the day-to-day operations of each banking center, including lending practices
and decision-making, pricing, sales and customer service. The Banks are
supported by centralized staff services provided by the Company for accounting,
auditing, financial and strategic planning, marketing, human resources, loan
review, securities management, retail sales, training, and regulatory
compliance.

Set forth below is selected financial and other information for each Bank
for the year ended December 31, 2002.

|                                 |  |                |           |        |  |        |         |  |  |   |        | 
|-------------------------------- |  | -------------- | --------- | ------ |  | ------ | ------- |  |  | - | ------ | 
|                                 |  | Total          |           | Total  |  | Net   
|                                 |  | Assets         |           | Equity |  | Income
|                                 |  |                |           |        |  |       
|                                 |  | (In Thousands)
|Midwest Bank and Trust Company   |  | $              | 1,721,370 |        |  | $      | 120,643 |  |  | $ | 16,161 | 
|Midwest Bank of Western Illinois |  |                | 276,810   |        |  |        | 23,347  |  |  |   | 2,793  | 

The Banks accounted for nearly 99.5% of the assets and virtually all the
net income of the Company as of and for the years ended 2002, 2001, and 2000.

5



---



##### Table of Contents



Markets

The Banks operate in broadly diverse markets, with varying levels and
growth rates of economic development and activity. Population trends,
geographic density, and the demographic mix vary by market. The largest
segments of the Companys customer base live and work in relatively mature
markets in Cook, DuPage, Lake, and McHenry Counties and West Central Illinois.
The markets in Hinsdale and Long Grove are more affluent and upwardly mobile
segments with a higher percentage of white-collar professionals.

The Company considers its primary market areas to be those areas
immediately surrounding its offices for retail customers and generally within a
10-20 mile radius of each Bank for commercial relationships. The Banks operate
out of 15 full-service locations in the Chicago metropolitan area and six
offices in West Central Illinois. Accordingly, the Companys business extends
throughout the Chicago metropolitan area and Western Illinois, but is highly
concentrated in the areas in which the Banks offices are located. The
communities in which the Banks offices are located have a broad spectrum of
demographic characteristics. These communities include a number of densely
populated areas as well as rural areas, and some extremely high-income areas as
well as many middle-income and some low-to-moderate income areas.

Strategy

The Company believes that its continued success is dependent on its
ability to provide its customers value-added retail and commercial banking
programs and other financial products and services which are delivered by
experienced, committed banking professionals operating under the highest
standards of customer service. The growth strategy of the Company is to
increase its core banking business, develop its insurance and retail brokerage
activities, and expand into new markets as well as diversify the financial
services it offers. The Companys strategy includes the following objectives:
(i) maintain high levels of customer service; (ii) increase market share within
existing markets and expand into new markets via the establishment of new
banking centers and bank or branch acquisitions; (iii) enhance cross-selling of
value-added products and services; (iv) maintain a competitive position in
product development and marketing; (v) increase the revenue base of nonbank
financial services subsidiaries; (vi) increase existing loan-to-deposit ratios
of the Banks and (vii) expand funding sources for liquidity and interest rate
risk management. Management believes that these strategies, which are subject
to change at any time based upon market conditions, will support the continued
profitable growth of the Company.

The Company plans to continue to implement its growth strategy through
selected acquisitions and by adding de novo banking centers in nearby
communities where management believes customers would be attracted to a
community-banking alternative. The Company intends to establish two de novo
banking centers per year. Previously, the Company announced its plans to open
two new banking centers in Addision and Glenview, Illinois during 2003. The
Company anticipates that it will take between 12 to 18 months for a new banking
center to become profitable. Any acquisition the Company pursues will ideally
be accretive to net income and diluted earnings per share within the first full
year following consolidation, with cost savings targeted to be realized in the
first phase of integration post closing. The Companys growth strategy of
establishing de novo banking centers and selected acquisitions are dependent
on many factors, including regulatory approval that may limit or prohibit such
expansion plans.

In July 2002, the Company announced the acquisition of Big Foot Financial
Corp. and its thrift subsidiary, Fairfield Savings Bank, F.S.B. This $200
million acquisition was completed on January 3, 2003. Final integration of
systems and processes were completed in February 2003. Fairfields Chicago,
Long Grove, and Norridge banking centers were merged into and became branches
of Midwest Bank and Trust

6



---



##### Table of Contents



Company. Expected cost savings are being realized and the Company expects
this acquisition to be accretive to diluted earnings per share in 2003.

In November 2002, the Company announced the acquisition of CoVest
Bancshares, Inc. and its subsidiary, CoVest Banc, N.A. This $600 million bank
has banking centers in Arlington Heights, Des Plaines, and Schaumburg. Expected
cost savings and diluted earnings per share accretion are anticipated to be
realized within the first full year following the closing. The agreement with
CoVest contemplates that the transaction must close by June 30, 2003, unless
extended by mutual agreement of the parties. The transaction is subject to
regulatory and CoVest shareholder approval and fulfillment of the other
conditions in the merger application. There can be no assurance that
regulatory and shareholder approvals necessary to complete the acquisition will
be obtained, or that expected cost savings will be realized at all or within
the first full year following the closing.

The Companys ability to implement its growth strategy is dependent upon,
among other things, obtaining timely regulatory approvals of acquisition
transactions and other matters. The Companys ability to
obtain regulatory approvals on a timely basis may be negatively impacted by the
results of examinations by federal and state regulatory agencies.

7



---



##### Table of Contents



Products and Services

Deposit Products

Management believes the Company and the Banks offer competitive deposit
products and programs which address the needs of customers in each of the local
markets served. These products include:

Checking and NOW Accounts. The Company has developed a range of different
checking account products designed and priced to meet specific target segments
(e.g., Free Checking and Small Business Checking) of the local markets served
by each Bank. The Company offers several types of premium rate NOW accounts
with interest rates indexed to the prime rate or the 91-day U.S. Treasury bill
rate.

Savings and Money Market Accounts. The Company offers multiple types of
money market accounts with interest rates indexed to the 91-day U.S. Treasury
bill rate as well as various types of savings accounts.

Time Deposits. The Company offers a wide range of innovative time
deposits (including traditional and Roth Individual Retirement Accounts),
usually offered at premium rates with special features to protect the
customers interest earnings in changing interest rate environments.

Lending Services

The Companys loan portfolio consists of commercial loans, commercial real
estate loans, agricultural loans, consumer real estate loans (including home
equity lines of credit), and consumer installment loans. Management emphasizes
sound credit analysis and loan documentation. Management also seeks to avoid
undue concentrations of loans to a single industry or based on a single class
of collateral. Management requires personal guarantees of the principals
except on cash secured, state or political subdivision, or non-for-profit
loans. The Company has focused its efforts on building its lending business in
the following areas:

Commercial Loans. Commercial and individual loans are made to small- to
medium-sized businesses that are sole proprietorships, partnerships and
corporations. Generally, these loans are secured with collateral including
accounts receivable, inventory and equipment, and require personal guarantees
of the principals. Frequently, these loans are further secured with real
estate collateral.

Commercial Real Estate Loans. Commercial real estate loans include loans
for acquisition, development and construction of real estate which are secured
by the real estate involved, and other loans secured by farmland, commercial
real estate, multifamily residential properties and other nonfarm,
nonresidential properties. Loans are generally short-term balloon loans and
adjustable rate mortgages with initial fixed terms of one to five years.

Agricultural Loans. A relatively small but important segment of the loan
portfolio consists of farm crop production loans on a seasonal basis, machinery
and equipment loans of a medium term nature and longer-term real estate loans
to purchase acreage. Farm production loans are concentrated primarily in corn
and bean crops, with only a small portion tied to livestock. Midwest Bank of
Western Illinois is a major agribusiness lender in West Central Illinois.

8



---



##### Table of Contents



Consumer Real Estate Loans. Consumer real estate loans are made to
finance residential units that will house from one to four families. While the
Company originates both fixed and adjustable rate consumer real estate loans,
most one- to five-year adjustable rate loans originated pursuant to Fannie Mae
and Freddie Mac guidelines are sold in the secondary market. In the normal
course of business, the Company retains medium-term fixed-rate loans. See
Managements Discussion and Analysis of Financial Condition and Results of
Operation.

Home equity lines of credit, included within the Companys consumer real
estate loan portfolio, are secured by the borrowers home and can be drawn on
at the discretion of the borrower. These lines of credit are generally at
variable interest rates. When made, home equity lines, combined with the
outstanding loan balance of prior mortgage loans, generally do not exceed 80%
of the appraised value of the underlying real estate collateral.

Consumer Loans. Consumer loans (other than consumer real estate loans)
are collateralized loans to individuals for various personal reasons such as
automobile financing and home improvements.

Lending officers are assigned various levels of loan approval authority
based upon their respective levels of experience and expertise. Loan approval
is also subject to the Companys formal loan policy, as established by each
Banks Board of Directors, and to the concurrence of an officers credit
committee (or the Banks Board of Directors or a committee of the Board) in
addition to the recommendation of the lending officer. This system is intended
to assure that commercial credit requests are subjected to independent
objective review on at least two different levels.

ATMs

The Banks maintain a network of 26 ATM sites generally located within the
Banks local markets. All except two off-site ATMs are owned by the Banks.
Nineteen of the ATM sites are located at various banking centers and seven are
maintained off-site at hotels, supermarkets, and schools.

Trust Activities

Midwest Bank and Trust Company and Midwest Bank of Western Illinois offer
land trusts, personal trusts, custody accounts, retirement plan services, and
corporate trust services. As of December 31, 2002, the Trust Department of
Midwest Bank and Trust Company maintained trust relationships representing an
aggregate market value of $97.4 million in assets with an aggregate book value
of $126.9 million. In addition, the Trust Department of Midwest Bank and Trust
Company administered 1,919 land trust accounts as of December 31, 2002.
Midwest Bank of Western Illinois also provides trust services to its customers
and maintained trust accounts with an aggregate market value of $45.6 million
and an aggregate book value of $47.6 million as of December 31, 2002.

Insurance Services

Porter Insurance Agency, Inc. is a full line independent insurance agency
acquired by Midwest Bank of Western Illinois in 1998. Concentrating in
agricultural-related insurance products, Porter Insurance Agency, Inc. is one
of the largest writers of crop hail insurance in Western Illinois. Its
services also include individual health care contracts and homeowners
insurance, as well as commercial and retail automobile insurance for
individuals, new car dealerships, and commercial trucking fleets.

Midwest Bank Insurance Services, L.L.C. is an independent insurance agency
established by Midwest Bank and Trust Company in 1998 which concentrates in
commercial insurance products and fixed rate annuities.

9



---



##### Table of Contents



Securities Brokerage

Securities brokerage services have been provided through arrangements with
an independent regional brokerage firm, Service 1st Financial Corp., which has
been operating for 13 years in our banking franchise. Licensed brokers are
located at four banking centers and provide investment-related services,
including securities trading, financial planning, mutual funds sales, fixed and
variable rate annuities, and tax-exempt and conventional unit trusts. In March
2002, the Companys newly formed subsidiary, Midwest Financial and Investment
Services, Inc., purchased certain assets of Service 1st Financial Corp. and
commenced brokerage activities through the banks investment centers. The
projected income from the addition of this brokerage line of business is
expected to increase the Companys overall other income. This acquisition is
expected to further one of the Companys strategic goals of increasing revenues
from nontraditional sources and to enhance the Companys net income in the
current year, though there is no guaranty that actual results will be attained.

Competition

The Company competes in the financial services industry through the Banks,
Porter Insurance Agency, Inc., Midwest Bank Insurance Services, L.L.C., and
Midwest Financial and Investment Services, Inc. The financial services
business is highly competitive. The Company encounters strong direct
competition for deposits, loans and other financial services. The Companys
principal competitors include other commercial banks, savings banks, savings
and loan associations, mutual funds, money market funds, finance companies,
credit unions, mortgage companies, insurance companies and agencies, private
issuers of debt obligations and suppliers of other investment alternatives,
such as securities firms.

In addition, in recent years, several major multibank holding companies
have entered or expanded in the Chicago metropolitan market. Generally, these
financial institutions are significantly larger than the Company and have
access to greater capital and other resources. In addition, many of the
Companys nonbank competitors are not subject to the same degree of regulation
as that imposed on bank holding companies, federally insured banks and Illinois
chartered banks. As a result, such nonbank competitors have advantages over
the Company in providing certain services.

The Company addresses these competitive challenges by creating market
differentiation and by maintaining an independent community bank presence with
local decision-making within its markets. The Banks compete for deposits
principally by offering depositors a variety of deposit programs, convenient
office locations and hours and other services. The Banks compete for loan
originations primarily through the interest rates and loan fees they charge,
the efficiency and quality of services they provide to borrowers, the variety
of their loan products and their trained staff of professional bankers.

The Company competes for qualified personnel by offering competitive
levels of compensation, management and employee cash incentive programs, and by
augmenting compensation with stock options pursuant to its stock option plan.
Attracting and retaining high quality employees is important in enabling the
Company to compete effectively for market share.

Employees

As of December 31, 2002, the Company and its subsidiaries had 384
full-time equivalent employees. Management considers its relationship with its
employees to be good.

Available Information

The Companys
internet address is www.midwestbanc.com. The Company does not
currently have the capability to post the filings it makes with the
SEC on its website on the same business day that it files these
reports with the SEC. However, the Company will provide electronic
and/or paper copies of these filings free of charge upon request. The
Company is taking the steps necessary in order to ensure that each of
the reports it files with or furnishes to the SEC are posted on its
website the same day that these reports are filed.

10



---



##### Table of Contents



11



---



##### Table of Contents



SUPERVISION AND REGULATION

Bank holding companies and banks are extensively regulated under federal
and state law. References under this heading to applicable statutes or
regulations are brief summaries of portions thereof which do not purport to be
complete and which are qualified in their entirety by reference to those
statutes and regulations. Any change in applicable laws or regulations may
have a material adverse effect on the business of commercial banks and bank
holding companies, including the Company and the Banks. However, management is
not aware of any current recommendations by any regulatory authority which, if
implemented, would have or would be reasonably likely to have a material effect
on the liquidity, capital resources or operations of the Company or the Banks.
Finally, please remember that the supervision, regulation and examination of
banks and bank holding companies by bank regulatory agencies are intended
primarily for the protection of depositors rather than stockholders of banks
and bank holding companies.

Bank Holding Company Regulation

The Company is registered as a bank holding company with the Federal
Reserve and, accordingly, is subject to supervision and regulation by the
Federal Reserve under the Bank Holding Company Act (the Bank Holding Company
Act and the regulations issued thereunder are collectively referred to as the
BHC Act). The Company is required to file with the Federal Reserve periodic
reports and such additional information as the Federal Reserve may require
pursuant to the BHC Act. The Federal Reserve examines the Company and the
Banks, and may examine Porter Insurance Agency, Inc., MBHI Capital Trust I,
MBHI Capital Trust II, Midwest Financial and Investment Services, Inc., MBTC
Investment Company, and Midwest Bank Insurance Services, L.L.C.

The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
the assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company. With certain exceptions, the BHC
Act prohibits a bank holding company from acquiring direct or indirect
ownership or control of voting shares of any company which is not a bank or
bank holding company and from engaging directly or indirectly in any activity
other than banking or managing or controlling banks or performing services for
its authorized subsidiaries. A bank holding company may, however, engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve has determined, by regulation or order, to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto,
such as performing functions or activities that may be performed by a trust
company, or acting as an investment or financial advisor. The Federal Reserve,
however, expects bank holding companies to maintain strong capital positions
while experiencing growth. In addition, the Federal Reserve, as a matter of
policy, may require a bank holding company to be well-capitalized at the time
of filing an acquisition application and upon consummation of the
acquisition.
Under the BHC Act, the Company and the Banks are prohibited from engaging in
certain tie-in arrangements in connection with an extension of credit, lease,
sale of property or furnishing of services. That means that, except with
respect to traditional banking products, the Company may not condition a
customers purchase of one of its services on the purchase of another service.
The passage of the Gramm-Leach-Bliley Act, however, allows bank holding
companies to become financial holding companies. Financial holding companies
do not face the same prohibitions on entering into certain business
transactions that bank holding companies currently face.

Under the Illinois Banking Act, any person who acquires more than 10% of
the Companys stock may be required to obtain the prior approval of the
Commissioner of the Illinois Office of Banks and Real Estate (the Illinois
Commissioner). Under the Change in Bank Control Act, a person may be required
to obtain the prior approval of the Federal Reserve before acquiring the power
to directly or indirectly

12



---



##### Table of Contents



control the management, operations or policies of the Company or before
acquiring 10% or more of any class of its outstanding voting stock.

It is the policy of the Federal Reserve that the Company is expected to
act as a source of financial strength to the Banks and to commit resources to
support the Banks. The Federal Reserve takes the position that in implementing
this policy, it may require the Company to provide such support when the
Company otherwise would not consider itself able to do so.

The Federal Reserve has adopted risk-based capital requirements for
assessing bank holding company capital adequacy. These standards define
regulatory capital and establish minimum capital ratios in relation to assets,
both on an aggregate basis and as adjusted for credit risks and
off-balance-sheet exposures. The Federal Reserves risk-based guidelines apply
on a consolidated basis for bank holding companies with consolidated assets of
$150 million or more and on a bank-only basis for bank holding companies with
consolidated assets of less than $150 million, subject to certain terms and
conditions. Under the Federal Reserves risk-based guidelines, capital is
classified into two categories. For bank holding companies, Tier 1, or core,
capital consists of common stockholders equity, qualifying noncumulative
perpetual preferred stock (including related surplus), qualifying cumulative
perpetual preferred stock (including related surplus) (subject to certain
limitations) and minority interests in the common equity accounts of
consolidated subsidiaries, and is reduced by goodwill, and specified intangible
assets (Tier 1 Capital). Tier 2, or supplementary capital consists of the
allowance for loan and lease losses, perpetual preferred stock and related
surplus, hybrid capital instruments, unrealized holding gains on equity
securities, perpetual debt and mandatory convertible debt securities, and term
subordinated debt and intermediate-term preferred stock, including related
surplus.

Under the Federal Reserves capital guidelines, bank holding companies are
required to maintain a minimum ratio of qualifying total capital to
risk-weighted assets of 8%, of which at least 4% must be in the form of Tier 1
Capital. The Federal Reserve also requires a minimum leverage ratio of Tier 1
Capital to total assets of 3% for strong bank holding companies (those rated a
composite 1 under the Federal Reserves rating system). For all other bank
holding companies, the minimum ratio of Tier 1 capital to total assets is 4%.
In addition, the Federal Reserve continues to consider the Tier 1 leverage
ratio in evaluating proposals for expansion or new activities.

In its capital adequacy guidelines, the Federal Reserve emphasizes that
the foregoing standards are supervisory minimums and that banking organizations
generally are expected to operate well above the minimum ratios. These
guidelines also provide that banking organizations experiencing growth, whether
internally or by making acquisitions, are expected to maintain strong capital
positions substantially above the minimum levels.

As of December 31, 2002, the Company had regulatory capital in excess of
the Federal Reserves minimum requirements. The Company had a total capital to
risk-weighted assets ratio of 11.7% and a Tier 1 capital to risk-weighted
assets ratio of 10.4% and a leverage ratio of 7.0% as of December 31, 2002.

As a holding company, the Company is primarily dependent upon dividend
distributions from its operating subsidiaries for its income. Federal and
state statutes and regulations impose restrictions on the payment of dividends
by the Company and the Banks.

Federal Reserve policy provides that a bank holding company should not pay
dividends unless (i) the bank holding companys net income over the prior year
is sufficient to fully fund the dividends and (ii) the prospective rate of
earnings retention appears consistent with the capital needs, asset quality and
overall financial condition of the bank holding company and its subsidiaries.

13



---



##### Table of Contents



Delaware law also places certain limitations on the ability of the Company
to pay dividends. For example, the Company may not pay dividends to its
stockholders if, after giving effect to the dividend, the Company would not be
able to pay its debts as they become due. Because a major source of the
Companys revenues is dividends the Company receives and expects to receive
from the Banks, the Companys ability to pay dividends is likely to be
dependent on the amount of dividends paid by the Banks. No assurance can be
given that the Banks will, in any circumstances, pay such dividends to the
Company on their stock.

Bank Regulation

Under Illinois law, the Banks are subject to supervision and examination
by the Illinois Commissioner. Each of the Banks is a member of the Federal
Reserve System and as such is also subject to examination by the Federal
Reserve. The Federal Reserve also supervises compliance with the provisions of
federal law and regulations, which place restrictions on loans by member banks
to their directors, executive officers and other controlling persons. Each
Bank is also a member of the FHLB of Chicago and may be subject to examination
by the FHLB of Chicago. As affiliates of the Banks, the Company and Porter
Insurance Agency, Inc. are also subject to examination by the Federal Reserve.

The deposits of the Banks are insured by the Bank Insurance Fund (BIF)
under the provisions of the Federal Deposit Insurance Act (the FDIA), and the
Banks are, therefore, also subject to supervision and examination by the FDIC.
The FDIA requires that the appropriate federal regulatory authority approve any
merger and/or consolidation by or with an insured bank, as well as the
establishment or relocation of any bank or branch office. The FDIA also gives
the Federal Reserve and other federal bank regulatory agencies power to issue
cease and desist orders against either banks, holding companies or persons
regarded as institution affiliated parties. A cease and desist order can
either prohibit such entities from engaging in certain unsafe and unsound bank
activity or can require them to take certain affirmative action.

Furthermore, banks are affected by the credit policies of the Federal
Reserve, which regulates the national supply of bank credit. Such regulation
influences overall growth of bank loans, investments and deposits and may also
affect interest rates charged on loans and paid on deposits. The monetary
policies of the Federal Reserve have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so
in the future.

As discussed above, under Illinois law, the Banks are subject to
supervision and examination by the Illinois Commissioner, and, as members of
the Federal Reserve System, by the Federal Reverse. Each of these regulatory
agencies conducts routine, periodic examinations of each of the Banks and the
Company. In March 2003, the Federal Reserve and the Illinois Commissioner
began a joint examination of the Banks. The exam is ongoing and has involved
further review of the adequacy of the Banks overall risk management practices,
including the proper identification and classifications of problem loans. The
failure of the Company and the Bank to adequately address any identified
deficiencies could negatively impact the Companys ability to implement all of
its growth strategies, including the pending acquisition of CoVest.

Financial Institution Regulation

Transactions with Affiliates. Transactions between a bank and its holding
company or other affiliates are subject to various restrictions imposed by
state and federal regulatory agencies. Such transactions include loans and
other extensions of credit, purchases of securities and other assets and
payments of fees or other distributions. In general, these restrictions limit
the amount of transactions between a bank and an affiliate of such bank, as
well as the aggregate amount of transactions between a

14



---



##### Table of Contents



bank and all of its affiliates, impose collateral requirements in some cases
and require transactions with affiliates to be on terms comparable to those for
transactions with unaffiliated entities.

Dividend Limitations. As state member banks, none of the Banks may,
without the approval of the Federal Reserve, declare a dividend if the total of
all dividends declared in a calendar year exceeds the total of its net income
for that year, combined with its retained net income of the preceding two
years, less any required transfers to the surplus account. Under Illinois law,
none of the Banks may pay dividends in an amount greater than its net profits
then on hand, after deducting losses and bad debts. For the purpose of
determining the amount of dividends that an Illinois bank may pay, bad debts
are defined as debts upon which interest is past due and unpaid for a period of
six months or more, unless such debts are well-secured and in the process of
collection.

In addition to the foregoing, the ability of the Company and the Banks to
pay dividends may be affected by the various minimum capital requirements and
the capital and noncapital standards established under the Federal Deposit
Insurance Corporation Improvements Act of 1991 (FDICIA), as described below.
The right of the Company, its stockholders and its creditors to participate in
any distribution of the assets or earnings of its subsidiaries is further
subject to the prior claims of creditors of the respective subsidiaries.

Capital Requirements. State member banks are required by the Federal
Reserve to maintain certain minimum capital levels. The Federal Reserves
capital guidelines for state member banks require state member banks to
maintain a minimum ratio of qualifying total capital to risk-weighted assets of
8%, of which at least 4% must be in the form of Tier 1 Capital. In addition,
the Federal Reserve requires a minimum leverage ratio of Tier 1 Capital to
total assets of 3% for strong banking institutions (those rated a composite 1
under the Federal Reserves rating system) and a minimum leverage ratio of Tier
1 Capital to total assets of 4% for all other banks.

At December 31, 2002 each of the Banks has a Tier 1 capital to
risk-weighted assets ratio and a total capital to risk-weighted assets ratio
which meets the above requirements. Midwest Bank and Trust Company has a Tier
1 capital to risk-weighted assets ratio of 9.8% and a total capital to
risk-weighted assets ratio of 11.1%. Midwest Bank of Western Illinois has a
Tier 1 capital to risk-weighted assets ratio of 12.4% and a total capital to
risk-weighted assets ratio of 13.2%.

Standards for Safety and Soundness. The FDIA, as amended by FDICIA and
the Riegle Community Development and Regulatory Improvement Act of 1994
requires the Federal Reserve, together with the other federal bank regulatory
agencies, to prescribe standards of safety and soundness, by regulations or
guidelines, relating generally to operations and management, asset growth,
asset quality, earnings, stock valuation and compensation. The Federal Reserve
and the other federal bank regulatory agencies have adopted a set of guidelines
prescribing safety and soundness standards pursuant to FDICIA, as amended. The
guidelines establish general standards relating to internal controls and
information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director or principal shareholder. In addition,
the Federal Reserve adopted regulations that authorize, but do not require, the
Federal Reserve to order an institution that has been given notice by the
Federal Reserve that it is not satisfying any of such safety and soundness
standards to submit a compliance plan. If, after being so notified, an
institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the Federal Reserve
must issue an order directing action to correct the deficiency and may issue an
order directing other actions of the types to which an undercapitalized
association is subject under the prompt

15



---



##### Table of Contents



corrective action provisions of FDICIA. If an institution fails to comply
with such an order, the Federal Reserve may seek to enforce such order in
judicial proceedings and to impose civil money penalties. The Federal Reserve
and the other federal bank regulatory agencies also adopted guidelines for
asset quality and earnings standards.

A range of other provisions in FDICIA include requirements applicable to
closure of branches; additional disclosures to depositors with respect to terms
and interest rates applicable to deposit accounts; uniform regulations for
extensions of credit secured by real estate; restrictions on activities of and
investments by state-chartered banks; modification of accounting standards to
conform to generally accepted accounting principles including the reporting of
off-balance-sheet items and supplemental disclosure of estimated fair market
value of assets and liabilities in financial statements filed with the banking
regulators; increased penalties in making or failing to file assessment reports
with the FDIC; greater restrictions on extensions of credit to directors,
officers and principal stockholders; and increased reporting requirements on
agricultural loans and loans to small businesses.

In addition, the Federal Reserve, FDIC and other federal banking agencies
adopted a final rule, which modified the risk-based capital standards to
provide for consideration of interest rate risk when assessing the capital
adequacy of a bank. Under this rule, the Federal Reserve and the FDIC must
explicitly include a banks exposure to declines in the economic value of its
capital due to changes in interest rates as a factor in evaluating a banks
capital adequacy. The Federal Reserve, the FDIC and other federal banking
agencies also have adopted a joint agency policy statement providing guidance
to banks for managing interest rate risk. The policy statement emphasizes the
importance of adequate oversight by management and a sound risk management
process. The assessment of interest rate risk management made by the banks
examiners will be incorporated into the banks overall risk management rating
and used to determine the effectiveness of management.

Prompt Corrective Action. FDICIA requires the federal banking regulators,
including the Federal Reserve and the FDIC, to take prompt corrective action
with respect to depository institutions that fall below minimum capital
standards and prohibits any depository institution from making any capital
distribution that would cause it to be undercapitalized. Institutions that are
not adequately capitalized may be subject to a variety of supervisory actions
including, but not limited to, restrictions on growth, investment activities,
capital distributions and affiliate transactions and will be required to submit
a capital restoration plan which, to be accepted by the regulators, must be
guaranteed in part by any company having control of the institution (such as
the Company). In other respects, FDICIA provides for enhanced supervisory
authority, including greater authority for the appointment of a conservator or
receiver for undercapitalized institutions. The capital-based prompt
corrective action provisions of FDICIA and their implementing regulations apply
to FDIC-insured depository institutions. However, federal banking agencies
have indicated that, in regulating bank holding companies, the agencies may
take appropriate action at the holding company level based on their assessment
of the effectiveness of supervisory actions imposed upon subsidiary insured
depository institutions pursuant to the prompt corrective action provisions of
FDICIA.

Insurance of Deposit Accounts. Under FDICIA, as a FDIC-insured
institution, each of the Banks is required to pay deposit insurance premiums
based on the risk it poses to the insurance fund. The FDIC has authority to
raise or lower assessment rates on insured deposits in order to achieve
statutorily required reserve ratios in the insurance funds and to impose
special additional assessments. Each depository institution is assigned to one
of three capital groups: well capitalized, adequately capitalized or
undercapitalized. An institution is considered well capitalized if it has a
total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based
capital ratio of 6% or greater, has leverage ratio of 5% or greater and is not
subject to any order or written directive to meet and maintain a specific
capital level. An adequately capitalized institution is defined as one that
has a total risk-based capital ratio of 8% or greater, has a Tier 1 risk-based
capital ratio of 4% or greater, has a leverage rate of 4% or greater

16



---



##### Table of Contents



and does not meet the definition of a well capitalized bank. An institution is
considered undercapitalized if it does not meet the definition of
well-capitalized or adequately capitalized. Within each capital group,
institutions are assigned to one of three supervisory subgroups: A
(institutions with few minor weaknesses), B (institutions which demonstrate
weaknesses which, if not corrected, could result in significant deterioration
of the institution and increased risk of loss to BIF), and C (institutions
that pose a substantial probability of loss to BIF unless effective corrective
action is taken). Accordingly, there are nine combinations of capital groups
and supervisory subgroups to which varying assessment rates would be
applicable. An institutions assessment rate depends on the capital category
and supervisory category to which it is assigned.

During 2002, the Banks were assessed deposit insurance in the aggregate
amount of $205,000. Deposit insurance may be terminated by the FDIC upon a
finding that an institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition or has violated any applicable law, regulation,
rule, order or condition imposed by the FDIC. Such terminations can only
occur, if contested, following judicial review through the federal courts. The
management of each of the Banks does not know of any practice, condition or
violation that might lead to termination of deposit insurance.

Federal Reserve System. The Banks are subject to Federal Reserve
regulations requiring depository institutions to maintain non-interest-earning
reserves against their transaction accounts (primarily NOW and regular checking
accounts). The Federal Reserve regulations generally require 3% reserves on
the first $41.3 million of transaction accounts and 10% on the remainder. The
first $5.7 million of otherwise reservable balances (subject to adjustments by
the Federal Reserve) are exempted from the reserve requirements. The Banks are
in compliance with the foregoing requirements.

Community Reinvestment. Under the Community Reinvestment Act (CRA), a
financial institution has a continuing and affirmative obligation, consistent
with the safe and sound operation of such institution, to help meet the credit
needs of its entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institutions
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. However,
institutions are rated on their performance in meeting the needs of their
communities. Performance is judged in three areas: (a) a lending test, to
evaluate the institutions record of making loans in its assessment areas; (b)
an investment test, to evaluate the institutions record of investing in
community development projects, affordable housing and programs benefiting low
or moderate income individuals and business; and (c) a service test to evaluate
the institutions delivery of services through its branches, ATMs and other
offices. The CRA requires each federal banking agency, in connection with its
examination of a financial institution, to assess and assign one of four
ratings to the institutions record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications by the institution, including applications for charters, branches
and other deposit facilities, relocations, mergers, consolidations,
acquisitions of assets or assumptions of liabilities and savings and loan
holding company acquisitions. The CRA also requires that all institutions make
public disclosure of their CRA ratings. Each of the Banks received
satisfactory ratings on its most recent CRA performance evaluation.

Consumer Compliance.Each Bank has been examined for consumer compliance
on a regular basis.

Brokered Deposits. Well-capitalized institutions are not subject to
limitations on brokered deposits, while an adequately capitalized institution
is able to accept, renew or rollover brokered deposits only with a waiver from
the FDIC and subject to certain restrictions on the yield paid on such
deposits. Undercapitalized institutions are not permitted to accept brokered
deposits.

17



---



##### Table of Contents



Enforcement Actions. Federal and state statutes and regulations provide
financial institution regulatory agencies with great flexibility to undertake
enforcement action against an institution that fails to comply with regulatory
requirements, particularly capital requirements. Possible enforcement actions
range from the imposition of a capital plan and capital directive to civil
money penalties, cease and desist orders, receivership, conservatorship or the
termination of deposit insurance.

Interstate Banking and Branching Legislation. Under the Interstate
Banking and Efficiency Act of 1994 (the Interstate Banking Act), bank holding
companies are allowed to acquire banks across state lines subject to various
requirements of the Federal Reserve. In addition, under the Interstate Banking
Act, banks are permitted, under some circumstances, to merge with one another
across state lines and thereby create a main bank with branches in separate
states. After establishing branches in a state through an interstate merger
transaction, a bank may establish and acquire additional branches at any
location in the state where any bank involved in the interstate merger could
have established or acquired branches under applicable federal and state law.

While the State of Illinois has adopted legislation opting in to
interstate bank mergers, it did not allow out of state banks to enter the
Illinois market through de novobranching or through branch-only acquisitions.
Since many states (host states) allow out-of-state banks to enter a host
state by de novobranching or branch-only acquisitions only if the banks of the
host state are afforded reciprocal treatment in the other state, the Banks have
limited opportunities to expand in other states except through whole bank or
bank holding company acquisitions. It is anticipated that this interstate
merger and branching ability will increase competition and further consolidate
the financial institutions industry.

Insurance Powers. Under state law, a state bank is authorized to act as
agent for any fire, life or other insurance company authorized to do business
in the State of Illinois. Similarly, the Illinois Insurance Code was amended
to allow a state bank to form a subsidiary for the purpose of becoming a firm
registered to sell insurance. Such sales of insurance by a state bank may only
take place through individuals who have been issued and maintain an insurance
producers license pursuant to the Illinois Insurance Code.

State banks are prohibited from assuming or guaranteeing any premium on an
insurance policy issued through the bank. Moreover, state law expressly
prohibits tying the provision of any insurance product to the making of any
loan or extension of credit and requires state banks to make disclosures of
this fact in some instances. Other consumer oriented safeguards are also
required.

In October 1998, Midwest Bank of Western Illinois acquired the Porter
Insurance Agency, Inc. Porter Insurance Agency, Inc. is a subsidiary of
Midwest Bank of Western Illinois and is a full-lines insurance agency. Porter
Insurance Company, Inc. is registered with, and subject to examination by, the
Illinois Department of Insurance, and the Company believes that each is
operating in compliance with applicable laws of the State of Illinois.

Securities Brokerage.Midwest Financial and Investment Services, Inc., a
subsidiary of the Company, is licensed as a retail securities broker and is
subject to regulation by the Securities and Exchange Commission, state
securities authorities, and the National Association of Securities Dealers.

Monetary Policy and Economic Conditions

The earnings of banks and bank holding companies are affected by general
economic conditions and by the fiscal and monetary policies of federal
regulatory agencies, including the Federal Reserve. Through open market
transactions, variations in the discount rate and the establishment of reserve
requirements, the Federal Reserve exerts considerable influence over the cost
and availability of funds obtainable for lending or investing.

18



---



##### Table of Contents



The above monetary and fiscal policies and resulting changes in interest
rates have affected the operating results of all commercial banks in the past
and are expected to do so in the future. The Banks and their respective
holding company cannot fully predict the nature or the extent of any effects
which fiscal or monetary policies may have on their business and earnings.

19



---



##### Table of Contents



SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995

This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995 and is including this statement for purposes of these safe
harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words believe, expect,
intend, anticipate, estimate, project or similar expressions. The
Companys ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material
adverse effect on the operations and future prospects of the Company and its
subsidiaries, including its ability to implement its growth strategies,
include, but are not limited to, changes in interest rates; general economic
conditions; legislative or regulatory changes; monetary and fiscal policies of
the U.S. government, including policies of the U.S. Treasury and the Federal
Reserve Board; possible administrative or enforcement action or similar
direction of federal or state banking regulators in connection with any
material failure of any of the Banks to comply with applicable banking laws,
rules, and regulations; the quality or composition of the loan or investment
portfolios; demand for loan products; deposit flows; competition; demand for
financial services in the Companys market area; the Companys ability to fully
integrate the operations and branch offices acquired as a result of the
acquisition of Big Foot Financial Corp.; the likelihood of the consummation of
the acquisition of CoVest Bancshares, Inc., and changes in accounting
principles, policies and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements.

20



---



##### Table of Contents



EXECUTIVE OFFICERS OF THE REGISTRANT

Listed below are the executive officers of the Company as of March 22,
2003.

Brad A. Luecke (52) has been President and Chief Executive Officer of the
Company since July 2000. He has also served as a director of the Company
since June 2002. Mr. Luecke became Vice Chairman of Midwest Bank and Trust
Company in 2000 and continues to serve as Chief Executive Officer and a
director since 1991. Mr. Luecke was named chairman and director of Midwest
Financial and Inve3tment Services, Inc. in March 2002. Mr. Luecke was named
Chairman, President, and director of MBTC Investment Company in August 2002.
He also served as president of Midwest Bank and Trust Company from 1991 to
2000. Mr. Luecke was a director of Midwest Bank of Hinsdale and First Midwest
Data Corp from 2000 to August 2002.

Sheldon Bernstein (56) was named a Senior Vice President of the Company in
2001. Mr. Bernstein has served as President and a director of Midwest Bank and
Trust Company, Cook County Region since 2000. Previously, Mr. Bernstein served
as Chief Operating Officer and Executive Vice President-Lending of Midwest Bank
and Trust Company since 2000 and 1993, respectively. He was also named
director of Midwest Financial and Investment Services, Inc. in March 2002. Mr.
Bernstein was a director of First Midwest Data Corp from 2001 to August 2002.

Mary M. Henthorn (45) was named a Senior Vice President of the Company in
2001. Ms. Henthorn was named President of Midwest Bank and Trust Company,
DuPage County Region in August 2002. She was also named director of Midwest
Financial and Investment Services, Inc. in March 2002. Ms. Henthorn served as
President and Chief Executive Officer of Midwest Bank of Hinsdale from 2000 to
August 2002. Previously, she served as Executive Vice President and a director
of Midwest Bank of Hinsdale from 1996 to August 2002. She held various
management positions at Midwest Bank of Hinsdale and Midwest Bank and Trust
Company since 1992.

Stephen M. Karaba (45) was named a Senior Vice President of the Company in
2000. Mr. Karaba was named President and director of Midwest Bank and Trust
Company, McHenry County Region in 2002. He was also named director of Midwest
Financial and Investment Services, Inc. in March 2002. Mr. Karaba had served
as president and director of Midwest Bank of McHenry County from 1994 to August
2002. Previously, Mr. Karaba held various management and executive positions
within Midwest Bank and Trust Company and Midwest Bank of McHenry County since
1989.

Christopher J. Gavin (41) was named a Senior Vice President of the Company
in 2000 and has served as President and Chief Executive Officer of Midwest Bank
of Western Illinois since 1998. Mr. Gavin was named director of Midwest
Financial and Investment Services, Inc. in March 2002. He also has been a
director of Midwest Bank of Western Illinois since 1997 and has served as a
director of Porter Insurance Agency, Inc. since 1998. Mr. Gavin was Executive
Vice President and Chief Credit Officer of Midwest Bank of Western Illinois
from 1997 to 1998.

Michelle T. Holman (43) was named Senior Vice President  Risk Management
in 2000. Ms. Holman had served as a director of First Midwest Data Corp. from
2000 to August 2002. Previously, she served as Vice President of Loan Review
since 1988 and in various management capacities at the Company and Midwest Bank
and Trust Company since 1985.

Daniel R. Kadolph, CPA (40) was named Senior Vice President and Chief
Financial Officer in 2000. Mr. Kadolph was also named director of Midwest
Financial and Investment Services, Inc. in March 2002. Mr. Kadolph was also
named director of MBTC Investment Company in August 2002. He has served as
Comptroller of the Company since 1994 and Treasurer since 1997. Mr. Kadolph
had served as a

21



---



##### Table of Contents



director of First Midwest Data Corp. from 2000 to August 2002 and has
served in various management capacities at the Company and Midwest Bank and
Trust Company since 1988.

Edward H. Sibbald (54) was named Executive Vice President, Director of
Marketing and Director of Investor Relations in 2000. Previously he served as
a Senior Vice President of the Company in 2000 and as Chief Financial Officer
of the Company from 1997 to 2000. Previously, Mr. Sibbald served as Executive
Vice President from 1997 to 1999 and Senior Vice President-Administration from
1991 to 1997. Mr. Sibbald also served as a director of Midwest Bank of McHenry
County from 1994 to August 2002 and continues to serve as a director of Midwest
Bank of Western Illinois.

Mary C. Ceas, SPHR (45) was named Senior Vice President  Human Resources
of the Company in 2000. Previously, Ms. Ceas was Vice President  Human
Resources since 1997 and served as Director  Training and Development from
1995 to 1997.

22



---



##### Table of Contents






ITEM 2. PROPERTIES

The following table sets forth certain information regarding the Companys
principal office and bank subsidiary facilities.

|                                                                         |  |               |      |                |  |                   |       |           |  |        |    | 
|------------------------------------------------------------------------ |  | ------------- | ---- | -------------- |  | ----------------- | ----- | --------- |  | ------ | -- | 
|                                                                         |  |               |      |                |  | Net Book Value at |       |           |  |       
|                                                                         |  |               |      |                |  | December 31, 2002 |       | Leased or
|Location                                                                 |  | Date Acquired |      | (In Thousands) |  | Owned            
|                                                                         |  |               |      |                |  |                  
|Principal Office
501 West North Avenue
Melrose Park, Illinois 60160      |  |               | 1987 |                |  | $                 | 1,468 |           |  | Owned 
|Midwest Bank and Trust Company Banking Offices                           |  |               |      |                |  |                   |       |           |  |        |    | 
|Cook County Region
1606 North Harlem Avenue
Elmwood Park, Illinois 60607 |  |               | 1959 |                |  |                   | 1,725 |           |  | Owned 
|300 South Michigan Avenue
Chicago, Illinois 60604                        |  |               | 1986 |                |  |                   |      |           |  | Leased
|4012 North Pulaski Road
Chicago, Illinois 60641                          |  |               | 1993 |                |  |                   | 1,049 |           |  | Owned 
|7227 West Addison Street
Chicago, Illinois 60634                         |  |               | 1996 |                |  |                   | 1,189 |           |  | Owned 
|1601 North Milwaukee Avenue *
Chicago, Illinois 60647                    |  |               | 1980 |                |  |                   | 208   |           |  | Owned 
|8301 West Lawrence *
Norridge, Illinois 60656                            |  |               | 1976 |                |  |                   | 9     |           |  |        | ** | 
|DuPage County Region
500 West Chestnut Street
Hinsdale, Illinois 60521   |  |               | 1991 |                |  |                   | 1,676 |           |  | Owned 
|927 Curtiss Street
Downers Grove, Illinois 60515                         |  |               | 1996 |                |  |                   | 4     |           |  | Leased
|505 N. Roselle Road
Roselle, Illinois 60172                              |  |               | 1999 |                |  |                   | 2,144 |           |  | Owned 
|McHenry County Region
17622 Depot Street
Union, Illinois 60180           |  |               | 1987 |                |  |                   | 52    |           |  | Owned 
|2045 East Algonquin Road
Algonquin, Illinois 60102                       |  |               | 1994 |                |  |                   | 795   |           |  | Owned 

23



---



##### Table of Contents



|                                                 |  |               |      |                |  |                   |       |           |  |        |  | 
|------------------------------------------------ |  | ------------- | ---- | -------------- |  | ----------------- | ----- | --------- |  | ------ |  | 
|                                                 |  |               |      |                |  | Net Book Value at |       |           |  |       
|                                                 |  |               |      |                |  | December 31, 2002 |       | Leased or
|Location                                         |  | Date Acquired |      | (In Thousands) |  | Owned            
|                                                 |  |               |      |                |  |                  
|204 E. State Road
Island Lake, Illinois 60042    |  |               | 1998 |                |  | $                 | 339   |           |  | Owned 
|5555 Bull Valley Road
McHenry, Illinois 60050    |  |               | 1998 |                |  |                   | 1,291 |           |  | Owned 
|Old McHenry Road *
Long Grove, Illinois          |  |               | 1980 |                |  |                   | 3,180 |           |  | Owned 
|Midwest Bank of Western Illinois Banking Offices |  |               |      |                |  |                   |       |           |  |        |  | 
|200 East Broadway
Monmouth, Illinois 61462       |  |               | 1993 |                |  |                   | 2,408 |           |  | Owned 
|612 West Main Street
Galesburg, Illinois 61401   |  |               | 1996 |                |  |                   | 531   |           |  | Owned 
|Schuyler Street
Oquawka, Illinois 61469          |  |               | 1991 |                |  |                   | 73    |           |  | Owned 
|104 S.E. 3rd Avenue
Aledo, Illinois 61231        |  |               | 1999 |                |  |                   | 140   |           |  | Owned 
|106 South Kirk
Kirkwood, Illinois 61473          |  |               | 1993 |                |  |                   |      |           |  | Owned 
|1120 North 6th Street
Monmouth, Illinois 61462   |  |               | 2001 |                |  |                   |      |           |  | Leased



---

|*  |  | Branches acquired through BFFC acquisition effective January 3, 2003.
|-- |  | ---------------------------------------------------------------------
|  
|** |  | Land is leased and building is owned.                                

24



---



##### Table of Contents






ITEM 3. LEGAL PROCEEDINGS

The Company and its subsidiaries are from time to time parties to various
legal actions arising in the normal course of business. Management believes
that there is no proceeding pending against the Company or any of its
subsidiaries which, if determined adversely, would have a material adverse
effect on the financial condition or results of operations of the Company.




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

None.

25



---



##### Table of Contents






PART II




ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Companys common stock is traded over-the-counter and quoted on the
Nasdaq National Market under the symbol MBHI. As of April 14, 2003, the
Company had approximately 2,000 stockholders of record. The table below sets
forth the high and low sale prices of the common stock during the periods
indicated. The prices reflected below have been adjusted to reflect the
3-for-2 stock split (effected in the form of a 50% common stock dividend) paid
on July 9, 2002 to stockholders of record on July 1, 2002.

|     |                |  |      |       |     |  |   |       | 
|---- | -------------- |  | ---- | ----- | --- |  | - | ----- | 
|     |                |  | High |       | Low
|     |                |  |      |       |    
|2001 |                |  |      |       |     |  |   |      
|     | First Quarter  |  | $    | 12.00 |     |  | $ | 10.00 | 
|     | Second Quarter |  |      | 14.67 |     |  |   | 10.33 | 
|     | Third Quarter  |  |      | 14.25 |     |  |   | 12.34 | 
|     | Fourth Quarter |  |      | 14.37 |     |  |   | 12.58 | 
|2002 |                |  |      |       |     |  |   |      
|     | First Quarter  |  | $    | 15.33 |     |  | $ | 13.30 | 
|     | Second Quarter |  |      | 20.67 |     |  |   | 14.73 | 
|     | Third Quarter  |  |      | 19.18 |     |  |   | 18.58 | 
|     | Fourth Quarter |  |      | 20.19 |     |  |   | 17.66 | 

The Company has declared per share cash dividends with respect to its
common stock in the last two fiscal years as follows:

|     |                |  |   |      | 
|---- | -------------- |  | - | ---- | 
|2001 |                |  |   |     
|     | First Quarter  |  | $ | 0.10 | 
|     | Second Quarter |  |   | 0.10 | 
|     | Third Quarter  |  |   | 0.10 | 
|     | Fourth Quarter |  |   | 0.10 | 
|2002 |                |  |   |     
|     | First Quarter  |  | $ | 0.10 | 
|     | Second Quarter |  |   | 0.10 | 
|     | Third Quarter  |  |   | 0.10 | 
|     | Fourth Quarter |  |   | 0.10 | 

Holders of common stock are entitled to receive such dividends as may be
declared by the Board of Directors from time to time and paid out of funds
legally available therefore. Because the Companys consolidated net income
consists largely of net income of the Banks, the Companys ability to pay
dividends depends upon its receipt of dividends from the Banks. The Banks
ability to pay dividends is regulated by banking statutes. See Supervision
and RegulationDividend Limitations. The declaration of dividends by the
Company is discretionary and depends on the Companys earnings and financial
condition, regulatory limitations, tax considerations and other factors
including limitations imposed by the terms of the Companys revolving lines of
credit and limitations imposed by the terms of the Companys outstanding junior
subordinated debentures. See Managements Discussion and Analysis of
Financial Condition and Results of OperationsLiquidity. While the Board of
Directors

26



---



##### Table of Contents



expects to continue to declare dividends quarterly, there can be no assurance
that dividends will be paid in the future.

In October 2002, the Company issued $15.0 million of floating rate trust
preferred securities through MBHI Capital Trust II, our wholly-owned, statutory
business trust subsidiary. The preferred securities were issued at $1,000 per
share to certain qualified institutional investors. Simultaneously with the
issuance of the preferred securities, the Company issued an equivalent amount
of floating rate subordinated debentures to the trust. The debentures mature
on November 7, 2032, and may be redeemed on or after November 7, 2007, if
certain conditions are met. The floating rate on each of the preferred
securities and the debentures is equal to three-month LIBOR plus 3.45%, resets
quarterly, and is capped at 12.5% through November 7, 2007. The rate is
currently set at 4.79%. The Company paid a placement agent fee equal to 3% of
the total amount of preferred securities issued in the transaction. The
issuance of the preferred securities and the subordinated debentures was exempt
from registration under the Securities Act pursuant to Section 4(2) thereunder.

27



---



##### Table of Contents






ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth certain selected consolidated financial
data at or for the periods indicated. This information should be read in
conjunction with the Companys Consolidated Financial Statements and notes
thereto included herein. See Item 8, Consolidated Financial Statements and
Supplementary Data.

|                           |                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |        |   |  |   |        |  
|-------------------------- | ----------------------------------------------------------- |  | --------------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | - |  | - | ------ | -
|                           |                                                             |  | Year Ended December 31,                      
|                           |                                                             |  |                                              
|                           |                                                             |  | 2002                                          |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                           |                                                             |  |                                               |         |      |  |      |         |      |  |     
|                           |                                                             |  | (Dollars in Thousands, Except Per Share Data)
|Statement of Income Data:  |                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |        |   |  |   |       
|                           | Total interest income                                       |  | $                                             | 112,721 |      |  | $    | 113,132 |      |  | $    | 109,792 |   |  | $ | 84,146 |   |  | $ | 74,827 |  
|                           | Total interest expense                                      |  |                                               | 53,319  |      |  |      | 65,665  |      |  |      | 64,032  |   |  |   | 44,262 |   |  |   | 41,014 |  
|                           |                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |        |   |  |   |        |  
|                           | Net interest income                                         |  |                                               | 59,402  |      |  |      | 47,467  |      |  |      | 45,760  |   |  |   | 39,884 |   |  |   | 33,813 |  
|                           | Provision for loan losses                                   |  |                                               | 18,532  |      |  |      | 2,220   |      |  |      | 1,850   |   |  |   | 2,203  |   |  |   | 1,326  |  
|                           | Other income                                                |  |                                               | 14,008  |      |  |      | 12,802  |      |  |      | 7,695   |   |  |   | 6,734  |   |  |   | 6,787  |  
|                           | Other expenses                                              |  |                                               | 33,909  |      |  |      | 31,463  |      |  |      | 29,360  |   |  |   | 25,774 |   |  |   | 22,895 |  
|                           |                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |        |   |  |   |        |  
|                           | Income before income taxes                                  |  |                                               | 20,969  |      |  |      | 26,586  |      |  |      | 22,245  |   |  |   | 18,641 |   |  |   | 16,379 |  
|                           | Provision for income taxes                                  |  |                                               | 4,661   |      |  |      | 8,704   |      |  |      | 7,632   |   |  |   | 6,750  |   |  |   | 5,974  |  
|                           |                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |        |   |  |   |        |  
|                           | Net income                                                  |  | $                                             | 16,308  |      |  | $    | 17,882  |      |  | $    | 14,613  |   |  | $ | 11,891 |   |  | $ | 10,405 |  
|                           |                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |        |   |  |   |        |  
|Per Share Data (1):        |                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |        |   |  |   |       
|                           | Earnings per share (basic)                                  |  | $                                             | 1.01    |      |  | $    | 1.11    |      |  | $    | 0.91    |   |  | $ | 0.72   |   |  | $ | 0.63   |  
|                           | Earnings per share (diluted)                                |  |                                               | 0.99    |      |  |      | 1.09    |      |  |      | 0.90    |   |  |   | 0.71   |   |  |   | 0.63   |  
|                           | Cash dividends declared                                     |  |                                               | 0.40    |      |  |      | 0.40    |      |  |      | 0.35    |   |  |   | 0.23   |   |  |   | 0.10   |  
|                           | Book value at end of year                                   |  |                                               | 7.12    |      |  |      | 5.99    |      |  |      | 5.13    |   |  |   | 4.15   |   |  |   | 4.59   |  
|                           | Tangible book value at end of year                          |  |                                               | 6.83    |      |  |      | 5.87    |      |  |      | 4.99    |   |  |   | 4.00   |   |  |   | 4.43   |  
|Selected Financial Ratios: |                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |        |   |  |   |       
|                           | Return on average assets                                    |  |                                               | 0.86    | %    |  |      | 1.12    | %    |  |      | 1.07    | % |  |   | 1.04   | % |  |   | 1.04   | %
|                           | Return on average equity                                    |  |                                               | 14.81   |      |  |      | 19.50   |      |  |      | 20.57   |   |  |   | 16.39  |   |  |   | 14.60  |  
|                           | Dividend payout ratio                                       |  |                                               | 39.61   |      |  |      | 36.02   |      |  |      | 38.64   |   |  |   | 32.28  |   |  |   | 15.72  |  
|                           | Average equity to average assets                            |  |                                               | 5.83    |      |  |      | 5.75    |      |  |      | 5.18    |   |  |   | 6.31   |   |  |   | 7.11   |  
|                           | Tier 1 risk-based capital                                   |  |                                               | 10.49   |      |  |      | 9.93    |      |  |      | 11.02   |   |  |   | 11.11  |   |  |   | 13.47  |  
|                           | Total risk-based capital                                    |  |                                               | 11.74   |      |  |      | 10.82   |      |  |      | 11.94   |   |  |   | 12.20  |   |  |   | 14.64  |  
|                           | Net interest margin (tax equivalent)                        |  |                                               | 3.46    |      |  |      | 3.31    |      |  |      | 3.65    |   |  |   | 3.75   |   |  |   | 3.61   |  
|                           | Loan to deposit ratio                                       |  |                                               | 81.74   |      |  |      | 82.82   |      |  |      | 75.95   |   |  |   | 66.58  |   |  |   | 60.04  |  
|                           | Net overhead expense to average assets (2)                  |  |                                               | 1.15    |      |  |      | 1.40    |      |  |      | 1.66    |   |  |   | 1.70   |   |  |   | 1.72   |  
|                           | Efficiency ratio (2)                                        |  |                                               | 47.40   |      |  |      | 52.21   |      |  |      | 53.90   |   |  |   | 55.84  |   |  |   | 58.01  |  
|                           | Allowance for loan losses to total loans
at the end of year |  |                                               | 1.83    |      |  |      | 1.01    |      |  |      | 1.04    |   |  |   | 1.17   |   |  |   | 1.26   |  
|                           | Provision for loan losses to total loans                    |  |                                               | 1.63    |      |  |      | 0.22    |      |  |      | 0.22    |   |  |   | 0.34   |   |  |   | 0.25   |  
|                           | Net loans charged off to average total loans                |  |                                               | 0.73    |      |  |      | 0.07    |      |  |      | 0.11    |   |  |   | 0.21   |   |  |   | 0.18   |  
|                           | Nonperforming loans to total loans
at the end of year (3)   |  |                                               | 2.78    |      |  |      | 0.24    |      |  |      | 0.26    |   |  |   | 0.37   |   |  |   | 0.90   |  
|                           | Nonperforming assets to total assets                        |  |                                               | 1.60    |      |  |      | 0.15    |      |  |      | 0.23    |   |  |   | 0.40   |   |  |   | 0.56   |  
|                           | Allowance for loan losses to
nonperforming loans            |  |                                               | 0.66    | x    |  |      | 4.28    | x    |  |      | 3.82    | x |  |   | 3.19   | x |  |   | 1.39   | x

|                    |                               |  |                        |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |           | 
|------------------- | ----------------------------- |  | ---------------------- | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                    |                               |  | December 31,          
|                    |                               |  |                       
|                    |                               |  | 2002                   |           | 2001 |  | 2000 |           | 1999 |  | 1998
|                    |                               |  |                        |           |      |  |      |           |      |  |     
|                    |                               |  | (Dollars in Thousands)
|Balance Sheet Data: |                               |  |                        |           |      |  |      |           |      |  |      |           |  |  |   |           |  |  |   |          
|                    | Total assets                  |  | $                      | 2,009,047 |      |  | $    | 1,810,422 |      |  | $    | 1,467,770 |  |  | $ | 1,256,462 |  |  | $ | 1,071,314 | 
|                    | Total earning assets          |  |                        | 1,908,533 |      |  |      | 1,711,030 |      |  |      | 1,371,519 |  |  |   | 1,184,546 |  |  |   | 1,014,691 | 
|                    | Year-to-date average assets   |  |                        | 1,889,511 |      |  |      | 1,593,939 |      |  |      | 1,370,386 |  |  |   | 1,148,675 |  |  |   | 1,002,848 | 
|                    | Total loans                   |  |                        | 1,136,704 |      |  |      | 1,003,386 |      |  |      | 824,632   |  |  |   | 646,455   |  |  |   | 521,880   | 
|                    | Allowance for loan losses     |  |                        | 20,754    |      |  |      | 10,135    |      |  |      | 8,593     |  |  |   | 7,567     |  |  |   | 6,576     | 
|                    | Total deposits                |  |                        | 1,390,648 |      |  |      | 1,211,520 |      |  |      | 1,085,786 |  |  |   | 970,954   |  |  |   | 869,152   | 
|                    | Borrowings                    |  |                        | 462,382   |      |  |      | 442,150   |      |  |      | 289,093   |  |  |   | 196,075   |  |  |   | 118,449   | 
|                    | Stockholders equity          |  |                        | 114,951   |      |  |      | 96,214    |      |  |      | 82,576    |  |  |   | 67,694    |  |  |   | 77,629    | 
|                    | Tangible stockholders equity |  |                        | 111,929   |      |  |      | 94,272    |      |  |      | 80,463    |  |  |   | 65,320    |  |  |   | 75,019    | 



---

|(1) |  | Restated for 3-for-2 stock split paid on July 9, 2002.                           
|--- |  | ---------------------------------------------------------------------------------
|   
|(2) |  | Excludes security gains and trading account profits or losses.                   
|   
|(3) |  | Includes total nonaccrual, impaired and all other loans 90 days or more
past due.

28



---



##### Table of Contents






ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The Companys principal business is conducted by the Banks and consists of
a full range of community-based financial services, including commercial and
retail banking. The profitability of the Companys operations depends
primarily on its net interest income, provision for loan losses, other income,
and other expenses. Net interest income is the difference between the income
the Company receives on its loan and securities portfolios and its cost of
funds, which consists of interest paid on deposits and borrowings. The
provision for loan losses reflects the cost of credit risk in the Companys
loan portfolio. Other income consists of service charges on deposit accounts,
securities gains, mortgage origination fees, insurance and brokerage
commissions, trust fees, and other income. Other expenses include salaries and
employee benefits, occupancy and equipment expenses, professional services,
marketing expenses, and other noninterest expenses.

Net interest income is dependent on the amounts of and yields on
interest-earning assets as compared to the amounts of and rates on
interest-bearing liabilities. Net interest income is sensitive to changes in
market rates of interest and the Companys asset/liability management
procedures in coping with such changes. The provision for loan losses is
dependent upon managements assessment of the collectibility of the loan
portfolio under current economic conditions. Other expenses are influenced by
the growth of operations, with additional employees necessary to staff and
open new banking centers and marketing expenses necessary to promote them.
Growth in the number of account relationships directly affects such expenses as
data processing costs, supplies, postage, and other miscellaneous expenses.

Recent Developments

As previously reported by the Company, on March 5, 2003, the Company
received a joint letter from the Federal Reserve Bank of Chicago (the Federal
Reserve) and the Illinois Office of Banks and Real Estate (the OBRE)
regarding additional loan classifications and provisions for loan losses that, based on their review of
certain loans, the regulators determined should be made by one of the Companys
subsidiary banks, Midwest Bank and Trust Company (the Bank). The loans
reviewed consisted of a series of loans to an individual borrower and certain
affiliated companies that were outstanding as of September 30, 2002 and
December 31, 2002. The loans were secured by receivables and other collateral
of other affiliated companies. The individual was indicted in March 2003 on
certain criminal charges. None of the activities covered by the indictment
involves the Bank. Two of the borrowers affiliated companies (the Affiliated
Companies) that provided collateral for the loans are the subject of pending
voluntary bankruptcy proceedings initiated under Chapter 11 of the United
States Bankruptcy Code in July 2002. The total credit relationship to this
borrower consisted of loans with an aggregate outstanding principal balance of
$19.6 million as of December 31, 2002.

In assessing the adequacy of its allowance for loan losses on a quarterly
basis, management considers a number of factors including, among other things,
regulatory review of its loan portfolio. The Federal Reserve and the OBRE
concluded that the loans described above should be classified as nonaccrual
loans as of September 30, 2002 and December 31, 2002, due to the regulators
assessment that the ultimate collectibility of the loans as of the end of the
third and fourth quarters was doubtful. As a result of further communications
with the Federal Reserve and OBRE through early April 2003, and additional
internal analysis of available information, the Company reclassified the $19.6
million of loans as nonaccrual loans as of September 30, 2002. The Company
filed an amended Form 10-Q on April 16, 2003, to reflect the reclassification
and to restate its interim financial statements for the period ended September
30, 2002, to record an additional loan loss provision consistent with its loan
loss reserve

29



---



##### Table of Contents



methodology in the amount of $9.8 million and to reverse $226,000 of
interest income. The net effect on net income, after income taxes, was
a $6.0 million reduction in previously reported net income for the third
quarter of 2002.

Also, as a result of the regulatory loan review of the loans previously
identified and certain other unrelated commercial loans reviewed by the
regulators in March 2003, and the receipt of a supplemental letter
received on April 10, 2003, the Company determined to place
approximately $5.1 million of additional commercial loans on nonaccrual as of
December 31, 2002, and to charge off approximately $5.8 million in commercial
loans reclassified as loss, including $4.7 million of the loans classified as
nonaccrual as of September 30, 2002. The additional nonaccrual classification
related to two separate loan relationships totaling $9.8 million. The Company
had previously classified these loans as substandard. One loan relationship
represents $8.3 million of the $9.8 million of nonaccrual
loans. This loan relationship is
secured by the borrowers residence and various business assets and business
interests. The Company recorded an additional provision to the allowance for
loan losses of $4.9 million relating to these loans and reversed $811,000 of
interest income previously recorded during the fourth quarter, of which
$390,000 was applied to principal, with an after-tax effect on previously
reported fourth quarter earnings of $3.4 million.

The aggregate after-tax effect of the recent loan reclassifications and
related financial statement adjustments on previously reported unaudited
earnings for 2002 was $9.5 million. As of December 31, 2002, total
non-performing loans were $31.5 million, or 2.78% of total loans, an increase
of $23.7 million from previously reported year end levels. The allowance for
loan losses as of December 31, 2002, as reflected in the Companys audited
financial statements included herein, was $20.8 million, or 1.83% of total
loans and 65.8% of non-performing loans as of that date.

On March 26, 2003, the Bank received proceeds of approximately $13.3
million from the nonrecourse sale of a 2 of 3 of the loans reclassified as
nonaccrual as of September 30, 2002 to a newly formed entity that will be the
sole owner of the Affiliated Companies following the emergence of these
companies from bankruptcy. The purchase price for the portion of the loans
sold was equal to the stated principal amount of $10.8 million as of September
30, 2002, $1.7 million of additional financing as of December 31, 2002, plus
accrued interest and late charges. The purchaser of the loans is indirectly
owned 50% by current management officials of the Affiliated Companies, and 50%
by 400 VC, LLC (400 VC), an entity owned by the adult son of Leon Wolin, a director
of the Company, the adult son of Leroy Rosasco, a director of the Company and Angelo
DiPaolo, a director of the Company. E.V. Silveri, Chairman of the Board of the
Company, is managing member of 400 VC. Pursuant to an agreement with 400 VC
and its present owners, Mr. Silveri and Brad Luecke, President and Chief
Executive Officer of the Company, will acquire equity ownership interests in
400 VC in the near future. The funds used by the purchaser to purchase the
identified credits from the Bank were borrowed from 400 VC. 400 VC obtained
those funds from the proceeds of loans extended by an unrelated financial
institution to 400 VC and Mr. Silveri ($3,000,000), Mr. Luecke ($3,000,000),
Michael Wolin ($1,500,000), Angelo DiPaolo ($2,000,000) and Lee Paul Rosasco
($4,000,000), as co-borrowers. The Company is currently evaluating how the sale
of the identified credits will be accounted for financial reporting purposes,
which could include some or all of the repayment being categorized as
a capital contribution. In addition, subject to approval of a
proposed plan of reorganization with respect to the Affiliated Companies, does
not currently anticipate any additional provisions relating to its loans to
this borrower.

A plan of reorganization was submitted to the bankruptcy court on March
27, 2003, and a hearing on the plan is scheduled for May 8, 2003.
Effectiveness of the plan of reorganization is dependent upon, among other
things, the purchaser of the loans from the Bank obtaining additional credit in
the amount of $8 million to fund the payment of certain additional indebtedness
of the Affiliated Companies. During March 2003, the Board of Directors of the
Bank considered and approved a proposal for extension of such credit, but
management of the Bank has indicated that no commitment to extend such credit
has been issued and that the Bank presently has no plans to extend such credit.
In an April 10, 2003 letter to the

30



---



##### Table of Contents



Company, the Federal Reserve and the OBRE indicated that they would
require the Bank to reserve (which could be treated as an other
expense for financial reporting purposes) as of March 31, 2003, on a
dollar for dollar basis
up to $8 million, if the Bank had issued a commitment to extend such loan or if
representations had been made to the bankruptcy court of the Banks willingness
to provide credit to fund a plan of reorganization for the borrowers. The
Company is presently in discussions with the Federal Reserve and OBRE
concerning this matter.

On March 3, 2003, the banking regulators commenced a regularly scheduled
examination of the Bank which is not yet completed. The ongoing examination has
involved further review of the adequacy of the Banks overall risk management
practices. There can be no assurance that the Federal Reserve and OBRE will not
identify other items which may have an impact on the financial statements of
the Company.

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 Consolidated Financial Statements and the Notes thereto
and the Selected Consolidated Financial Data 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

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. By their nature, changes in these
assumptions and estimates could significantly affect the Companys financial
position or results of operations. Actual results could differ from those
estimates. Discussed below are those critical accounting policies that are of
particular significance to the Company.

Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required based on past loan loss experience, the nature
and volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in managements judgment, should be
charged off. Loan losses are charged against the allowance when management
believes that the uncollectibility of a loan balance is confirmed.

Fair Value of Financial Instruments: Fair values of financial instruments
are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties
and matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. There is no ready market for a significant portion of the
Companys financial instruments. Accordingly, fair values are based on various
factors relative to expected loss experience, current economic conditions, risk

31



---



##### Table of Contents



characteristics, and other factors. The assumptions and estimates used in the
fair value determination process are subjective in nature and involve
uncertainties and significant judgment and, therefore, fair values cannot be
determined with precision. Changes in assumptions or in market conditions
could significantly affect the estimates.

Consolidated Results of Operations

Total assets increased $198.6 million, or 11.0%, to $2.0 billion as of
December 31, 2002 from $1.8 billion as of December 31, 2001. Net income
decreased $1.6 million , or 8.8%, to $16.3 million for the year ended December
31, 2002 compared to $17.9 million for the year ended December 31, 2001. The
return on average assets was 0.86% for 2002 and 1.12% for 2001. The return on
average equity decreased to 14.81% in 2002 from 19.50% in 2001 due to the
decrease in earnings and the increase in other comprehensive income. The
return on average assets was 1.12% and 1.07% for both 2001 and 2000,
respectively. The return on average equity decreased to 19.50% in 2001 from
20.57% in 2000.

2002 Compared to 2001

Net Interest Income. Net interest income on a tax-equivalent basis
increased $12.2 million, or 24.4%, to $62.3 million in 2002 from $50.1 million
in 2001. Interest income on total earning assets decreased $145,000 to $115.6
million in 2002 from $115.8 million in 2001. Interest income on loans decreased
$1.9 million to $74.9 million in 2002 from $76.8 million in 2001 due to a
decrease in average rates paid on loans from 8.37% to 6.87%, an increase in
nonaccrual loans, as discussed above in Recent Developments, and despite the
increase in average loans outstanding of $172.7 million. Interest expense on
interest-bearing liabilities decreased $12.3 million to $53.3 million in 2002
from $65.7 million in 2001, or 18.8%, as a result of a $13.5 million decrease
in interest expense on deposits despite a $1.1 million increase in interest
expense on other borrowings. The decrease in interest expense was due
primarily to the repricing opportunities on core deposits and certificates of
deposits. The increase in interest expense on other borrowings was due
primarily to an $111.3 million increase in average fed funds purchased and
repurchase agreements during 2002 even though average FHLB advances decreased
by $7.8 million. In addition, the Company issued $15.0 million in junior
subordinated debentures in October 2002 at an initial rate of 5.27% with a
maturity of 30 years. The net interest margin on a tax-equivalent basis
increased from 3.31% in 2001 to 3.52% for 2002. The primary reason for the
increase in net interest margin was attributable to the decrease in yields on
interest-bearing liabilities being more than the decrease in yields on earnings
assets. The Company expects net interest income and net interest margin to
improve during 2003.

Provision for Loan Losses.The provision for loan losses increased $16.3
million, or 734.8%, to $18.5 million in 2002 from $2.2 million in 2001
primarily due to additional provisions relating to increased nonperforming
loans as discussed in Recent Developments. As of December 31, 2002, the
allowance for loan losses totaled $20.8 million, or 1.83% of total loans, and
was equal to 65.8% of nonperforming loans. The amount of the provision for
loan losses is based on quarterly evaluations of the loan portfolio, with
particular attention directed toward nonperforming and other potential problem
loans. During these evaluations, consideration is also given to such factors
as managements evaluation of specific loans, the level and composition of
impaired and other nonperforming loans, historical loss experience, results of
examinations by regulatory agencies, independent loan review, the market value
of collateral, the estimate of discounted cash flows, the strength and
availability of guaranties, concentrations of credits, and other factors. See
Analysis of Allowance for Loan Losses beginning on page 41.

Other Income. The Companys total other income increased $1.2 million, or
9.4%, to $14.0 million in 2002 from $12.8 million in 2001. Other income as a
percentage of average assets was 0.74% for the year ended 2002 compared to
0.80% for the year ended 2001. The increase in total other income in 2002

32



---



##### Table of Contents



compared to 2001 was primarily due to a $1.3 million increase in option income
to $1.8 million for the year ended December 31,2002, as a result of the
purchase or sale of various covered put or call options, with terms less than
90 days, on mortgage-backed securities. The covered options have either
expired or have been exercised. This increase in option income was offset by a
$1.8 million decrease in net securities gains and trading profits. Insurance
and brokerage commissions, service charges on deposits as a result of a larger
deposit base, mortgage banking fees, and increase in cash surrender value of
life insurance increased by $695,000, $678,000, $88,000, and $143,000,
respectively.

Other Expenses. The Companys total other expenses increased $2.4
million, or 7.8%, to $33.9 million in 2002 from $31.5 million in 2001. Other
expenses as a percentage of average assets were 1.79% for the year ended 2002
compared to 1.97% for the year ended 2001. Net overhead expenses were 1.15%
and 1.17% as a percentage of average assets in 2002 and 2001, respectively.
The increase in total other expenses in 2002 was primarily due to the following
factors: salaries and employee benefits increased $1.9 million or 10.1%
compared to the similar period in 2001 due to additional staffing in Midwest
Financial and Investment Services, Inc., growth in existing banking centers,
and annual merit increases; professional services increased $681,000 for 2002
compared to 2001 due to higher legal, consulting, and ATM charges. The
efficiency ratio was 47.40% for the year ended December 31, 2002 compared to
52.2% in 2001. The Company expects its efficiency ratio to be impacted in 2003
as a result of the acquisition of Big Foot Financial Corp. The Company has
adopted new accounting guidance as it relates to goodwill in 2002 and, as a
result, amortization expense has decreased by $200,000 in 2002.

Federal and State Income Tax. The Companys consolidated income tax rate
varies from statutory rates principally due to interest income from tax-exempt
securities and loans. The Company recorded income tax expense of $4.6 million
in 2002 compared to $8.7 million in 2001, a decrease of 46.4%, due to changes
in income. The effective tax rate in 2002 was 22.2% compared to 32.7% in 2001.
These declines are a result of a new regulation issued by the Illinois
Department of Revenue related to apportionment of business income of financial
organizations, the favorable settlement of an Illinois Department of Revenue
exam and various other tax planning initiatives. The Company may potentially
have further reductions in its state income tax expense for prior tax reporting
periods.

2001 Compared to 2000

Net Interest Income. Net interest income on a tax-equivalent basis
increased $3.0 million, or 6.4%, to $50.1 million in 2001 from $47.1 million in
2000. Interest income on total earning assets increased $4.7 million in 2001
from 2000. This was primarily due to interest income on loans, which increased
$4.7 million in 2001 from 2000 resulting from a $172.5 million increase in
average loans outstanding despite a decrease in average rates paid on loans
from 9.69% to 8.37%. Interest expense on interest-bearing liabilities
increased $1.6 million in 2001 from 2000, or 2.6%, as a result of an $1.8
million increase in interest expense on other borrowings. Interest expense on
deposits declined by $161,000 in 2001. The interest expense on interest-bearing
liabilities increased due to the $62.0 million increase in total average
borrowings. Average rate on total borrowings for 2001 was 5.49% compared to
6.09% in 2000. The increase in interest expense on other borrowings was due
primarily to an $28.1 million increase in average fed funds purchased and
repurchase agreements during 2001 and $27.5 million increase in average FHLB
advances. In addition, the Company issued $20.0 million in junior subordinated
debentures in June 2000 at a rate of 10.0% with a maturity of 30 years. The
net interest margin on a tax-equivalent basis decreased from 3.65% in 2000 to
3.31% for 2001. In 2001, the interest expense on the junior subordinated
debentures for a full year was recognized. The primary reason for the decrease
in net interest margin was that yields on earnings assets decreased more than
the yields on interest bearing liabilities. Repricing opportunities on core
deposits and certificates of deposits are expected to offset any unfavorable
impact from future interest rate reductions in the near term.

33



---



##### Table of Contents



Provision for Loan Losses.The provision for loan losses increased
$370,000, or 20.0%, to $2.2 million in 2001 from $1.9 million in 2000. As of
December 31, 2001, the allowance for loan losses totaled $10.1 million, or
1.01% of total loans, and was equal to 428% of nonperforming loans. The
amount of the provision for loan losses is based on quarterly evaluations of
the loan portfolio, with particular attention directed toward nonperforming and
other potential problem loans. During these evaluations, consideration is also
given to such factors as managements evaluation of specific loans, the level
and composition of impaired and other nonperforming loans, historical loss
experience, results of examinations by regulatory agencies, independent loan
review, the market value of collateral, the estimate of discounted cash flows,
the strength and availability of guaranties, concentrations of credits, and
other factors.

Other Income. The Companys total other income increased $5.1 million, or
66.4%, to $12.8 million in 2001 from $7.7 million in 2000. Other income as a
percentage of average assets was 0.80% for the year ended 2001 compared to
0.56% for the year ended 2000. The increase in total other income in 2001 from
2000 was primarily due to a $2.6 million increase in net securities gains and
trading profits, a $1.4 million increase in service charges on deposits, a
$492,000 increase in cash surrender value of life insurance, and a $408,000
increase in mortgage loan origination fees.

Other Expenses. The Companys total other expenses increased $2.1
million, or 7.2%, to $31.5 million in 2001 from $29.4 million in 2000. Other
expenses as a percentage of average assets were 1.97% for the year ended 2001
compared to 2.14% for the year ended 2000. Net overhead expenses were 1.17%
and 1.57% as a percentage of average assets in 2001 and 2000, respectively.
The increase in total other expenses in 2001 was primarily due to the following
factors: salaries and employee benefits increased $2.2 million or 13.5%
compared to the similar period in 2000; and professional services increased
$351,000 for 2001 compared to 2000 due to higher ATM charges and outsourced
engagements. The efficiency ratio was 52.2% for the year ended December 31,
2001 compared to 53.9% in 2000.

Federal and State Income Tax. The Companys consolidated income tax rate
varies from statutory rates principally due to interest income from tax-exempt
securities and loans. The Company recorded income tax expense of $8.7 million
in 2001 compared to $7.6 million in 2000, an increase of 14.0%, due to changes
in income. The effective tax rate in 2001 was 32.7% compared to 34.3% in 2000.

Interest-Earning Assets and Interest-Bearing Liabilities

The following table sets forth the average balances, net interest income
and expense and average yields and rates for the Companys interest-earning
assets and interest-bearing liabilities for the indicated periods on a
tax-equivalent basis assuming a 35% tax rate for 2002, 2001, and 2000.

34



---



##### Table of Contents



|                              |                                      |   |                                 |         |          |   |         |        |         |  |          |      |      |   |           |         |          |   |         |        |  |  |      |      |         |   |           |         |  |   |         |        |  |  |      |      | 
|----------------------------- | ------------------------------------ | - | ------------------------------- | ------- | -------- | - | ------- | ------ | ------- |  | -------- | ---- | ---- | - | --------- | ------- | -------- | - | ------- | ------ |  |  | ---- | ---- | ------- | - | --------- | ------- |  | - | ------- | ------ |  |  | ---- | ---- | 
|                              |                                      |   | For the Year Ended December 31,
|                              |                                      |   |                                
|                              |                                      |   | 2002                            |         | 2001     |   | 2000   
|                              |                                      |   |                                 |         |          |   |        
|                              |                                      |   | Average                         |         |          |   |         |        | Average |  | Average  |      |      |   |           |         | Average  |   | Average |        |  |  |      |      | Average
|                              |                                      |   | Balance                         |         | Interest |   | Rate    |        | Balance |  | Interest |      | Rate |   | Balance   |         | Interest |   | Rate   
|                              |                                      |   |                                 |         |          |   |         |        |         |  |          |      |      |   |           |         |          |   |        
|                              |                                      |   | (Dollars in Thousands)         
|Interest-Earning Assets:      |                                      |   |                                 |         |          |   |         |        |         |  |          |      |      |   |           |         |          |   |         |        |  |  |      |      |         |   |           |         |  |   |         |        |  |  |      |     
|Federal funds sold            |                                      | $ | 8,796                           |         |          | $ | 138     |        |         |  | 1.57     | %    |      | $ | 6,132     |         |          | $ | 250     |        |  |  | 4.08 | %    |         | $ | 10,476    |         |  | $ | 661     |        |  |  | 6.31 | %   
|Securities:                   |                                      |   |                                 |         |          |   |         |        |         |  |          |      |      |   |           |         |          |   |         |        |  |  |      |      |         |   |           |         |  |   |         |        |  |  |      |     
|                              | Taxable (1)                          |   |                                 | 639,226 |          |   |         | 36,542 |         |  |          | 5.72 |      |   |           | 555,053 |          |   |         | 36,362 |  |  |      | 6.55 |         |   |           | 494,791 |  |   |         | 35,412 |  |  |      | 7.16 | 
|                              | Exempt from
federal income
taxes (1) |   |                                 | 59,662  |          |   |         | 4,033  |         |  |          | 6.76 |      |   |           | 33,255  |          |   |         | 2,320  |  |  |      | 6.98 |         |   |           | 40,747  |  |   |         | 2,853  |  |  |      | 7.00 | 
|                              |                                      |   |                                 |         |          |   |         |        |         |  |          |      |      |   |           |         |          |   |         |        |  |  |      |      |         |   |           |         |  |   |         |        |  |  |      |     
|Total securities              |                                      |   | 698,888                         |         |          |   | 40,575  |        |         |  | 5.81     |      |      |   | 588,308   |         |          |   | 38,682  |        |  |  | 6.58 |      |         |   | 535,538   |         |  |   | 38,265  |        |  |  | 7.15 |     
|Loans (2):                    |                                      |   |                                 |         |          |   |         |        |         |  |          |      |      |   |           |         |          |   |         |        |  |  |      |      |         |   |           |         |  |   |         |        |  |  |      |     
|                              | Commercial
loans (1)                 |   |                                 | 229,525 |          |   |         | 13,175 |         |  |          | 5.74 |      |   |           | 215,722 |          |   |         | 17,067 |  |  |      | 7.91 |         |   |           | 193,053 |  |   |         | 18,948 |  |  |      | 9.81 | 
|                              | Commercial
real estate
loans (1)     |   |                                 | 684,414 |          |   |         | 49,044 |         |  |          | 7.17 |      |   |           | 526,309 |          |   |         | 45,145 |  |  |      | 8.58 |         |   |           | 385,538 |  |   |         | 38,371 |  |  |      | 9.95 | 
|                              | Agricultural
loans (1)               |   |                                 | 53,853  |          |   |         | 3,702  |         |  |          | 6.87 |      |   |           | 49,332  |          |   |         | 3,994  |  |  |      | 8.10 |         |   |           | 45,758  |  |   |         | 3,997  |  |  |      | 8.74 | 
|                              | Consumer
real estate
loans           |   |                                 | 108,339 |          |   |         | 7,805  |         |  |          | 7.20 |      |   |           | 112,053 |          |   |         | 9,291  |  |  |      | 8.29 |         |   |           | 106,768 |  |   |         | 9,545  |  |  |      | 8.94 | 
|                              | Consumer
installment
loans           |   |                                 | 14,183  |          |   |         | 1,172  |         |  |          | 8.26 |      |   |           | 14,194  |          |   |         | 1,327  |  |  |      | 9.35 |         |   |           | 13,967  |  |   |         | 1,309  |  |  |      | 9.37 | 
|                              |                                      |   |                                 |         |          |   |         |        |         |  |          |      |      |   |           |         |          |   |         |        |  |  |      |      |         |   |           |         |  |   |         |        |  |  |      |     
|Total loans                   |                                      |   | 1,090,314                       |         |          |   | 74,898  |        |         |  | 6.87     |      |      |   | 917,610   |         |          |   | 76,824  |        |  |  | 8.37 |      |         |   | 745,084   |         |  |   | 72,170  |        |  |  | 9.69 |     
|                              |                                      |   |                                 |         |          |   |         |        |         |  |          |      |      |   |           |         |          |   |         |        |  |  |      |      |         |   |           |         |  |   |         |        |  |  |      |     
|Total interest-earning assets |                                      | $ | 1,797,998                       |         |          | $ | 115,611 |        |         |  | 6.43     | %    |      | $ | 1,512,050 |         |          | $ | 115,756 |        |  |  | 7.66 | %    |         | $ | 1,291,098 |         |  | $ | 111,096 |        |  |  | 8.60 | %   
|                              |                                      |   |                                 |         |          |   |         |        |         |  |          |      |      |   |           |         |          |   |         |        |  |  |      |      |         |   |           |         |  |   |         |        |  |  |      |     

35



---



##### Table of Contents



|                                                  |  |                                 |           |          |  |      |        |         |  |          |      |      |  |         |           |          |  |         |        |  |  |  |      |         |  |   |           |  |  |   |        |  |  |  |      |  
|------------------------------------------------- |  | ------------------------------- | --------- | -------- |  | ---- | ------ | ------- |  | -------- | ---- | ---- |  | ------- | --------- | -------- |  | ------- | ------ |  |  |  | ---- | ------- |  | - | --------- |  |  | - | ------ |  |  |  | ---- | -
|                                                  |  | For the Year Ended December 31,
|                                                  |  |                                
|                                                  |  | 2002                            |           | 2001     |  | 2000
|                                                  |  |                                 |           |          |  |     
|                                                  |  | Average                         |           |          |  |      |        | Average |  | Average  |      |      |  |         |           | Average  |  | Average |        |  |  |  |      | Average
|                                                  |  | Balance                         |           | Interest |  | Rate |        | Balance |  | Interest |      | Rate |  | Balance |           | Interest |  | Rate   
|                                                  |  |                                 |           |          |  |      |        |         |  |          |      |      |  |         |           |          |  |        
|                                                  |  | (Dollars in Thousands)         
|Interest-Bearing Liabilities:                     |  |                                 |           |          |  |      |        |         |  |          |      |      |  |         |           |          |  |         |        |  |  |  |      |         |  |   |           |  |  |   |        |  |  |  |      |  
|Deposits:                                         |  |                                 |           |          |  |      |        |         |  |          |      |      |  |         |           |          |  |         |        |  |  |  |      |         |  |   |           |  |  |   |        |  |  |  |      |  
|Interest-bearing
demand deposits                  |  | $                               | 135,943   |          |  | $    | 2,035  |         |  |          | 1.50 | %    |  | $       | 129,116   |          |  | $       | 3,409  |  |  |  | 2.64 | %       |  | $ | 112,714   |  |  | $ | 3,942  |  |  |  | 3.50 | %
|Money-market
demand accounts
and savings
accounts |  |                                 | 260,151   |          |  |      | 4,271  |         |  |          | 1.64 |      |  |         | 264,603   |          |  |         | 8,369  |  |  |  | 3.16 |         |  |   | 248,214   |  |  |   | 11,151 |  |  |  | 4.49 |  
|Time deposits less
than $100,000                  |  |                                 | 590,978   |          |  |      | 21,298 |         |  |          | 3.60 |      |  |         | 480,036   |          |  |         | 27,372 |  |  |  | 5.70 |         |  |   | 423,721   |  |  |   | 25,262 |  |  |  | 5.96 |  
|Time deposits of
$100,000 or more                 |  |                                 | 133,991   |          |  |      | 4,132  |         |  |          | 3.08 |      |  |         | 95,389    |          |  |         | 4,991  |  |  |  | 5.23 |         |  |   | 62,075    |  |  |   | 3,762  |  |  |  | 6.06 |  
|Public funds                                      |  |                                 | 72,495    |          |  |      | 2,300  |         |  |          | 3.17 |      |  |         | 69,137    |          |  |         | 3,378  |  |  |  | 4.89 |         |  |   | 58,525    |  |  |   | 3,563  |  |  |  | 6.09 |  
|                                                  |  |                                 |           |          |  |      |        |         |  |          |      |      |  |         |           |          |  |         |        |  |  |  |      |         |  |   |           |  |  |   |        |  |  |  |      |  
|Total interest-
bearing deposits                  |  |                                 | 1,193,558 |          |  |      | 34,036 |         |  |          | 2.85 |      |  |         | 1,038,281 |          |  |         | 47,519 |  |  |  | 4.58 |         |  |   | 905,249   |  |  |   | 47,680 |  |  |  | 5.27 |  
|Borrowings:                                       |  |                                 |           |          |  |      |        |         |  |          |      |      |  |         |           |          |  |         |        |  |  |  |      |         |  |   |           |  |  |   |        |  |  |  |      |  
|Federal funds and
repurchase
agreements           |  |                                 | 172,011   |          |  |      | 4,518  |         |  |          | 2.63 |      |  |         | 60,674    |          |  |         | 2,221  |  |  |  | 3.66 |         |  |   | 32,587    |  |  |   | 2,020  |  |  |  | 6.20 |  
|FHLB advances                                     |  |                                 | 235,923   |          |  |      | 13,004 |         |  |          | 5.51 |      |  |         | 243,706   |          |  |         | 13,528 |  |  |  | 5.55 |         |  |   | 216,173   |  |  |   | 12,549 |  |  |  | 5.81 |  
|Notes payable and
other borrowings                |  |                                 | 30,472    |          |  |      | 1,761  |         |  |          | 5.78 |      |  |         | 26,146    |          |  |         | 2,397  |  |  |  | 9.17 |         |  |   | 19,731    |  |  |   | 1,783  |  |  |  | 9.03 |  
|                                                  |  |                                 |           |          |  |      |        |         |  |          |      |      |  |         |           |          |  |         |        |  |  |  |      |         |  |   |           |  |  |   |        |  |  |  |      |  
|Total borrowings                                  |  |                                 | 438,406   |          |  |      | 19,283 |         |  |          | 4.40 |      |  |         | 330,526   |          |  |         | 18,146 |  |  |  | 5.49 |         |  |   | 268,491   |  |  |   | 16,352 |  |  |  | 6.09 |  
|                                                  |  |                                 |           |          |  |      |        |         |  |          |      |      |  |         |           |          |  |         |        |  |  |  |      |         |  |   |           |  |  |   |        |  |  |  |      |  
|Total interest-bearing liabilities                |  | $                               | 1,631,964 |          |  | $    | 53,319 |         |  |          | 3.27 | %    |  | $       | 1,368,807 |          |  | $       | 65,665 |  |  |  | 4.80 | %       |  | $ | 1,173,740 |  |  | $ | 64,032 |  |  |  | 5.46 | %
|                                                  |  |                                 |           |          |  |      |        |         |  |          |      |      |  |         |           |          |  |         |        |  |  |  |      |         |  |   |           |  |  |   |        |  |  |  |      |  
|Net interest income
(taxequivalent)(1)            |  |                                 |           |          |  | $    | 62,292 |         |  |          | 3.16 | %    |  |         |           |          |  | $       | 50,091 |  |  |  | 2.86 | %       |  |   |           |  |  | $ | 47,064 |  |  |  | 3.14 | %
|                                                  |  |                                 |           |          |  |      |        |         |  |          |      |      |  |         |           |          |  |         |        |  |  |  |      |         |  |   |           |  |  |   |        |  |  |  |      |  
|Net interest
margin (tax equivalent)(1)           |  |                                 |           |          |  |      |        |         |  |          | 3.46 | %    |  |         |           |          |  |         |        |  |  |  | 3.31 | %       |  |   |           |  |  |   |        |  |  |  | 3.65 | %
|                                                 
|Net interest
income(2)                            |  |                                 |           |          |  | $    | 59,402 |         |  |          |      |      |  |         |           |          |  | $       | 47,467 |  |  |  |      |         |  |   |           |  |  | $ | 45,760 | 
|                                                  |  |                                 |           |          |  |      |        |         |  |          |      |      |  |         |           |          |  |         |        |  |  |  |      |         |  |   |           |  |  |   |        |  |  |  |      |  
|Net interest
margin(2)                            |  |                                 |           |          |  |      |        |         |  |          | 3.30 | %    |  |         |           |          |  |         |        |  |  |  | 3.14 | %       |  |   |           |  |  |   |        |  |  |  | 3.54 | %



---

|(1) |  | Adjusted for 35% tax rate in 2002, 2001, and 2000 and adjusted for the
dividends-received deduction where applicable.
|--- |  | ---------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Not adjusted for 35% tax rate in
2002, 2001, and 2000, or for the dividends-received deduction.                      
|   
|(3) |  | Nonaccrual loans are included in the average balance, however these loans
are not earning any interest.              

Changes in Interest Income and Expense

The changes in net interest income from period to period are reflective of
changes in the interest rate environment, changes in the composition of assets
and liabilities as to type and maturity (and the inherent interest rate
differences related thereto), and volume changes. Later sections of this
discussion and analysis address the changes in maturity composition of loans
and investments and in the asset and liability repricing gaps associated with
interest rate risk, all of which contribute to changes in net interest margin.

36



---



##### Table of Contents



The following table sets forth an analysis of volume and rate changes in
interest income and interest expense of the Companys average interest-earning
assets and average interest-bearing liabilities for the indicated periods on a
tax-equivalent basis assuming a 35% tax rate in 2002, 2001, and 2000. The
table distinguishes between the changes related to average outstanding balances
(changes in volume holding the interest rate constant) and the changes related
to average interest rates (changes in average rate holding the outstanding
balance constant). The change in interest due to both volume and rate has been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.

|                              |                                                   |                                    |        |                                 |         |                       |       |        |        |     |       |         |         |      |       |        |       |   |       |        |        |   |        |         |        |  
|----------------------------- | ------------------------------------------------- | ---------------------------------- | ------ | ------------------------------- | ------- | --------------------- | ----- | ------ | ------ | --- | ----- | ------- | ------- | ---- | ----- | ------ | ----- | - | ----- | ------ | ------ | - | ------ | ------- | ------ | -
|                              |                                                   |                                    |        | For the Year Ended December 31,
|                              |                                                   |                                    |        |                                
|                              |                                                   |                                    |        | 2002 Compared to 2001           |         | 2001 Compared to 2000
|                              |                                                   |                                    |        | Change Due to                   |         | Change Due to        
|                              |                                                   |                                    |        |                                 |         |                      
|                              |                                                   |                                    |        | Net                             |         | Volume                |       | Rate   |        | Net |       | Volume  |         | Rate
|                              |                                                   |                                    |        |                                 |         |                       |       |        |        |     |       |         |         |     
|Interest-Earning Assets:      |                                                   |                                    |        |                                 |         |                       |       |        |        |     |       |         |         |      |       |        |       |   |       |        |        |   |        |        
|                              | Federal funds sold                                |                                    | $      | (112                            | )       |                       | $     | 81     |        |     | $     | (193    | )       |      | $     | (411   | )     |   | $     | (222   | )      |   | $      | (189    | )     
|                              | Securities taxable                                |                                    |        | 180                             |         |                       |       | 5,132  |        |     |       | (4,952  | )       |      |       | 950    |       |   |       | 4,098  |        |   |        | (3,148  | )     
|                              | Securities exempt from
federal income taxes       |                                    |        | 1,713                           |         |                       |       | 1,787  |        |     |       | (74     | )       |      |       | (533   | )     |   |       | (523   | )      |   |        | (10     | )     
|                              | Commercial loans                                  |                                    |        | (3,892                          | )       |                       |       | 1,035  |        |     |       | (4,927  | )       |      |       | (1,881 | )     |   |       | 2,062  |        |   |        | (3,943  | )     
|                              | Commercial real estate loans                      |                                    |        | 3,899                           |         |                       |       | 12,120 |        |     |       | (8,221  | )       |      |       | 6,774  |       |   |       | 12,606 |        |   |        | (5,832  | )     
|                              | Agricultural loans                                |                                    |        | (292                            | )       |                       |       | 345    |        |     |       | (637    | )       |      |       | (3     | )     |   |       | 300    |        |   |        | (303    | )     
|                              | Consumer real estate loans                        |                                    |        | (1,486                          | )       |                       |       | (300   | )      |     |       | (1,186  | )       |      |       | (254   | )     |   |       | 459    |        |   |        | (713    | )     
|                              | Consumer installment loans                        |                                    |        | (155                            | )       |                       |       | (1     | )      |     |       | (154    | )       |      |       | 18     |       |   |       | 21     |        |   |        | (3      | )     
|                              |                                                   |                                    |        |                                 |         |                       |       |        |        |     |       |         |         |      |       |        |       |   |       |        |        |   |        |        
|                              | Total interest-earning
assets                     |                                    | $      | (145                            | )       |                       | $     | 20,199 |        |     | $     | (20,344 | )       |      | $     | 4,660  |       |   | $     | 18,801 |        |   | $      | (14,141 | )     
|                              |                                                   |                                    |        |                                 |         |                       |       |        |        |     |       |         |         |      |       |        |       |   |       |        |        |   |        |        
|Interest-Bearing Liabilities: |                                                   |                                    |        |                                 |         |                       |       |        |        |     |       |         |         |      |       |        |       |   |       |        |        |   |        |        
|                              | Interest-bearing demand
deposits                  |                                    | $      | (1,374                          | )       |                       | $     | 172    |        |     | $     | (1,546  | )       |      | $     | (533   | )     |   | $     | 521    |        |   | $      | (1,054  | )     
|                              | Money market demand
accounts and savings accounts |                                    |        | (4,098                          | )       |                       |       | (139   | )      |     |       | (3,959  | )       |      |       | (2,782 | )     |   |       | 697    |        |   |        | (3,479  | )     
|                              | Time deposits of less
than $100,000               |                                    |        | (6,074                          | )       |                       |       | 5,428  |        |     |       | (11,502 | )       |      |       | 2,110  |       |   |       | 3,247  |        |   |        | (1,137  | )     
|                              | Time deposits of $100,000
or more                 |                                    |        | (859                            | )       |                       |       | 1,608  |        |     |       | (2,467  | )       |      |       | 1,229  |       |   |       | 1,799  |        |   |        | (570    | )     
|                              | Public funds                                      |                                    |        | (1,078                          | )       |                       |       | 157    |        |     |       | (1,235  | )       |      |       | (185   | )     |   |       | 587    |        |   |        | (772    | )     
|                              | Federal funds and repurchase
agreements           |                                    |        | 2,297                           |         |                       |       | 3,078  |        |     |       | (781    | )       |      |       | 201    |       |   |       | 1,258  |        |   |        | (1,057  | )     
|                              | FHLB advances                                     |                                    |        | (524                            | )       |                       |       | (430   | )      |     |       | (94     | )       |      |       | 979    |       |   |       | 1,546  |        |   |        | (567    | )     
|                              | Notes payable and other
borrowings                |                                    |        | (636                            | )       |                       |       | 351    |        |     |       | (987    | )       |      |       | 614    |       |   |       | 646    |        |   |        | (32     | )     
|                              |                                                   |                                    |        |                                 |         |                       |       |        |        |     |       |         |         |      |       |        |       |   |       |        |        |   |        |        
|                              |                                                   | Total interest-bearing
liabilities |        | $                               | (12,346 | )                     |       | $      | 10,225 |     |       | $       | (22,571 | )    |       | $      | 1,633 |   |       | $      | 10,301 |   |        | $       | (8,668 | )
|                              |                                                   |                                    |        |                                 |         |                       |       |        |        |     |       |         |         |      |       |        |       |   |       |        |        |   |        |        
|Net interest                  |                                                   | $                                  | 12,201 |                                 |         | $                     | 9,974 |        |        | $   | 2,227 |         |         | $    | 3,027 |        |       | $ | 8,500 |        |        | $ | (5,473 | )      
|                              |                                                   |                                    |        |                                 |         |                       |       |        |        |     |       |         |         |      |       |        |       |   |       |        |        |   |        |        

Financial Condition

Loans

The Companys loan portfolio largely reflects the profile of the
communities in which it operates. The following table sets forth the
composition of the Companys loan portfolio as of the indicated dates.

37



---



##### Table of Contents



|                          |                      |   |                |           |      |   |         |           |      |   |         |         |  |   |         |         |  |   |         |         | 
|------------------------- | -------------------- | - | -------------- | --------- | ---- | - | ------- | --------- | ---- | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                          |                      |   | December 31,  
|                          |                      |   |               
|                          |                      |   | 2002           |           | 2001 |   | 2000    |           | 1999 |   | 1998   
|                          |                      |   |                |           |      |   |         |           |      |   |        
|                          |                      |   | (In Thousands)
|Commercial                |                      | $ | 229,764        |           |      | $ | 220,801 |           |      | $ | 205,698 |         |  | $ | 187,822 |         |  | $ | 148,081 |        
|Commercial real estate    |                      |   | 730,836        |           |      |   | 612,687 |           |      |   | 448,988 |         |  |   | 300,071 |         |  |   | 229,489 |        
|Agricultural              |                      |   | 57,426         |           |      |   | 48,772  |           |      |   | 47,773  |         |  |   | 41,745  |         |  |   | 33,231  |        
|Consumer real estate (1)  |                      |   | 105,391        |           |      |   | 109,329 |           |      |   | 108,780 |         |  |   | 103,681 |         |  |   | 95,604  |        
|Consumer installment      |                      |   | 14,573         |           |      |   | 13,375  |           |      |   | 14,529  |         |  |   | 13,889  |         |  |   | 16,128  |        
|                          |                      |   |                |           |      |   |         |           |      |   |         |         |  |   |         |         |  |   |         |        
|                          | Total loans, gross   |   |                | 1,137,990 |      |   |         | 1,004,964 |      |   |         | 825,768 |  |   |         | 647,208 |  |   |         | 522,533 | 
|Unearned discount         |                      |   | (1,286         | )         |      |   | (1,578  | )         |      |   | (1,136  | )       |  |   | (753    | )       |  |   | (653    | )      
|                          |                      |   |                |           |      |   |         |           |      |   |         |         |  |   |         |         |  |   |         |        
|                          | Total loans          |   |                | 1,136,704 |      |   |         | 1,003,386 |      |   |         | 824,632 |  |   |         | 646,455 |  |   |         | 521,880 | 
|Allowance for loan losses |                      |   | (20,754        | )         |      |   | (10,135 | )         |      |   | (8,593  | )       |  |   | (7,567  | )       |  |   | (6,576  | )      
|                          |                      |   |                |           |      |   |         |           |      |   |         |         |  |   |         |         |  |   |         |        
|                          | Net loans            |   | $              | 1,115,950 |      |   | $       | 993,251   |      |   | $       | 816,039 |  |   | $       | 638,888 |  |   | $       | 515,304 | 
|                          |                      |   |                |           |      |   |         |           |      |   |         |         |  |   |         |         |  |   |         |        
|Loans held for sale:      |                      |   |                |           |      |   |         |           |      |   |         |         |  |   |         |         |  |   |         |        
|                          | Consumer real estate |   | $              | 4,924     |      |   | $       | 3,414     |      |   | $       | 616     |  |   | $       | 449     |  |   | $       | 3,829   | 
|                          |                      |   |                |           |      |   |         |           |      |   |         |         |  |   |         |         |  |   |         |        



---

|(1) |  | Includes loans held for sale.
|--- |  | -----------------------------

Total loans increased $133.3 million to $1.1 billion as of December 31,
2002 from $1.0 billion as of December 31, 2001, an increase of 13.3%. The
Company expects loan growth for 2003 to decline moderately due to the ongoing
difficulties in the general economy.

Commercial loans increased $9.0 million to $229.8 million as of December
31, 2002 from $220.8 million as of December 31, 2001, an increase of 4.1%. The
increase reflects increased demand due to increased working capital and
equipment requirements both by existing borrowers and new customer
relationships.

Commercial real estate loans increased $118.1 million to $730.8 million as
of December 31, 2002 from $612.7 million as of December 31, 2001, an increase
of 19.3%. The Company continues to focus its lending efforts in this area.
The Company has added lending personnel to assist in this growth. The increase
in commercial real estate loans reflects continued growth in the commercial
real estate market, increased commitments with existing borrowers, and market
penetration and market share growth as a result of these efforts.

Agricultural loans increased $8.7 million to $57.4 million as of December
31, 2002 from $48.8 million as of December 31, 2001, an increase of 17.7%. The
increase in agricultural loans reflects increased market share in west central
Illinois.

Consumer real estate loans decreased $3.9 million to $105.4 million as of
December 31, 2002 from $109.3 million as of December 31, 2001, a decrease of
3.6%. The decrease is due in part to the ongoing refinancing activity.

Most mortgage loans the Company originates are sold in the secondary
market. At any point in time, loans will be at various stages of the mortgage
banking process. Included as part of consumer real estate loans are loans held
for sale, which were $4.9 million as of December 31, 2002 and $3.4 million as of
December 31, 2001. The carrying value of these loans approximated their market
value at that time.

38



---



##### Table of Contents



Consumer installment loans increased $1.2 million to $14.6 million as of
December 31, 2002 from $13.4 million as of December 31, 2001, an increase of
9.0%.

Although the risk of nonpayment for any reason exists with respect to all
loans, certain other more specific risks are associated with each type of loan.
The primary risks associated with commercial loans are the quality of the
borrowers management, financial strength and cash flow resources, and the
impact of local economic factors. Risks associated with real estate loans
include concentrations of loans in a certain loan type, such as commercial or
residential, and fluctuating land and property values. Consumer loans also
have risks associated with concentrations of loans in a single type of loan, as
well as the risk a borrower may become unemployed as a result of deteriorating
economic conditions.

The Company attempts to balance the types of loans in its portfolio with
the objective of reducing risk. At the end of 2002, the Company had 73.0% of
its loan portfolio in commercial and consumer real estate loans, 59.6% of these
real estate loans are variable rate and 40.4% of these real estate loans are
fixed rate. The Company believes that most credits should have both a primary
and a secondary source of repayment, and that the primary source should
generally be supported by operating cash flows, while the secondary source
should generally be disposition of collateral. The Company engages in very
little unsecured lending and generally requires personal guarantees of
principals for business obligations. The Company practices a system of
concurrence in the approval of commercial credit whereby the documented
approval of an officers credit committee (or approval by the Board or a Board
committee, where applicable) is obtained in addition to that of the
recommending officer. This system is intended to ensure that commercial credit
is subjected to an independent objective review on at least two different
levels.

Loan Maturities

The following table sets forth the remaining maturities, based upon
contractual dates, for selected loan categories as of December 31, 2002.

|                       |             |   |                |         |           |   |              |         |       |   |          |         |       |   |        |        |  |   |        |        |  |   |           |           | 
|---------------------- | ----------- | - | -------------- | ------- | --------- | - | ------------ | ------- | ----- | - | -------- | ------- | ----- | - | ------ | ------ |  | - | ------ | ------ |  | - | --------- | --------- | 
|                       |             |   | One Year       |         | 1-5 Years |   | Over 5 Years |         |       |   |         
|                       |             |   |                |         |           |   |              |         |       |   |         
|                       |             |   | Or Less        |         | Fixed     |   | Variable     |         | Fixed |   | Variable |         | Total
|                       |             |   |                |         |           |   |              |         |       |   |          |         |      
|                       |             |   | (In Thousands)
|Commercial             |             | $ | 163,335        |         |           | $ | 26,709       |         |       | $ | 34,053   |         |       | $ | 2,834  |        |  | $ | 2,833  |        |  | $ | 229,764   |          
|Commercial real estate |             |   | 353,071        |         |           |   | 213,820      |         |       |   | 119,584  |         |       |   | 32,066 |        |  |   | 12,295 |        |  |   | 730,836   |          
|Agricultural           |             |   | 17,683         |         |           |   | 4,737        |         |       |   | 6,171    |         |       |   | 3,385  |        |  |   | 25,450 |        |  |   | 57,426    |          
|Consumer real estate   |             |   | 25,225         |         |           |   | 21,199       |         |       |   | 11,639   |         |       |   | 18,974 |        |  |   | 28,354 |        |  |   | 105,391   |          
|Consumer installment   |             |   | 4,067          |         |           |   | 9,808        |         |       |   |         |         |       |   | 698    |        |  |   |       |        |  |   | 14,573    |          
|                       |             |   |                |         |           |   |              |         |       |   |          |         |       |   |        |        |  |   |        |        |  |   |           |          
|Total loans, gross     |             |   | 563,381        |         |           |   | 276,273      |         |       |   | 171,447  |         |       |   | 57,957 |        |  |   | 68,932 |        |  |   | 1,137,990 |          
|Unearned discount      |             |   | (1,286         | )       |           |   |             |         |       |   |         |         |       |   |       |        |  |   |       |        |  |   | (1,286    | )        
|                       |             |   |                |         |           |   |              |         |       |   |          |         |       |   |        |        |  |   |        |        |  |   |           |          
|                       | Total loans |   | $              | 562,095 |           |   | $            | 276,273 |       |   | $        | 171,447 |       |   | $      | 57,957 |  |   | $      | 68,932 |  |   | $         | 1,136,704 | 
|                       |             |   |                |         |           |   |              |         |       |   |          |         |       |   |        |        |  |   |        |        |  |   |           |          

Nonperforming Loans

The Companys financial statements are prepared on the accrual basis of
accounting, including the recognition of interest income on its loan portfolio,
unless a loan is placed on nonaccrual status. Loans are placed on nonaccrual
status when there are serious doubts regarding the collectibility of all
principal and interest due under the terms of the loans based on the Companys
analysis of all available information, internal loan reviews, independent loan
reviews, and information provided by regulatory loan reviews. Amounts received
on nonaccrual loans generally are applied first to principal and then to
interest after all of the principal has been collected. A loan is generally
transferred to nonaccrual status if

39



---



##### Table of Contents



it is not in the process of collection and is delinquent in payment of either
principal or interest beyond 90 days.

Under Statement of Financial Accounting Standards No. 114 and No. 118, the
Company defined loans that are individually evaluated for impairment to include
commercial loans and mortgages secured by commercial properties or five-plus
family residences that are in nonaccrual status or were restructured. All
other smaller balance loans with similar attributes (such as auto) are
evaluated for impairment in total.

The classification of a loan as impaired or nonaccrual does not
necessarily indicate that the principal is uncollectible, in whole or in part.
The Company makes a determination as to the collectibility on a case-by-case
basis. The Company considers both the adequacy of the collateral and the other
resources of the borrower in determining the steps to be taken to collect
impaired or nonaccrual loans. The final determination as to the steps taken is
made based upon the specific facts of each situation. Alternatives that are
typically considered to collect impaired or nonaccrual loans are foreclosure,
collection under guarantees, loan restructuring, or judicial collection
actions.

Loans that are considered to be impaired are reduced to the present value
of expected future cash flows or to the fair value of the related collateral by
allocating a portion of the allowance to such loans. If these allocations
require an increase to be made to the allowance for loan losses, such increase
is reported as a provision for loan losses charged to expense. Loans are
evaluated for impairment when payments are delinquent 90 days or more or when
management downgrades the loan classification to doubtful.

The following table sets forth information on the Companys nonperforming
loans and other nonperforming assets as of the indicated dates.

|                                                                |                            |   |                        |        |      |   |       |       |      |   |       |       |  |   |       |       |  |   |       |       | 
|--------------------------------------------------------------- | -------------------------- | - | ---------------------- | ------ | ---- | - | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                                                |                            |   | December 31,          
|                                                                |                            |   |                       
|                                                                |                            |   | 2002                   |        | 2001 |   | 2000  |       | 1999 |   | 1998 
|                                                                |                            |   |                        |        |      |   |       |       |      |   |      
|                                                                |                            |   | (Dollars in Thousands)
|Nonaccrual and impaired loans
not accruing                      |                            | $ | 29,035                 |        |      | $ | 1,774 |       |      | $ | 1,168 |       |  | $ | 1,567 |       |  | $ | 2,190 |      
|Impaired and other loans 90 days
past due and accruing          |                            |   | 2,514                  |        |      |   | 595   |       |      |   | 1,082 |       |  |   | 806   |       |  |   | 2,528 |      
|                                                                |                            |   |                        |        |      |   |       |       |      |   |       |       |  |   |       |       |  |   |       |      
|                                                                | Total nonperforming loans  |   |                        | 31,549 |      |   |       | 2,369 |      |   |       | 2,250 |  |   |       | 2,373 |  |   |       | 4,718 | 
|Other real estate                                               |                            |   | 533                    |        |      |   | 355   |       |      |   | 1,153 |       |  |   | 2,651 |       |  |   | 1,245 |      
|                                                                |                            |   |                        |        |      |   |       |       |      |   |       |       |  |   |       |       |  |   |       |      
|                                                                | Total nonperforming assets |   | $                      | 32,082 |      |   | $     | 2,724 |      |   | $     | 3,403 |  |   | $     | 5,024 |  |   | $     | 5,963 | 
|                                                                |                            |   |                        |        |      |   |       |       |      |   |       |       |  |   |       |       |  |   |       |      
|Total nonperforming loans to
total loans                        |                            |   | 2.78                   | %      |      |   | 0.24  | %     |      |   | 0.26  | %     |  |   | 0.37  | %     |  |   | 0.90  | %    
|Total nonperforming assets to
total loans and other real estate |                            |   | 2.82                   |        |      |   | 0.27  |       |      |   | 0.41  |       |  |   | 0.77  |       |  |   | 1.14  |      
|Total nonperforming assets to
total assets                      |                            |   | 1.60                   |        |      |   | 0.15  |       |      |   | 0.23  |       |  |   | 0.40  |       |  |   | 0.56  |      

During 2002, 2001, and 2000, the Company recognized interest income on
impaired loans of $207,000, $69,000, and $67,000, respectively.

Nonperforming loans increased $29.1 million or 1,077.8% to $31.5 million
at December 31, 2002 from $2.4 million at December 31, 2001. Other real estate
increased $178,000 in 2002 from $355,000 in 2001 to $533,000. Total
nonperforming assets increased by $29.4 million from $2.7 million in 2001 to
$32.1 million in 2002.

40



---



##### Table of Contents



Analysis of Allowance for Loan Losses

The Company recognizes that credit losses will be experienced and the risk
of loss will vary with, among other things, general economic conditions; the
type of loan being made; the creditworthiness of the borrower over the term of
the loan; and in the case of a collateralized loan, the quality of the
collateral for such loan. The allowance for loan losses represents the
Companys estimate of the allowance necessary to provide for probable incurred
losses in the portfolio. In making this determination, the Company analyzes
the ultimate collectibility of the loans in its portfolio by incorporating
feedback provided by internal loan staff, an independent loan review function,
and information provided by examinations performed by regulatory agencies. The
Company makes an ongoing evaluation as to the adequacy of the allowance for
loan losses.

On a quarterly basis, management of the Banks meets to review the adequacy
of the allowance for loan losses. Each loan officer grades these individual
commercial credits, and the Companys independent loan review function
validates the officers grades. In the event that loan review downgrades the
loan, it is included in the allowance analysis at the lower grade. The grading
system is in compliance with the regulatory classifications, and the allowance
is allocated to the loans based on the regulatory grading, except in instances
where there are known differences (e.g., collateral value is nominal).

The analysis of the allowance for loan losses is comprised of three
components: specific credit allocation; general portfolio allocation; and
subjectively by determined allocation. The specific credit allocation includes
a detailed review of the credit in accordance with SFAS No. 114 and No. 118,
and an allocation is made based on this analysis. The general portfolio
allocation consists of an assigned reserve percentage based on the credit
rating of the loan and charge-off history. The subjective portion is
determined based on loan history and the Companys evaluation of various
factors including economic and industry outlooks. In addition, the subjective
portion of the allowance is influenced by current economic conditions and
trends in the portfolio including delinquencies and impairments, as well as
changes in the composition of the portfolio.

The allowance for loan losses is based on estimates, and ultimate losses
will vary from current estimates. These estimates are reviewed quarterly, and
as adjustments, either positive or negative, become necessary, a corresponding
increase or decrease is made in the provision for loan losses. The methodology
used to determine the adequacy of the allowance for loan losses is consistent
with prior years.

41



---



##### Table of Contents



The following table sets forth loans charged off and recovered by type of
loan and an analysis of the allowance for loan losses for the indicated
periods.

|                                        |                              |                   |           |                         |       |      |           |      |     |      |         |      |       |   |         |       |       |   |         |     |       | 
|--------------------------------------- | ---------------------------- | ----------------- | --------- | ----------------------- | ----- | ---- | --------- | ---- | --- | ---- | ------- | ---- | ----- | - | ------- | ----- | ----- | - | ------- | --- | ----- | 
|                                        |                              |                   |           | Year Ended December 31,
|                                        |                              |                   |           |                        
|                                        |                              |                   |           | 2002                    |       | 2001 |           | 2000 |     | 1999 |         | 1998
|                                        |                              |                   |           |                         |       |      |           |      |     |      |         |     
|                                        |                              |                   |           | (Dollars in Thousands) 
|Average total loans                     |                              | $                 | 1,090,314 |                         |       | $    | 917,610   |      |     | $    | 745,085 |      |       | $ | 583,683 |       |       | $ | 508,465 |    
|                                        |                              |                   |           |                         |       |      |           |      |     |      |         |      |       |   |         |       |       |   |         |    
|Total loans at end of year              |                              | $                 | 1,136,704 |                         |       | $    | 1,003,386 |      |     | $    | 824,632 |      |       | $ | 646,455 |       |       | $ | 521,880 |    
|                                        |                              |                   |           |                         |       |      |           |      |     |      |         |      |       |   |         |       |       |   |         |    
|Total nonperforming and impaired loans  |                              | $                 | 31,549    |                         |       | $    | 2,369     |      |     | $    | 2,250   |      |       | $ | 2,373   |       |       | $ | 4,718   |    
|                                        |                              |                   |           |                         |       |      |           |      |     |      |         |      |       |   |         |       |       |   |         |    
|Allowance at beginning of year          |                              | $                 | 10,135    |                         |       | $    | 8,593     |      |     | $    | 7,567   |      |       | $ | 6,576   |       |       | $ | 6,143   |    
|Charge-offs:                            |                              |                   |           |                         |       |      |           |      |     |      |         |      |       |   |         |       |       |   |         |    
|                                        | Commercial loans             |                   |           | 6,957                   |       |      |           | 541  |     |      |         | 874  |       |   |         | 1,124 |       |   |         | 883 |      
|                                        | Consumer real estate loans   |                   |           | 14                      |       |      |           | 49   |     |      |         | 56   |       |   |         | 49    |       |   |         | 49  |      
|                                        | Commercial real estate loans |                   |           | 651                     |       |      |           | 231  |     |      |         | 89   |       |   |         | 120   |       |   |         | 126 |      
|                                        | Agricultural loans           |                   |           | 284                     |       |      |           |     |     |      |         | 11   |       |   |         |      |       |   |         |    |      
|                                        | Consumer installment loans   |                   |           | 300                     |       |      |           | 56   |     |      |         | 77   |       |   |         | 124   |       |   |         | 110 |      
|                                        |                              |                   |           |                         |       |      |           |      |     |      |         |      |       |   |         |       |       |   |         |    
|                                        |                              | Total charge-offs |           |                         | 8,206 |      |           |      | 877 |      |         |      | 1,107 |   |         |       | 1,417 |   |         |     | 1,168 | 
|Recoveries:                             |                              |                   |           |                         |       |      |           |      |     |      |         |      |       |   |         |       |       |   |         |    
|                                        | Commercial loans             |                   |           | 206                     |       |      |           | 168  |     |      |         | 256  |       |   |         | 108   |       |   |         | 197 |      
|                                        | Consumer real estate loans   |                   |           | 47                      |       |      |           | 2    |     |      |         | 6    |       |   |         | 1     |       |   |         | 1   |      
|                                        | Commercial real estate loans |                   |           | 5                       |       |      |           |     |     |      |         | 1    |       |   |         | 71    |       |   |         | 6   |      
|                                        | Agricultural loans           |                   |           |                        |       |      |           |     |     |      |         |     |       |   |         | 8     |       |   |         | 20  |      
|                                        | Consumer installment loans   |                   |           | 35                      |       |      |           | 29   |     |      |         | 20   |       |   |         | 17    |       |   |         | 51  |      
|                                        |                              |                   |           |                         |       |      |           |      |     |      |         |      |       |   |         |       |       |   |         |    
|                                        |                              | Total recoveries  |           |                         | 293   |      |           |      | 199 |      |         |      | 283   |   |         |       | 205   |   |         |     | 275   | 
|                                        |                              |                   |           |                         |       |      |           |      |     |      |         |      |       |   |         |       |       |   |         |    
|Net charge-offs                         |                              |                   | 7,913     |                         |       |      | 678       |      |     |      | 824     |      |       |   | 1,212   |       |       |   | 893     |    
|Provision for loan losses               |                              |                   | 18,532    |                         |       |      | 2,220     |      |     |      | 1,850   |      |       |   | 2,203   |       |       |   | 1,326   |    
|                                        |                              |                   |           |                         |       |      |           |      |     |      |         |      |       |   |         |       |       |   |         |    
|Allowance at end of the year            |                              | $                 | 20,754    |                         |       | $    | 10,135    |      |     | $    | 8,593   |      |       | $ | 7,567   |       |       | $ | 6,576   |    
|                                        |                              |                   |           |                         |       |      |           |      |     |      |         |      |       |   |         |       |       |   |         |    
|Net charge-off to average total loans   |                              |                   | 0.73      | %                       |       |      | 0.07      | %    |     |      | 0.11    | %    |       |   | 0.21    | %     |       |   | 0.18    | %  
|Allowance to total loans at end of year |                              |                   | 1.83      |                         |       |      | 1.01      |      |     |      | 1.04    |      |       |   | 1.17    |       |       |   | 1.26    |    
|Allowance to nonperforming loans        |                              |                   | 0.66      | x                       |       |      | 4.28      | x    |     |      | 3.82    | x    |       |   | 3.19    | x     |       |   | 1.39    | x  

As previously discussed in Recent Developments, the provision for loan
losses increased $16.3 million, or 734.8%, to $18.5 million for the year ended
December 31, 2002 from $2.2 million for the year ended December 31, 2001. The
allowance for loan losses was $20.8 million at December 31, 2002 and $10.1
million at December 31, 2001. Total recoveries on loans previously charged off
were $293,000 for the year ended December 31, 2002 and $199,000 for the year
ended December 1, 2001. These recoveries were due primarily to payments from
customers bankruptcy proceedings or payment plans on charged-off loans.

Net charge-offs increased $7.2 million to $7.9 million, or 0.73% of
average loans in 2002 compared to $678,000, or 0.07%, of average loans in 2001.
Allowance for loan losses to nonperforming loans ratio was 0.66x and 4.28x at
December 31, 2002 and December 31, 2001, respectively.

As noted in
Recent Developments, the Company received approximately $13.3 to repay in full
a substantial portion of the loans classified as nonaccrual at December 31,
2002 subsequent to year-end. Management believes the allowance for loan losses
is adequate to provide for losses inherent in portfolio at December 31, 2002.

42



---



##### Table of Contents



The following table sets forth the Companys allocation of the allowance
for loan losses by types
of loans as of the indicated dates.

|                       |                                 |   |                        |        |       |  |          |        |       |   |        |        |          |  |        |        |       |   |          |       |       |  |       |        |          |   |       |       |  |  |          |        |   |   |       |       |  |  |       |        |  
|---------------------- | ------------------------------- | - | ---------------------- | ------ | ----- |  | -------- | ------ | ----- | - | ------ | ------ | -------- |  | ------ | ------ | ----- | - | -------- | ----- | ----- |  | ----- | ------ | -------- | - | ----- | ----- |  |  | -------- | ------ | - | - | ----- | ----- |  |  | ----- | ------ | -
|                       |                                 |   | December 31,          
|                       |                                 |   |                       
|                       |                                 |   | 2002                   |        | 2001  |  | 2000     |        | 1999  |   | 1998  
|                       |                                 |   |                        |        |       |  |          |        |       |   |       
|                       |                                 |   |                        |        |       |  | Loan     |        |       |   |        |        | Loan     |  |        |        |       |   | Loan     |       |       |  |       |        | Loan     |   |       |       |  |  | Loan    
|                       |                                 |   |                        |        |       |  | Category |        |       |   |        |        | Category |  |        |        |       |   | Category |       |       |  |       |        | Category |   |       |       |  |  | Category
|                       |                                 |   |                        |        |       |  | To Gross |        |       |   |        |        | To Gross |  |        |        |       |   | To Gross |       |       |  |       |        | To Gross |   |       |       |  |  | To Gross
|                       |                                 |   | Amount                 |        | Loans |  | Amount   |        | Loans |   | Amount |        | Loans    |  | Amount |        | Loans |   | Amount   |       | Loans
|                       |                                 |   |                        |        |       |  |          |        |       |   |        |        |          |  |        |        |       |   |          |       |      
|                       |                                 |   | (Dollars in Thousands)
|Commercial             |                                 | $ | 15,392                 |        |       |  | 20.19    | %      |       | $ | 5,339  |        |          |  | 22.00  | %      |       | $ | 4,579    |       |       |  | 24.91 | %      |          | $ | 3,771 |       |  |  | 29.02    | %      |   | $ | 3,294 |       |  |  | 28.34 | %     
|Commercial real estate |                                 |   | 3,141                  |        |       |  | 64.22    |        |       |   | 2,386  |        |          |  | 60.95  |        |       |   | 1,865    |       |       |  | 54.37 |        |          |   | 1,635 |       |  |  | 46.36    |        |   |   | 1,222 |       |  |  | 43.92 |       
|Agricultural           |                                 |   | 426                    |        |       |  | 5.05     |        |       |   | 737    |        |          |  | 4.86   |        |       |   | 659      |       |       |  | 5.79  |        |          |   | 637   |       |  |  | 6.45     |        |   |   | 418   |       |  |  | 6.36  |       
|Consumer real estate   |                                 |   | 145                    |        |       |  | 9.26     |        |       |   | 310    |        |          |  | 10.89  |        |       |   | 206      |       |       |  | 13.17 |        |          |   | 194   |       |  |  | 16.02    |        |   |   | 177   |       |  |  | 18.30 |       
|Consumer installment   |                                 |   | 421                    |        |       |  | 1.28     |        |       |   | 173    |        |          |  | 1.30   |        |       |   | 138      |       |       |  | 1.76  |        |          |   | 146   |       |  |  | 2.15     |        |   |   | 169   |       |  |  | 3.08  |       
|Unallocated            |                                 |   | 1,229                  |        |       |  |         |        |       |   | 1,190  |        |          |  |       |        |       |   | 1,146    |       |       |  |      |        |          |   | 1,184 |       |  |  |         |        |   |   | 1,296 |       |  |  |      |       
|                       |                                 |   |                        |        |       |  |          |        |       |   |        |        |          |  |        |        |       |   |          |       |       |  |       |        |          |   |       |       |  |  |          |        |   |   |       |       |  |  |       |       
|                       | Total allowance
for loan losses |   | $                      | 20,754 |       |  |          | 100.00 | %     |   | $      | 10,135 |          |  |        | 100.00 | %     |   | $        | 8,593 |       |  |       | 100.00 | %        |   | $     | 7,567 |  |  |          | 100.00 | % |   | $     | 6,576 |  |  |       | 100.00 | %
|                       |                                 |   |                        |        |       |  |          |        |       |   |        |        |          |  |        |        |       |   |          |       |       |  |       |        |          |   |       |       |  |  |          |        |   |   |       |       |  |  |       |       

As of December 31, 2002, approximately 75% of the allowance was allocated
to commercial loans, versus 50% in the prior year, as a result of the
reclassification of certain commercial loans in the third and fourth
quarters of
2002. See Recent Developments.

Securities

The Company manages its securities portfolio to provide a source of both
liquidity and earnings. Each of the Banks has its own asset/liability
committee, which develops current investment policies based upon its operating
needs and market circumstances. The investment policy is reviewed by senior
financial management of the Company in terms of its objectives, investment
guidelines, and consistency with overall Company performance and risk
management goals. Each of the Banks investment policy is formally reviewed
and approved annually by its Board of Directors. The asset/liability committee
of each of the Banks is responsible for reporting and monitoring compliance
with the investment policy. Reports are provided to each of the Banks Board
of Directors and the Board of Directors of the Company on a regular basis.

The securities
portfolio represented approximately 38.4% and 38.9% of the
Companys assets as of December 31, 2002 and 2001, respectively. During the
past two years, the securities portfolio ranged between 30% and 50% of each of
the Banks assets, depending upon liquidity requirements, deposit growth, and
loan demand in each market.

The total fair value of the securities portfolio was $772.3 million as of
December 31, 2002, or 101.7% of amortized cost. The fair value of the
securities portfolio was $705.3 million and $538.7 million as of December 31,
2001 and 2000, respectively.

43



---



##### Table of Contents



The following tables set forth the composition of the Companys securities
portfolio by major category as of the indicated dates. The securities
portfolio as of December 31, 2002, 2001, and 2000 has been categorized as
either available-for-sale or held-to-maturity in accordance with SFAS No. 115.

|                                                           |  |                        |         |                    |  |       |         |            |  |      |         |            |  |           |         |  |  |   |         |      |  |   |         |  |  |  |        |  
|---------------------------------------------------------- |  | ---------------------- | ------- | ------------------ |  | ----- | ------- | ---------- |  | ---- | ------- | ---------- |  | --------- | ------- |  |  | - | ------- | ---- |  | - | ------- |  |  |  | ------ | -
|                                                           |  | December 31, 2002     
|                                                           |  |                       
|                                                           |  | Held-to-Maturity       |         | Available-for-Sale |  | Total |         |            |  |     
|                                                           |  |                        |         |                    |  |       |         |            |  |     
|                                                           |  | Amortized              |         |                    |  |       |         | Amortized  |  |      |         |            |  | Amortized |         |  |  |   |         | % of
|                                                           |  | Cost                   |         | Fair Value         |  | Cost  |         | Fair Value |  | Cost |         | Fair Value |  | Portfolio
|                                                           |  |                        |         |                    |  |       |         |            |  |      |         |            |  |          
|                                                           |  | (Dollars in Thousands)
|U.S. Treasury and obligations
of U. S. government agencies |  | $                      |        |                    |  | $     |        |            |  | $    | 23,856  |            |  | $         | 23,544  |  |  | $ | 23,856  |      |  | $ | 23,544  |  |  |  | 3.14   | %
|Obligations of states and
political subdivisions           |  |                        | 17,706  |                    |  |       | 18,666  |            |  |      | 55,109  |            |  |           | 57,720  |  |  |   | 72,815  |      |  |   | 76,386  |  |  |  | 9.58   |  
|Mortgage-backed securities                                 |  |                        | 100,914 |                    |  |       | 101,755 |            |  |      | 495,569 |            |  |           | 504,432 |  |  |   | 596,483 |      |  |   | 606,187 |  |  |  | 78.51  |  
|Equity securities                                          |  |                        |        |                    |  |       |        |            |  |      | 59,369  |            |  |           | 59,364  |  |  |   | 59,369  |      |  |   | 59,364  |  |  |  | 7.81   |  
|Other bonds                                                |  |                        |        |                    |  |       |        |            |  |      | 7,194   |            |  |           | 6,813   |  |  |   | 7,194   |      |  |   | 6,813   |  |  |  | 0.95   |  
|                                                           |  |                        |         |                    |  |       |         |            |  |      |         |            |  |           |         |  |  |   |         |      |  |   |         |  |  |  |        |  
|Total                                                      |  | $                      | 118,620 |                    |  | $     | 120,421 |            |  | $    | 641,097 |            |  | $         | 651,873 |  |  | $ | 759,717 |      |  | $ | 772,294 |  |  |  | 100.00 | %
|                                                           |  |                        |         |                    |  |       |         |            |  |      |         |            |  |           |         |  |  |   |         |      |  |   |         |  |  |  |        |  

|                                                           |  |                        |        |                    |  |       |        |            |  |      |         |            |  |           |         |  |  |   |         |      |  |   |         |  |  |  |        |  
|---------------------------------------------------------- |  | ---------------------- | ------ | ------------------ |  | ----- | ------ | ---------- |  | ---- | ------- | ---------- |  | --------- | ------- |  |  | - | ------- | ---- |  | - | ------- |  |  |  | ------ | -
|                                                           |  | December 31, 2001     
|                                                           |  |                       
|                                                           |  | Held-to-Maturity       |        | Available-for-Sale |  | Total |        |            |  |     
|                                                           |  |                        |        |                    |  |       |        |            |  |     
|                                                           |  | Amortized              |        |                    |  |       |        | Amortized  |  |      |         |            |  | Amortized |         |  |  |   |         | % of
|                                                           |  | Cost                   |        | Fair Value         |  | Cost  |        | Fair Value |  | Cost |         | Fair Value |  | Portfolio
|                                                           |  |                        |        |                    |  |       |        |            |  |      |         |            |  |          
|                                                           |  | (Dollars in Thousands)
|U.S. Treasury and obligations
of U. S. government agencies |  | $                      |       |                    |  | $     |       |            |  | $    | 505     |            |  | $         | 516     |  |  | $ | 505     |      |  | $ | 516     |  |  |  | 0.07   | %
|Obligations of states and
political subdivisions           |  |                        | 21,445 |                    |  |       | 21,865 |            |  |      | 12,872  |            |  |           | 13,008  |  |  |   | 34,317  |      |  |   | 34,873  |  |  |  | 4.86   |  
|Mortgage-backed securities                                 |  |                        |       |                    |  |       |       |            |  |      | 597,902 |            |  |           | 596,147 |  |  |   | 597,902 |      |  |   | 596,147 |  |  |  | 84.61  |  
|Equity securities                                          |  |                        |       |                    |  |       |       |            |  |      | 72,007  |            |  |           | 72,233  |  |  |   | 72,007  |      |  |   | 72,233  |  |  |  | 10.19  |  
|Other bonds                                                |  |                        |       |                    |  |       |       |            |  |      | 1,941   |            |  |           | 1,570   |  |  |   | 1,941   |      |  |   | 1,570   |  |  |  | 0.27   |  
|                                                           |  |                        |        |                    |  |       |        |            |  |      |         |            |  |           |         |  |  |   |         |      |  |   |         |  |  |  |        |  
|Total                                                      |  | $                      | 21,445 |                    |  | $     | 21,865 |            |  | $    | 685,227 |            |  | $         | 683,474 |  |  | $ | 706,672 |      |  | $ | 705,339 |  |  |  | 100.00 | %
|                                                           |  |                        |        |                    |  |       |        |            |  |      |         |            |  |           |         |  |  |   |         |      |  |   |         |  |  |  |        |  

|                                                           |                                     |   |                        |   |                    |   |        |   |            |   |         |         |            |   |           |         |  |   |         |         |      |   |         |         |  |  |        |       | 
|---------------------------------------------------------- | ----------------------------------- | - | ---------------------- | - | ------------------ | - | ------ | - | ---------- | - | ------- | ------- | ---------- | - | --------- | ------- |  | - | ------- | ------- | ---- | - | ------- | ------- |  |  | ------ | ----- | 
|                                                           |                                     |   | December 31, 2000     
|                                                           |                                     |   |                       
|                                                           |                                     |   | Held-to-Maturity       |   | Available-for-Sale |   | Total  |   |            |   |        
|                                                           |                                     |   |                        |   |                    |   |        |   |            |   |        
|                                                           |                                     |   | Amortized              |   |                    |   |        |   | Amortized  |   |         |         |            |   | Amortized |         |  |   |         |         | % of
|                                                           |                                     |   | Cost                   |   | Fair Value         |   | Cost   |   | Fair Value |   | Cost    |         | Fair Value |   | Portfolio
|                                                           |                                     |   |                        |   |                    |   |        |   |            |   |         |         |            |   |          
|                                                           |                                     |   | (Dollars in Thousands)
|U.S. Treasury and obligations
of U. S. government agencies |                                     | $ |                       |   |                    | $ |       |   |            | $ | 1,000   |         |            | $ | 934       |         |  | $ | 1,000   |         |      | $ | 934     |         |  |  | 0.18   | %    
|Obligations of states and
political subdivisions           |                                     |   | 25,174                 |   |                    |   | 25,215 |   |            |   | 10,789  |         |            |   | 10,974    |         |  |   | 35,963  |         |      |   | 36,189  |         |  |  | 6.60   |      
|Mortgage-backed securities:                                |                                     |   |                        |   |                    |   |        |   |            |   |         |         |            |   |           |         |  |   |         |         |      |   |         |         |  |  |        |      
|                                                           | Pass-through securities             |   |                        |  |                    |   |        |  |            |   |         | 427,339 |            |   |           | 422,407 |  |   |         | 427,339 |      |   |         | 422,407 |  |  |        | 78.40 | 
|                                                           | Collateralized mortgage
obligations |   |                        |  |                    |   |        |  |            |   |         | 1,724   |            |   |           | 1,720   |  |   |         | 1,724   |      |   |         | 1,720   |  |  |        | 0.32  | 
|Equity securities                                          |                                     |   |                       |   |                    |   |       |   |            |   | 59,746  |         |            |   | 59,735    |         |  |   | 59,746  |         |      |   | 59,735  |         |  |  | 10.96  |      
|Other bonds                                                |                                     |   |                       |   |                    |   |       |   |            |   | 19,312  |         |            |   | 17,742    |         |  |   | 19,312  |         |      |   | 17,742  |         |  |  | 3.54   |      
|                                                           |                                     |   |                        |   |                    |   |        |   |            |   |         |         |            |   |           |         |  |   |         |         |      |   |         |         |  |  |        |      
|Total                                                      |                                     | $ | 25,174                 |   |                    | $ | 25,215 |   |            | $ | 519,910 |         |            | $ | 513,512   |         |  | $ | 545,084 |         |      | $ | 538,727 |         |  |  | 100.00 | %    
|                                                           |                                     |   |                        |   |                    |   |        |   |            |   |         |         |            |   |           |         |  |   |         |         |      |   |         |         |  |  |        |      

During the third quarter of 2002, the Company reclassified approximately
$100 million of mortgage-backed securities from the available-for-sale category
to the held-to-maturity category under permissible provisions of FASB 115.
This transfer was required to be at fair value which resulted in an unrealized
gain and accumulated other comprehensive income at the time of transfer, of
$1,396,000 and $842,000, respectively, which is being amortized/accreted to
expense/income over the life of the securities as a yield adjustment. This
transfer was completed in order to enhance the Companys interest rate risk by
matching longer-term assets with longer term funding sources.

As of December 31, 2002, the Company was involved in certain derivative
transactions. All derivative instruments are recorded at their fair values and
the change in the fair value of a derivative is included in other income. If
derivative instruments are designated as hedges of fair values, both the

44



---



##### Table of Contents



change in the fair value of the hedge and the hedged item are included in
current earnings. Fair value adjustments related to cash flow hedges are
recorded in other comprehensive income and reclassified to earnings when the
hedged transaction is reflected in earnings. Ineffective portions of hedges
are reflected in earnings as they occur.

The Company has bought and sold various put and call options, with terms
less than 90 days, on mortgage-backed securities at December 31, 2002. These
are stand-alone derivatives that are carried at their estimated fair value with
the corresponding gain or loss recorded in option income. See Note 20 to the
audited financial statements.

In August 2002, the Company entered into a credit derivative transaction
with a notional amount of $20.0 million for a term of five years, maturing
August 30, 2007. The credit swap has a credit rating of Aa2/AA by
Moodys and Standard and Poors. In November 2002, the Company entered a credit
derivative transaction with a notional amount of $30.0 million for a term of
five years, maturing November 27, 2002. The credit swap has a credit
rating of Aa1/AAA by Moodys and Standard and Poors. The notional amount, which is the Companys credit risk, represents the maximum
accounting loss that could be recognized at the reporting date if actual
defaults exceeded certain thresholds. These are stand-alone
derivatives with the changes in the market value charged to earnings on a
quarterly basis. The Company receives fee income quarterly (1.25% of
the notional amount on an annual basis) to cover potential credit losses in
the event that actual defaults incurred by each underlying instrument exceed
certain thresholds. On inception date, the Company received 1% of the notional
amount as payment for entering into the contract. There has been no material
change in the fair value of $500,000 since the Company entered into these credit derivatives.
In both transactions, the underlying
asset-backed security is $1.0 billion and is diversified amongst 100 companies.

As of December 31, 2002, the Company held no securities of a single issuer
with a book value exceeding 10% of stockholders equity other than those of the
U.S. Treasury or other U.S. government agencies.

The Companys securities portfolio on an amortized cost basis increased
$53.0 million, or 7.5%, in 2002 compared to a $161.6 million increase in 2001.
The change was attributed to the generation of new deposits and additional
borrowings in excess of the loan funding and operational requirements of the
Banks. During 2002, the Company increased its securities portfolio by
increasing its holdings in U.S. Treasuries and agencies and obligations of
political subdivisions by $23.4 million and $38.5 million from the prior year,
respectively. This increase is a result of investing the accumulation of new
deposits and borrowings.

The securities portfolio consists primarily of agency-guaranteed,
mortgage-backed securities. Mortgage-backed securities represented 78.5%,
84.6%, and 78.4% of total securities as of December 31, 2002, 2001, and 2000,
respectively. Based upon the Companys evaluation, mortgage-backed securities
are a preferable investment vehicle for the Banks. Mortgage-backed securities
offer attractive yields, provide monthly cash flows, serve as acceptable
collateral, and have most of the liquidity characteristics of U.S. Treasury
notes and bonds.

The Banks investment strategies during the past three years have been
focused on the purchase of seasoned and new production mortgage-backed
securities of moderate average lives (5 to 8 years), which have been purchased
at discounts, at par, and at a premium to par. Historically, management
believes these securities are reasonably predictable in terms of price
volatility, prepayment speeds, and monthly cash flows. The sharp decrease in
long-term investment yields and, as a consequence, lower mortgage rates, led to
a significant increase in prepayment speeds in 2001 and 2002. As a result,
management repositioned the securities portfolio in 2002 to reduce the overall
impact on yields and improve longer-term profitability. During the third
quarter of 2002, the Company reclassified $100.0

45



---



##### Table of Contents



million of its mortgage-backed securities from available-for-sale to
held-to-maturity under permissible provisions of FASB 115 in order to enhance
its interest rate risk position.

The Company manages its securities available-for-sale portfolio and
trading account portfolio on a total return basis. In this respect, management
regularly reviews the performance of its securities and sells specific
securities to provide opportunities to enhance net interest income and net
interest margin, and when possible it will recognize gains on the sale of
securities. The Company has a long history of managing its securities in this
manner. During 2002, the Company experienced an above average level of
refinancing activity on its mortgage-backed securities. Trading account
profits result from trading strategies that are utilized to supplement
narrowing bond yields during periods of interest rate volatility. Gains on
securities transactions for the years ended December 31, 2002 and 2001 were
$1.5 million and $2.8 million, respectively. Trading account profits were
$348,000 compared to $899,000 for the years ended December 31, 2002 and 2001,
respectively. Option income was $1.8 million and $508,000 for the years ended
December 31, 2002 and 2001, respectively.

All fixed and adjustable rate mortgage pools contain a certain amount of
risk related to the uncertainty of prepayments of the underlying mortgages.
Interest rate changes have a direct impact upon prepayment rates. The Company
uses computer simulation models to test the average life and yield volatility
of adjustable rate mortgage pools under various interest rate assumptions to
monitor volatility. Stress tests are performed quarterly.

Investment Maturities and Yields

The following tables set forth the contractual or estimated maturities of
the components of the Companys securities portfolio as of December 31, 2002
and the weighted average yields on a nontax-equivalent basis. The table
assumes estimated fair values for available-for-sale securities and amortized
cost for held-to-maturity securities:

|                                                          |       |       |       |                        |       |                   |      |                  |      |                 |         |               |         |                |      |        |      |       |        |        |        |       |      |      |      |   |        |   |        |  |      |      |      |   |         |         |         |  |      |      |      | 
|--------------------------------------------------------- | ----- | ----- | ----- | ---------------------- | ----- | ----------------- | ---- | ---------------- | ---- | --------------- | ------- | ------------- | ------- | -------------- | ---- | ------ | ---- | ----- | ------ | ------ | ------ | ----- | ---- | ---- | ---- | - | ------ | - | ------ |  | ---- | ---- | ---- | - | ------- | ------- | ------- |  | ---- | ---- | ---- | 
|                                                          |       |       |       | Maturing              
|                                                          |       |       |       |                       
|                                                          |       |       |       |                        |       |                   |      |                  |      |                 |         | After One But |         | After Five But |      |        |      |       |        |        |        |       |      |      |      |   |        |   |        | 
|                                                          |       |       |       | Within One Year        |       | Within Five Years |      | Within Ten Years |      | After Ten Years |         | Total        
|                                                          |       |       |       |                        |       |                   |      |                  |      |                 |         |              
|                                                          |       |       |       | Amount                 |       | Yield             |      | Amount           |      | Yield           |         | Amount        |         | Yield          |      | Amount |      | Yield |        | Amount |        | Yield
|                                                          |       |       |       |                        |       |                   |      |                  |      |                 |         |               |         |                |      |        |      |       |        |        |        |      
|                                                          |       |       |       | (Dollars in Thousands)
|Available-for-Sale Securities:                            |       |       |       |                        |       |                   |      |                  |      |                 |         |               |         |                |      |        |      |       |        |        |        |       |      |      |      |   |        |   |        |  |      |      |      |   |         |         |         |  |      |     
|U.S. Treasury and
obligations ofU. S.
government agencies |       | $     |      |                        |       |                   | 0.00 | %                |      | $               | 2,625   |               |         |                | 3.10 | %      |      | $     | 20,919 |        |        |       | 4.38 | %    |      | $ |       |   |        |  | 0.00 | %    |      | $ | 23,544  |         |         |  | 4.23 | %   
|Obligations of states and
political subdivisions          |       |       | 160   |                        |       |                   | 4.65 |                  |      |                 | 6,443   |               |         |                | 5.73 |        |      |       | 30,588 |        |        |       | 4.22 |      |      |   | 20,529 |   |        |  | 3.95 |      |      |   | 57,720  |         |         |  | 4.29 |     
|Mortgage-backed securities                                |       |       | 624   |                        |       |                   | 7.14 |                  |      |                 | 494,804 |               |         |                | 6.57 |        |      |       | 8,880  |        |        |       | 6.51 |      |      |   | 124    |   |        |  | 5.38 |      |      |   | 504,432 |         |         |  | 6.57 |     
|Equity securities                                         |       |       |      |                        |       |                   | 0.00 |                  |      |                 |        |               |         |                | 0.00 |        |      |       |       |        |        |       | 0.00 |      |      |   | 59,364 |   |        |  | 5.55 |      |      |   | 59,364  |         |         |  | 5.55 |     
|Other bonds                                               |       |       | 970   |                        |       |                   | 5.50 |                  |      |                 | 4,113   |               |         |                | 6.54 |        |      |       |       |        |        |       | 0.00 |      |      |   | 1,730  |   |        |  | 3.00 |      |      |   | 6,813   |         |         |  | 5.32 |     
|                                                          |       |       |       |                        |       |                   |      |                  |      |                 |         |               |         |                |      |        |      |       |        |        |        |       |      |      |      |   |        |   |        |  |      |      |      |   |         |         |         |  |      |     
|                                                          |       | Total |       | $                      | 1,754 |                   |      |                  | 6.01 |                 |         | $             | 507,985 |                |      |        | 6.54 |       |        | $      | 60,387 |       |      |      | 4.61 |   |        | $ | 81,747 |  |      |      | 5.09 |   |         | $       | 651,873 |  |      |      | 6.18 | 
|                                                          |       |       |       |                        |       |                   |      |                  |      |                 |         |               |         |                |      |        |      |       |        |        |        |       |      |      |      |   |        |   |        |  |      |      |      |   |         |         |         |  |      |     
|Held-to-Maturity Securities:                              |       |       |       |                        |       |                   |      |                  |      |                 |         |               |         |                |      |        |      |       |        |        |        |       |      |      |      |   |        |   |        |  |      |      |      |   |         |         |         |  |      |     
|Obligations of states and
political subdivisions          |       | $     | 4,706 |                        |       |                   | 4.52 | %                |      | $               | 12,750  |               |         |                | 4.92 | %      |      | $     | 250    |        |        |       | 4.90 | %    |      | $ |       |   |        |  | 0.00 | %    |      | $ | 17,706  |         |         |  | 4.81 | %   
|Mortgage-backed securities                                |       |       | 89    |                        |       |                   | 7.50 |                  |      |                 | 97,244  |               |         |                | 6.58 |        |      |       | 3,581  |        |        |       | 6.26 |      |      |   |       |   |        |  | 0.00 |      |      |   | 100,914 |         |         |  | 6.57 |     
|                                                          |       |       |       |                        |       |                   |      |                  |      |                 |         |               |         |                |      |        |      |       |        |        |        |       |      |      |      |   |        |   |        |  |      |      |      |   |         |         |         |  |      |     
|                                                          | Total |       | $     | 4,795                  |       |                   |      | 4.57             |      |                 | $       | 109,994       |         |                |      | 6.39   |      |       | $      | 3,831  |        |       |      | 6.17 |      |   | $      |  |        |  |      | 0.00 |      |   | $       | 118,620 |         |  |      | 6.31 |     
|                                                          |       |       |       |                        |       |                   |      |                  |      |                 |         |               |         |                |      |        |      |       |        |        |        |       |      |      |      |   |        |   |        |  |      |      |      |   |         |         |         |  |      |     

Deposits

The Company has experienced significant growth in total deposits in recent
years. Total deposits were $1.4 billion at December 31, 2002, $1.2 billion at
December 31, 2001, and $1.1 billion at December 31, 2000, representing an
increase of 14.8% and 11.6%, respectively, between the three years. Average
total deposits were $1.3 billion for the year ended December 31, 2002, $1.2
billion for the year ended December 31, 2001, and $1.0 billion for the year
ended December 31, 2000. These increases in deposits are the result of
increased marketing activity in the last three years as well as normal growth
in the Banks core market areas. Deposit

46



---



##### Table of Contents



growth in 2002 surpassed the budgeted levels; management believes the rate of
deposit growth is likely to increase in 2003.

The following table sets forth the average amount of and the average rate
paid on deposits by category for the indicated periods.

|                                           |              |                     |         |                                 |           |          |       |         |        |         |      |          |      |      |         |         |           |          |       |         |        |    |      |      |      |   |         |         |           |  |       |      |        |   |      |      |      |  
|------------------------------------------ | ------------ | ------------------- | ------- | ------------------------------- | --------- | -------- | ----- | ------- | ------ | ------- | ---- | -------- | ---- | ---- | ------- | ------- | --------- | -------- | ----- | ------- | ------ | -- | ---- | ---- | ---- | - | ------- | ------- | --------- |  | ----- | ---- | ------ | - | ---- | ---- | ---- | -
|                                           |              |                     |         | For the Year Ended December 31,
|                                           |              |                     |         |                                
|                                           |              |                     |         | 2002                            |           | 2001     |       | 2000   
|                                           |              |                     |         |                                 |           |          |       |        
|                                           |              |                     |         |                                 |           |          |       | Percent |        |         |      |          |      |      |         |         |           | Percent  |       |         |        |    |      |      |      |   |         | Percent |           |  |       |     
|                                           |              |                     |         | Average                         |           | of       |       |         |        |         |      | Average  |      | of   |         |         |           |          |       | Average |        | of |      |      |      |  
|                                           |              |                     |         | Balance                         |           | Deposits |       | Rate    |        | Balance |      | Deposits |      | Rate |         | Balance |           | Deposits |       | Rate   
|                                           |              |                     |         |                                 |           |          |       |         |        |         |      |          |      |      |         |         |           |          |       |        
|                                           |              |                     |         | (Dollars in Thousands)         
|Non-interest-bearing
demand deposits       |              | $                   | 129,864 |                                 |           |          | 9.81  | %       |        |         | 0.00 | %        |      | $    | 121,394 |         |           |          | 10.47 | %       |        |    | 0.00 | %    |      | $ | 117,396 |         |           |  | 11.48 | %    |        |   | 0.00 | %   
|Interest-bearing
demand deposits           |              |                     | 135,943 |                                 |           |          | 10.27 |         |        |         | 1.50 |          |      |      | 129,116 |         |           |          | 11.13 |         |        |    | 2.64 |      |      |   | 112,714 |         |           |  | 11.02 |      |        |   | 3.50 |     
|Savings and money
market accounts          |              |                     | 260,151 |                                 |           |          | 19.66 |         |        |         | 1.64 |          |      |      | 264,603 |         |           |          | 22.82 |         |        |    | 3.16 |      |      |   | 248,214 |         |           |  | 24.28 |      |        |   | 4.49 |     
|Time Deposits:                             |              |                     |         |                                 |           |          |       |         |        |         |      |          |      |      |         |         |           |          |       |         |        |    |      |      |      |   |         |         |           |  |       |      |        |   |      |     
|Certificates of deposit,
under $100,000(1) |              |                     | 590,978 |                                 |           |          | 44.66 |         |        |         | 3.60 |          |      |      | 480,036 |         |           |          | 41.39 |         |        |    | 5.70 |      |      |   | 423,721 |         |           |  | 41.43 |      |        |   | 5.96 |     
|Certificates of deposit,
over $100,000(1)  |              |                     | 133,991 |                                 |           |          | 10.12 |         |        |         | 3.08 |          |      |      | 95,389  |         |           |          | 8.23  |         |        |    | 5.23 |      |      |   | 62,075  |         |           |  | 6.07  |      |        |   | 6.06 |     
|                                           | Public funds |                     |         | 72,495                          |           |          |       | 5.48    |        |         |      | 3.17     |      |      |         | 69,137  |           |          |       | 5.96    |        |    |      | 4.89 |      |   |         | 58,525  |           |  |       | 5.72 |        |   |      | 6.09 |     
|                                           |              |                     |         |                                 |           |          |       |         |        |         |      |          |      |      |         |         |           |          |       |         |        |    |      |      |      |   |         |         |           |  |       |      |        |   |      |     
|                                           |              | Total time
deposits |         |                                 | 797,464   |          |       |         | 60.26  |         |      |          | 3.48 |      |         |         | 644,562   |          |       |         | 55.58  |    |      |      | 5.55 |   |         |         | 544,321   |  |       |      | 53.22  |   |      |      | 5.99 |  
|                                           |              |                     |         |                                 |           |          |       |         |        |         |      |          |      |      |         |         |           |          |       |         |        |    |      |      |      |   |         |         |           |  |       |      |        |   |      |     
|                                           |              | Total deposits      |         | $                               | 1,323,422 |          |       |         | 100.00 | %       |      |          | 2.57 | %    |         | $       | 1,159,675 |          |       |         | 100.00 | %  |      |      | 4.10 | % |         | $       | 1,022,645 |  |       |      | 100.00 | % |      |      | 4.66 | %
|                                           |              |                     |         |                                 |           |          |       |         |        |         |      |          |      |      |         |         |           |          |       |         |        |    |      |      |      |   |         |         |           |  |       |      |        |   |      |     



---

|(1) |  | Certificates of deposit exclusive of public funds.
|--- |  | --------------------------------------------------

The following table summarizes the maturity distribution of certificates
of deposit in amounts of $100,000 or more as of December 31, 2002. These
deposits have been made by individuals, businesses, and public and other
not-for-profit entities, most of which are located within the Companys market
area.

|                                        |       |                |         |         | 
|--------------------------------------- | ----- | -------------- | ------- | ------- | 
|                                        |       | (In Thousands)
|                                        |       |               
|Three months or less                    |       | $              | 91,900  |        
|Over three months through twelve months |       |                | 170,638 |        
|Over one year through three years       |       |                | 28,066  |        
|Over three years                        |       |                | 1,325   |        
|                                        |       |                |         |        
|                                        | Total |                | $       | 291,929 | 
|                                        |       |                |         |        

47



---



##### Table of Contents



Borrowings

The following table summarizes the Companys borrowings for the periods
indicated.

|                                               |       |   |                        |         |      |   |         |         |  |   |         |         | 
|---------------------------------------------- | ----- | - | ---------------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                               |       |   | December 31,          
|                                               |       |   |                       
|                                               |       |   | 2002                   |         | 2001 |   | 2000   
|                                               |       |   |                        |         |      |   |        
|                                               |       |   | (Dollars in Thousands)
|Federal funds purchased                        |       | $ | 20,825                 |         |      | $ | 24,350  |         |  | $ | 3,830   |        
|Securities sold under agreements to repurchase |       |   | 185,057                |         |      |   | 146,800 |         |  |   | 20,463  |        
|Lines of credit                                |       |   | 2,000                  |         |      |   | 6,500   |         |  |   | 5,300   |        
|Junior subordinated debt                       |       |   | 35,000                 |         |      |   | 20,000  |         |  |   | 20,000  |        
|FHLB advances                                  |       |   | 219,500                |         |      |   | 244,500 |         |  |   | 239,500 |        
|                                               |       |   |                        |         |      |   |         |         |  |   |         |        
|                                               | Total |   | $                      | 462,382 |      |   | $       | 442,150 |  |   | $       | 289,093 | 
|                                               |       |   |                        |         |      |   |         |         |  |   |         |        

The Company uses short-term borrowings on a limited basis. These
borrowings include overnight funds purchased, securities sold under agreements
to repurchase, FHLB advances, and commercial bank lines of credit. The
following tables set forth categories and the balances of the Companys
short-term borrowings for the periods indicated.

|                         |                                               |  |                         |        |      |  |      |        |   |  |   |        |  
|------------------------ | --------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                         |                                               |  | Year Ended December 31,
|                         |                                               |  |                        
|                         |                                               |  | 2002                    |        | 2001 |  | 2000
|                         |                                               |  |                         |        |      |  |     
|                         |                                               |  | (Dollars in Thousands) 
|Federal funds purchased: |                                               |  |                         |        |      |  |      |        |   |  |   |       
|                         | Balance at end of year                        |  | $                       | 20,825 |      |  | $    | 24,350 |   |  | $ | 3,830  |  
|                         | Weighted average interest rate at end of year |  |                         | 1.43   | %    |  |      | 1.89   | % |  |   | 6.02   | %
|                         | Maximum amount outstanding (1)                |  | $                       | 29,850 |      |  | $    | 51,500 |   |  | $ | 14,815 |  
|                         | Average amount outstanding                    |  |                         | 16,376 |      |  |      | 23,604 |   |  |   | 8,848  |  
|                         | Weighted average interest rate during year    |  |                         | 1.91   | %    |  |      | 3.36   | % |  |   | 6.60   | %



---

|(1) |  | Based on amount outstanding at month end during each year.
|--- |  | ----------------------------------------------------------

|                                             |                                               |  |                         |         |      |  |      |         |   |  |   |        |  
|-------------------------------------------- | --------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                             |                                               |  | Year Ended December 31,
|                                             |                                               |  |                        
|                                             |                                               |  | 2002                    |         | 2001 |  | 2000
|                                             |                                               |  |                         |         |      |  |     
|                                             |                                               |  | (Dollars in Thousands) 
|Securities sold under repurchase agreements: |                                               |  |                         |         |      |  |      |         |   |  |   |       
|                                             | Balance at end of year                        |  | $                       | 185,057 |      |  | $    | 146,800 |   |  | $ | 20,463 |  
|                                             | Weighted average interest rate at end of year |  |                         | 2.95    | %    |  |      | 2.04    | % |  |   | 6.35   | %
|                                             | Maximum amount outstanding (1)                |  | $                       | 204,830 |      |  | $    | 146,800 |   |  | $ | 36,005 |  
|                                             | Average amount outstanding                    |  |                         | 155,635 |      |  |      | 37,070  |   |  |   | 23,935 |  
|                                             | Weighted average interest rate during year    |  |                         | 2.70    | %    |  |      | 3.85    | % |  |   | 6.00   | %



---

|(1) |  | Based on amount outstanding at month end during each year.
|--- |  | ----------------------------------------------------------

The Banks each became members of the Federal Home Loan Bank of Chicago
(FHLB) during 1996. Membership requirements include common stock ownership
in the FHLB. The Banks have FHLB advances due at various times through 2011.
These advances are used as a supplemental source of funds. At December 31,
2002, $206.5 million of these advances had call provisions and $2.0 million had
adjustable rates. The following table sets forth categories and the balances
of the Companys of FHLB advances of the Company as of the indicated dates or
for the indicated periods. The Banks are currently in compliance with the
FHLBs membership requirements.

48



---



##### Table of Contents



|               |                                               |  |                         |         |      |  |      |         |   |  |   |         |  
|-------------- | --------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|               |                                               |  | Year Ended December 31,
|               |                                               |  |                        
|               |                                               |  | 2002                    |         | 2001 |  | 2000
|               |                                               |  |                         |         |      |  |     
|               |                                               |  | (Dollars in Thousands) 
|FHLB advances: |                                               |  |                         |         |      |  |      |         |   |  |   |        
|               | Balance at end of year                        |  | $                       | 219,500 |      |  | $    | 244,500 |   |  | $ | 239,500 |  
|               | Weighted average interest rate at end of year |  |                         | 4.75    | %    |  |      | 5.47    | % |  |   | 5.56    | %
|               | Maximum amount outstanding (1)                |  | $                       | 244,500 |      |  | $    | 244,500 |   |  | $ | 239,500 |  
|               | Average amount outstanding                    |  |                         | 235,923 |      |  |      | 243,706 |   |  |   | 216,173 |  
|               | Weighted average interest rate during year    |  |                         | 5.51    | %    |  |      | 5.55    | % |  |   | 5.81    | %



---

|(1) |  | Based on amount outstanding at month end during each year.
|--- |  | ----------------------------------------------------------

The following table sets forth categories and balances of the Companys
short-term or revolving lines of credit borrowings from correspondent banks as
of the indicated dates or for the indicated periods.

|                 |                                               |  |                         |        |      |  |      |       |   |  |   |        |  
|---------------- | --------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ----- | - |  | - | ------ | -
|                 |                                               |  | Year Ended December 31,
|                 |                                               |  |                        
|                 |                                               |  | 2002                    |        | 2001 |  | 2000
|                 |                                               |  |                         |        |      |  |     
|                 |                                               |  | (Dollars in Thousands) 
|Lines of Credit: |                                               |  |                         |        |      |  |      |       |   |  |   |       
|                 | Balance at end of year                        |  | $                       | 2,000  |      |  | $    | 6,500 |   |  | $ | 5,300  |  
|                 | Weighted average interest rate at end of year |  |                         | 2.37   | %    |  |      | 2.59  | % |  |   | 7.57   | %
|                 | Maximum amount outstanding (1)                |  | $                       | 12,300 |      |  | $    | 6,500 |   |  | $ | 13,750 |  
|                 | Average amount outstanding                    |  |                         | 7,842  |      |  |      | 6,147 |   |  |   | 8,307  |  
|                 | Weighted average interest rate during year    |  |                         | 2.61   | %    |  |      | 6.46  | % |  |   | 7.87   | %



---

|(1) |  | Based on amount outstanding at month end during each year.
|--- |  | ----------------------------------------------------------

The Company entered into a credit agreement with a correspondent bank on
January 30, 1998 (the Credit Agreement), which provides the Company with a
revolving line of credit with a maximum availability of $25.0 million. The
original maturity of the revolving line of credit was January 30, 2000. On
January 17, 2000, this revolving line of credit was extended until January 31,
2002 by an amendment to the existing agreement. On January 11, 2002, this
revolving line of credit was further extended until January 30, 2004.

Amounts outstanding under the Companys revolving line of credit represent
borrowings incurred to provide capital contributions to the Banks to support
their growth. The Company makes interest payments, at its option, at the 30-,
60-, 90-, or 180-day London Inter-Bank Offered Rate (LIBOR) plus 95 basis
points or the prime rate less 25 basis points. The principal balance
outstanding under the line was $2.0 million as of December 31, 2002.

The revolving line of credit includes the following covenants at December
31, 2002: (1) the banks must not have nonperforming assets in excess of 25% of
Tier 1 capital plus the loan loss allowance; (2) the Company and each
subsidiary bank must be considered well capitalized; (3) the Company must
maintain consolidated tangible net worth (as defined in the credit agreement)
of not less than $70 million; and (4) consolidated net income for the four
previous quarters combined must be at least $5.5 million. The Company has
complied with these covenants at December 31, 2002, except for the covenant
regarding nonperforming assets. On April 14, 2003, the Company obtained a
waiver for the nonperforming asset covenant. At April 15, 2003, the Company
had $5.0 million outstanding. As a condition to the grant of the waiver
related to the covenant regarding nonperforming assets, the lender has reduced
the available line amount to $10.0 million and increased the interest rate on
existing and future borrowings by 25 basis points.

49



---



##### Table of Contents



In May 2000, the Company formed MBHI Capital Trust I (the Trust). The
Trust is a statutory business trust formed under the laws of the State of
Delaware and is wholly owned by the Company. In June 2000, the Trust issued
10.0% preferred securities with an aggregate liquidation amount of $20,000,000
($25 per preferred security) to third-party investors in an underwritten public
offering. The Company issued 10.0% junior subordinated debentures aggregating
$20,000,000 to the Trust. The junior subordinated debentures are the sole
assets of the Trust. The junior subordinated debentures and the preferred
securities pay distributions and dividends, respectively, on a quarterly basis,
which are included in interest expense. The junior subordinated debentures
will mature on June 7, 2030, at which time the preferred securities must be
redeemed. The junior subordinated debentures and preferred securities can be
redeemed contemporaneously, in whole or in part, beginning June 7, 2005 at a
redemption price of $25 per preferred security. The Company has provided a
full, irrevocable, and unconditional guarantee on a subordinated basis of the
obligations of the Trust under the preferred securities in the event of the
occurrence of an event of default, as defined in such guarantee.

In October 2002, the Company formed MBHI Capital Trust II (the Trust), a
statutory trust formed under the laws of the State of Delaware and a
wholly-owned financing subsidiary of the Company. In October 2002, the Trust
issued $15 million in aggregate liquidation amount of trust preferred
securities in a private placement offering. Simultaneously with the issuance of
the trust preferred securities by the Trust, the Company issued an equivalent
amount of junior subordinated debentures to the Trust. The junior subordinated
debentures are the sole assets of the Trust. The junior subordinated
debentures and the trust preferred securities pay distributions and dividends,
respectively, on a quarterly basis, which are included in interest expense. The
interest rate payable on the debentures and the trust preferred securities
resets quarterly, and is equal to LIBOR plus 3.45%, provided that this rate
cannot exceed 12.5% through the interest payment date in November 2007. The
junior subordinated debentures will mature on November 7, 2032, at which time
the preferred securities must be redeemed. The Company has provided a full,
irrevocable, and unconditional guarantee on a subordinated basis of the
obligations of the Trust under the preferred securities as set forth in such
guarantee agreement. Debt issuance costs and fees of the placement agent in
connection with the offering will be capitalized and will be amortized over the
estimated life of the junior subordinated debentures.

Capital Resources

The Company monitors compliance with bank and bank-holding company
regulatory capital requirements, focusing primarily on risk-based capital
guidelines. Under the risk-based capital method of capital measurement, the
ratio computed is dependent upon the amount and composition of assets recorded
on the balance sheet and the amount and composition of off-balance-sheet items,
in addition to the level of capital. Included in the risk-based capital method
are two measures of capital adequacy, Tier 1, or core capital, and total
capital, which consists of Tier 1 plus Tier 2 capital. See
Business  Supervision and Regulation  Bank Holding Company Regulation for
definitions of Tier 1 and Tier 2 capital.

The following tables set forth the Companys capital ratios as of the
indicated dates.

50



---



##### Table of Contents



|                                       |  |                           |           |       |  |      |       |   |  |        |  |       |  |        |           |       |  |  |       |   |  |   |         |  |  |  |       |  
|-------------------------------------- |  | ------------------------- | --------- | ----- |  | ---- | ----- | - |  | ------ |  | ----- |  | ------ | --------- | ----- |  |  | ----- | - |  | - | ------- |  |  |  | ----- | -
|                                       |  | Risk-Based Capital Ratios
|                                       |  | December 31,             
|                                       |  |                          
|                                       |  | 2002                      |           | 2001  |  | 2000
|                                       |  |                           |           |       |  |     
|                                       |  | Amount                    |           | Ratio |  |      |       |   |  | Amount |  | Ratio |  | Amount |           | Ratio
|                                       |  |                           |           |       |  |      |       |   |  |        |  |       |  |        |           |      
|                                       |  | (Dollars in Thousands)   
|Tier 1 capital to
risk-weighted assets |  | $                         | 138,197   |       |  |      | 10.44 | % |  |        |  |       |  | $      | 113,747   |       |  |  | 9.93  | % |  | $ | 102,532 |  |  |  | 11.02 | %
|Tier 1 capital
minimum requirement     |  |                           | 52,938    |       |  |      | 4.00  |   |  |        |  |       |  |        | 45,814    |       |  |  | 4.00  |   |  |   | 37,214  |  |  |  | 4.00  |  
|Total capital to
risk-weighted assets  |  |                           | 154,740   |       |  |      | 11.69 |   |  |        |  |       |  |        | 123,984   |       |  |  | 10.82 |   |  |   | 111,125 |  |  |  | 11.94 |  
|Total capital minimum
requirements     |  |                           | 105,876   |       |  |      | 8.00  |   |  |        |  |       |  |        | 91,628    |       |  |  | 8.00  |   |  |   | 74,428  |  |  |  | 8.00  |  
|Total risk-weighted
assets             |  |                           | 1,323,454 |       |  |      |       |   |  |        |  |       |  |        | 1,145,354 |       |  |  |       |   |  |   | 930,352 |  |  |  |       |  

Liquidity

The Company manages its liquidity position with the objective of
maintaining sufficient funds to respond to the needs of depositors and
borrowers and to take advantage of earnings enhancement opportunities. In
addition to the normal inflow of funds from core-deposit growth, together with
repayments and maturities of loans and securities, the Company utilizes other
short-term funding sources such as securities sold under agreements to
repurchase, overnight funds purchased from correspondent banks and the
acceptance of short-term deposits from public entities. The FHLB provides an
additional source of liquidity. The Banks have used the FHLB extensively since
1999. In 2002, FHLB advances decreased by $25.0 million. Assuming that
collateral is available to secure loans, each Bank can borrow up to 35% of its
assets with the FHLB, which provided the Banks with a total additional $483.5
million in unused capacity at December 31, 2002. The Company believes it has
sufficient liquidity to meet its current and future liquidity needs.

The Banks also have various funding arrangements with commercial and
investment banks providing up to $1.9 billion of available funding sources in
the form of Federal funds lines, repurchase agreements, and brokered
certificate of deposit programs. Unused capacity under these lines was $1.6
billion at December 31, 2002. The Banks maintain these funding arrangements to
achieve favorable costs of funds, manage interest rate risk, and enhance
liquidity in the event of deposit withdrawals.

The Company monitors and manages its liquidity position on several bases,
which vary depending upon the time period. As the time period is expanded,
other data is factored in, including estimated loan funding requirements,
estimated loan payoffs, securities portfolio maturities or calls, and
anticipated depository buildups or runoffs.

The Company classifies the majority of its securities as
available-for-sale, thereby maintaining significant liquidity. The Companys
liquidity position is further enhanced by the structuring of a majority of its
loan portfolio interest payments as monthly and also by the significant
representation of retail credit and residential mortgage loans in the Companys
loan portfolio.

The Companys cash flows are composed of three classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Net cash provided by operating activities,
consisting primarily of earnings, was $25.2 million, $19.3 million, and $15.6
million for the years ended December 31, 2002, 2001, and 2000, respectively.
Net cash used in investing activities, consisting primarily of loan and
investment funding, was $217.9 million, $287.8 million, and $204.5 million for
the years ended December 31, 2002, 2001, and 2000, respectively. Net cash
provided by financing activities, consisting principally of deposit growth and
net borrowings, was $192.5 million, $271.7 million, and $199.3 million for the
years ended December 31, 2002, 2001, and 2000, respectively.

51



---



##### Table of Contents



Contractual Obligations And Commitments

|                                               |  |                        |        |           |  |           |         |         |  |       |       |  |  |       |         |  |  |   |         | 
|---------------------------------------------- |  | ---------------------- | ------ | --------- |  | --------- | ------- | ------- |  | ----- | ----- |  |  | ----- | ------- |  |  | - | ------- | 
|(Dollars in thousands)                         |  | Payments due by period
|                                               |  |                       
|                                               |  |                        |        |           |  |           |         |         |  |       |       |  |  | After |         |  |  |  
|                                               |  | Within 1 year          |        | 1-3 years |  | 4-5 years |         | 5 years |  | Total
|                                               |  |                        |        |           |  |           |         |         |  |      
|Securities Sold Under Agreements
to Repurchase |  | $                      | 33,536 |           |  | $         | 151,475 |         |  | $     | 46    |  |  | $     |        |  |  | $ | 185,057 | 
|FHLB advances                                  |  |                        |       |           |  |           | 37,000  |         |  |       | 2,000 |  |  |       | 180,500 |  |  |   | 219,500 | 
|Junior Subordinated Debt                       |  |                        |       |           |  |           |        |         |  |       |      |  |  |       | 35,000  |  |  |   | 35,000  | 
|Note Payable                                   |  |                        | 2,000  |           |  |           |        |         |  |       |      |  |  |       |        |  |  |   | 2,000   | 
|Due to Broker                                  |  |                        | 20,582 |           |  |           |        |         |  |       |      |  |  |       |        |  |  |   | 20,582  | 
|                                               |  |                        |        |           |  |           |         |         |  |       |       |  |  |       |         |  |  |   |         | 
|Total contractual cash obligations             |  | $                      | 56,118 |           |  | $         | 188,475 |         |  | $     | 2,046 |  |  | $     | 215,500 |  |  | $ | 462,139 | 
|                                               |  |                        |        |           |  |           |         |         |  |       |       |  |  |       |         |  |  |   |         | 

|                             |  |                                            |         |           |  |           |        |         |  |       |       |  |  |       |        |  |  |   |         | 
|---------------------------- |  | ------------------------------------------ | ------- | --------- |  | --------- | ------ | ------- |  | ----- | ----- |  |  | ----- | ------ |  |  | - | ------- | 
|(Dollars in thousands)       |  | Amount of commitment expiration per period
|                             |  |                                           
|                             |  |                                            |         |           |  |           |        |         |  |       |       |  |  | After |        |  |  |  
|                             |  | Within 1 year                              |         | 1-3 years |  | 4-5 years |        | 5 years |  | Total
|                             |  |                                            |         |           |  |           |        |         |  |      
|Lines of credit              |  | $                                          | 176,394 |           |  | $         | 49,094 |         |  | $     | 5,100 |  |  | $     | 19,400 |  |  | $ | 249,988 | 
|Letters of credit            |  |                                            | 12,431  |           |  |           | 7,783  |         |  |       | 115   |  |  |       |       |  |  |   | 20,329  | 
|                             |  |                                            |         |           |  |           |        |         |  |       |       |  |  |       |        |  |  |   |         | 
|Total commercial commitments |  | $                                          | 188,825 |           |  | $         | 56,877 |         |  | $     | 5,215 |  |  | $     | 19,400 |  |  | $ | 270,317 | 
|                             |  |                                            |         |           |  |           |        |         |  |       |       |  |  |       |        |  |  |   |         | 

Asset/Liability Management

The business of the Company and the composition of its balance sheet
consists of investments in interest-earning assets (primarily loans,
mortgage-backed securities, and other securities) that are primarily funded by
interest-bearing liabilities, (deposits and borrowings). All of the financial
instruments of the Company as of December 31, 2002 were for other than trading
purposes. Such financial instruments have varying levels of sensitivity to
changes in market rates of interest. The Companys net interest income is
dependent on the amounts of and yields on its interest-earning assets as
compared to the amounts of and rates on its interest-bearing liabilities. Net
interest income is therefore sensitive to changes in market rates of interest.

The Companys asset/liability management strategy is to maximize net
interest income while limiting exposure to risks associated with a volatile
interest rate environment. This strategy is implemented by the Companys
ongoing analysis and management of its interest rate risk. A principal
function of asset/liability management is to coordinate the levels of
interest-sensitive assets and liabilities to minimize net interest income
fluctuations in times of fluctuating market interest rates. In January 2002,
the Company entered into a plain vanilla interest rate swap with a counterparty
in order to convert its $20 million of outstanding trust preferred securities
and related junior subordinated debentures from a 10.00% fixed rate instrument
into floating rate debt. The average yield on the $20 million trust preferred
securities and related junior subordinated debentures was 5.80% for the first
nine months of 2002. During July of 2002, the Company terminated the fair
value hedge in exchange for $718,000. Approximately $294,000 of this amount was
determined to be due to hedge ineffectiveness and recognized into income in the
third quarter. The remaining amount is being accreted into income, as a
reduction of interest expense, over the estimated life of the junior
subordinated debentures.

The Company enters into hedging activities to float interest payments of
some of its fixed rate liabilities. As of December 31, 2002, the Company has
various swap transactions, which results in the Company converting $67.5
million of its Federal Home Loan Bank Advance fixed rate debt to floating rate
debt. The swap transactions require payment of interest by the Company at the
one-month LIBOR plus a spread and, in turn, the Company receives a fixed rate.
The Company has documented these to be

52



---



##### Table of Contents



fair value hedges qualifying for the shortcut method of accounting. See Note
20 to the audited financial statements.

Interest rate risk results when the maturity or repricing intervals and
interest rate indices of the interest-earning assets, interest-bearing
liabilities, and off-balance-sheet financial instruments are different, thus
creating a risk that will result in disproportionate changes in the value of
and the net earnings generated from the Companys interest-earning assets,
interest-bearing liabilities, and off-balance-sheet financial instruments. The
Companys exposure to interest rate risk is managed primarily through the
Companys strategy of selecting the types and terms of interest-earning assets
and interest-bearing liabilities that generate favorable earnings while
limiting the potential negative effects of changes in market interest rates.
Because the Companys primary source of interest-bearing liabilities is
customer deposits, the Companys ability to manage the types and terms of such
deposits may be somewhat limited by customer maturity preferences in the market
areas in which the Company operates. Borrowings, which include FHLB advances,
short-term borrowings, and long-term borrowings, are generally structured with
specific terms which, in managements judgment, when aggregated with the terms
for outstanding deposits and matched with interest-earning assets, reduce the
Companys exposure to interest rate risk. The rates, terms, and interest rate
indices of the Companys interest-earning assets result primarily from the
Companys strategy of investing in securities and loans (a substantial portion
of which have adjustable rate terms). This permits the Company to limit its
exposure to interest rate risk, together with credit risk, while at the same
time achieving a positive interest rate spread from the difference between the
income earned on interest-earning assets and the cost of interest-bearing
liabilities.

Management uses a duration model for each of the Banks internal
asset/liability management. The model uses cash flows and repricing
information from loans and certificate of deposits, plus repricing assumptions
on products without specific repricing dates (e.g., savings and
interest-bearing demand deposits), to calculate the durations of each of the
Banks assets and liabilities. Securities are stress tested, and the
theoretical changes in cash flow are key elements of the Companys model. The
model also projects the effect on the Companys earnings and theoretical value
for a change in interest rates. The model computes the duration of each of the
Banks rate sensitive assets and liabilities, a theoretical market value of
each of the Banks and the effects of rate changes on each of the Banks
earnings and market value. The Banks exposure to interest rates is reviewed
on a monthly basis by senior management and the Companys Board of Directors.

Each of the Banks also maintains specific interest rate risk management
policy limits. Based upon simulation modeling, these guidelines include a +/-
20% change in net interest income upon an immediate or gradual 200 basis point
change in interest rates.

Effects of Inflation

Inflation can have a significant effect on the operating results of all
industries. However, management believes that inflationary factors are not as
critical to the banking industry as they are to other industries, due to the
high concentration of relatively short-duration monetary assets in the banking
industry. Inflation does, however, have some impact on the Companys growth,
earnings, and total assets and on its need to closely monitor its equity
capital levels. Management does not expect inflation to be a significant
factor in 2003.

Interest rates are significantly affected by inflation, but it is
difficult to assess the impact, since neither the timing nor the magnitude of
the changes in the various inflation indices coincide with changes in interest
rates. Inflation does impact the economic value of longer term,
interest-earning assets and interest-bearing liabilities, but the Company
attempts to limit its long-term assets and liabilities, as indicated in the
tables set forth under Financial Condition and Asset/Liability Management.

53



---



##### Table of Contents






ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Companys overall interest rate sensitivity is demonstrated by net
interest income analysis. Net interest income analysis measures the change in
net interest income in the event of hypothetical changes in interest rates.
This analysis assesses the risk of change in net interest income in the event
of sudden and sustained 1.0% and 2.0% increases and 1.0% decrease in market
interest rates. The tables below present the Companys projected changes in
net interest income for the various rate shock levels at December 31, 2002 and
2001, respectively.

|        |  |                          |        |        |  |        |        |      |  |  |       |   
|------- |  | ------------------------ | ------ | ------ |  | ------ | ------ | ---- |  |  | ----- | --
|        |  | 2002 Net Interest Income
|        |  |                         
|        |  |                          |        |        |  | Dollar |        | Rate
|        |  | Amount                   |        | Change |  | Change
|        |  |                          |        |        |  |       
|        |  | (Dollars in Thousands)  
|+200 bp |  | $                        | 64,348 |        |  | $      | (2,137 | )    |  |  | (3.21 | )%
|+100 bp |  |                          | 64,487 |        |  |        | (1,998 | )    |  |  | (3.01 | ) 
|Base    |  |                          | 66,485 |        |  |        |       |      |  |  |      |   
|-100 bp |  |                          | 67,360 |        |  |        | 875    |      |  |  | 1.32  |   

|        |  |                          |        |        |  |        |        |      |  |  |       |   
|------- |  | ------------------------ | ------ | ------ |  | ------ | ------ | ---- |  |  | ----- | --
|        |  | 2001 Net Interest Income
|        |  |                         
|        |  |                          |        |        |  | Dollar |        | Rate
|        |  | Amount                   |        | Change |  | Change
|        |  |                          |        |        |  |       
|        |  | (Dollars in Thousands)  
|+200 bp |  | $                        | 64,675 |        |  | $      | (2,951 | )    |  |  | (4.36 | )%
|+100 bp |  |                          | 64,550 |        |  |        | (3,076 | )    |  |  | (4.55 | ) 
|Base    |  |                          | 67,626 |        |  |        |       |      |  |  |      |   
|-100 bp |  |                          | 69,487 |        |  |        | 1,861  |      |  |  | 2.75  |   
|-200 bp |  |                          | 69,191 |        |  |        | 1,565  |      |  |  | 2.31  |   

As shown above, at December 31, 2002, the effect of an immediate 200 basis
point increase in interest rates would decrease the Companys net interest
income by 3.21%, or approximately $2.1 million. Overall net interest income
sensitivity has decreased slightly from 2001 to 2002, but remains within the
Companys and recommended regulatory guidelines. This decreased sensitivity
was due to the changes in interest rates that affected various earning assets
and interest-bearing liabilities. Due to the level of interest rates at
December 31, 2002, the Company is not able to model an additional 200 basis
point decrease in rates.

As shown above, at December 31, 2001, the effect of an immediate 200 basis
point increase in interest rates would decrease the Companys net income by
4.36%, or approximately $3.0 million. The effect of an immediate 200 basis
point decrease in rates would decrease the Companys net interest income by
2.31%, or approximately $1.6 million.




ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Contents of Consolidated Financial Statements on page F-1.

54



---



##### Table of Contents






ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

In response to the Sarbanes-Oxley Act of 2002, the Audit Committee of the
Board of Directors the Company determined on December 16, 2002 to segregate the
internal and external auditing functions and dismissed Crowe Chizek and
Company LLC (Crowe Chizek) as the Companys external auditor, effective upon
the Companys filing of its Annual Report on Form 10-K for the fiscal year
ending December 31, 2002. On December 16, 2002, the Audit Committee also
appointed KPMG, LLP (KPMG), to become the Companys external auditor
effective upon the Companys filing of its Annual Report on Form 10-K for the
fiscal year ending December 31, 2002. Crowe Chizek will continue to provide
internal audit services to the Company under the direction of the Companys
Senior Vice President  Risk Management thereafter. This change in accountants
was previously reported in our Current Report on Form 8-K filed with the SEC on
December 23, 2002 and as amended by Form 8-K/A filed January 7, 2003.

Crowe Chizeks reports on the Companys consolidated financial statements
for the fiscal years ended December 31, 2000 and 2001 did not contain an
adverse opinion or disclaimer of opinion, nor were they qualified or modified
as to uncertainty, audit scope or accounting principles.

In connection with the audits of the Companys consolidated financial
statements for the fiscal years ended December 31, 2000 and 2001, and in the
subsequent interim period to December 16, 2002, there were no disagreements
with Crowe Chizek on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures which, if not
resolved to the satisfaction of Crowe Chizek, would have caused Crowe Chizek to
make reference to the matter in its report. There were no reportable events
as that term is described in Item 304(a)(1)(v) of Regulation S-K.

The Company provided Crowe Chizek with a copy of the foregoing
disclosures. A copy of Crowe Chizeks letter, dated January 7, 2003, stating
its agreement with such statements was filed with the SEC as an exhibit to the
Companys Current Report on Form 8-K/A dated January 7, 2003.

During the fiscal years ended December 31, 2000 and 2001, and through
December 16, 2002, the Company did not consult KPMG with respect to the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Companys consolidated financial statements, or regarding any other matters
or reportable events described under Item 304(a)(2) of Regulation S-K.

55



---



##### Table of Contents






PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding directors of the Company is included in the
Companys Proxy Statement for its 2003 Annual Meeting of Stockholders (the
Proxy Statement) under the heading Election of Directors and the information
included therein is incorporated herein by reference. Information regarding
the executive officers of the Company is included in Item 1. Business.




ITEM 11. EXECUTIVE COMPENSATION

Information regarding compensation of executive officers and directors is
included in the Companys Proxy Statement under the headings Directors
Compensation, Executive Compensation, and Employment Agreements, and the
information included therein is incorporated herein by reference.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information regarding security ownership of certain beneficial owners and
management is included in the Companys Proxy Statement under the headings
Voting Securities and Security Ownership of Certain Beneficial Owners, and
the information included therein is incorporated herein by reference.

Information as of December 31, 2002 regarding the Companys compensation
plans under which common securities of the Company are authorized for issuance
is included in the table below. For additional information regarding this
plan, see Note 19  Stock Option Plan to the financial statements.

The following table summarizes information as of December 31, 2002,
relating to equity compensation plans of the Company pursuant to which common
stock is authorized for issuance:

Equity Compensation Plan Information

|                                                           |  |                            |           |                      |  |                                    |       |  |  |                                |         | 
|---------------------------------------------------------- |  | -------------------------- | --------- | -------------------- |  | ---------------------------------- | ----- |  |  | ------------------------------ | ------- | 
|                                                           |  |                            |           |                      |  |                                    |       |  |  | Number of securities remaining
|                                                           |  | Number of securities       |           | Weighted-average     |  | available for future issuance     
|                                                           |  | to be issued upon exercise |           | exercise price of    |  | under equity compensation plans   
|                                                           |  | of outstanding options,    |           | outstanding options, |  | (excluding securities reflected in
|                                                           |  | warrants, and rights       |           | warrants, and rights |  | column (a))                       
|Plan category                                              |  | (a)                        |           | (b)                  |  | (c)                               
|                                                           |  |                            |           |                      |  |                                   
|Equity compensation
plans approved by
security holders     |  |                            | 1,099,797 |                      |  | $                                  | 10.90 |  |  |                                | 915,022 | 
|Equity compensation
plans not approved by
security holders |  |                            |          |                      |  |                                    |      |  |  |                                |        | 
|                                                           |  |                            |           |                      |  |                                    |       |  |  |                                |         | 
|Total                                                      |  |                            | 1,099,797 |                      |  | $                                  | 10.90 |  |  |                                | 915,022 | 
|                                                           |  |                            |           |                      |  |                                    |       |  |  |                                |         | 

56



---



##### Table of Contents






ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions is
included in the Companys Proxy Statement under the heading Transactions with
Certain Related Persons, and the information included therein is incorporated
herein by reference.

57



---



##### Table of Contents






PART IV




ITEM 14. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Companys Chief
Executive Officer and Chief Financial Officer carried out an evaluation, with
the participation of other members of management as they deemed appropriate, of
the effectiveness of the design and operation of the Companys disclosure
controls and procedures as contemplated by Exchange Act Rule 13a-14. Based
upon, and as of the date of that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Companys disclosure controls and
procedures are effective, in all material respects, in timely alerting them to
material information relating to the Company (and its consolidated
subsidiaries) required to be included in the periodic reports the Company is
required to file and submit to the SEC under the Exchange Act. While management
concluded that its disclosure controls and procedures are adequate in all
material respects for SEC reporting purposes, the Company is currently
reviewing its policies and procedures regarding identification and
classification of problem loans and its asset quality review process in an
effort to avoid subsequent changes to previously reported financial results.

There have been no significant changes to the Companys internal controls
or in other factors that could significantly affect these controls subsequent
to the date that the internal controls were most recently evaluated nor were
there identified any significant deficiencies or material weaknesses requiring
corrective actions. The Companys management, including the Chief Executive
Officer and the Chief Financial Officer, does not expect that its disclosure
controls or its internal controls will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable assurance that the objectives of the control system are met.
Further, the design of a control system will take into account resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, any system of controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions; over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected. However, the Companys management
believes its system of controls provides reasonable assurances that the
information required to be disclosed in the Companys Exchange Act reports is
recorded, processed, summarized and reported within the time frames specified
in the SECs rules and forms. The Company is currently reviewing its asset
quality review policies and procedures and may implement additional processes
and controls to strengthen its risk management.




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) INDEX TO FINANCIAL STATEMENTS

The consolidated financial statements of the Company and its subsidiaries
as required by Item 8 of Form 10-K are filed as a part of this document. See
Contents of Consolidated Financial Statements on page F-1.

58



---



##### Table of Contents



(a)(2) FINANCIAL STATEMENT SCHEDULES

All financial statement schedules as required by Item 8 and Item 15 of
Form 10-K have been omitted because the information requested is either not
applicable or has been included in the consolidated financial statements or
notes thereto.

59



---



##### Table of Contents



(a)(3)EXHIBITS

The following exhibits are either filed as part of this report or are incorporated herein by reference:

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                   
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1   |  | Restated Certificate of Incorporation, as amended (incorporated by
reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).                                                                                                                                                                                                                                                     
|3.2   |  | Certificate of Amendment of Restated Certificate of Incorporation
(incorporated by reference to Registrants Form 10-Q for quarter ended
June 30, 2002, File No. 001-13735).                                                                                                                                                                                                                                      
|3.3   |  | Restated By-Laws, as amended (incorporated by reference to Registrants
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File
No. 0-29652).                                                                                                                                                                                                                                                     
|3.4   |  | Amendment of Restated By-Laws (incorporated by reference to
Registrants Quarterly Report on Form 10-Q for the quarter ended June
30, 2000, File No. 0-29598).                                                                                                                                                                                                                                                    
|3.5   |  | Certificate of Amendment of Restated By-laws (incorporated by reference
to the Registrants Form 10-Q for the quarter ended September 30, 2002,
File No. 001-13735).                                                                                                                                                                                                                                              
|4.1   |  | Specimen Common Stock Certificate (incorporated by reference to
Registrants Registration Statement on Form S-1, Registration No.
333-42827).                                                                                                                                                                                                                                                                     
|4.2   |  | Certain instruments defining the rights of the holders of long-term
debt of the Company and certain of its subsidiaries, none of which
authorize a total amount of indebtedness in excess of 10% of the total
assets of the Company and its subsidiaries on a consolidated basis,
have not been filed as Exhibits. The Company hereby agrees to furnish a
copy of any of these agreements to the SEC upon request.
|*10.3 |  | Midwest Banc Holdings, Inc. 1996 Stock Option Plan (incorporated by
reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).                                                                                                                                                                                                                                                    
|*10.4 |  | Amendment to the Midwest Banc Holdings, Inc. 1996 Stock Option Plan
(incorporated by reference to Registrants Annual Report on Form 10-K
for the year ended December 31, 1998, File No. 0-29652).                                                                                                                                                                                                                
|*10.5 |  | Form of Transitional Employment Agreements (incorporated by reference
to Registrants Registration Statement on Form S-1, Registration No.
333-42827).                                                                                                                                                                                                                                                            
|10.6  |  | 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).                                                                                                                                                                           
|10.7  |  | Britannica Centre Lease, dated as of May 1, 1994, between Chicago Title
and Trust Company, as Trustee under Trust Agreement dated November 2,
1977 and known as Trust No. 1070932 and Midwest Bank & Trust Company
(incorporated by reference to Registrants Registration Statement on
Form S-1, Registration No. 333-42827).                                                                                    
|10.8  |  | 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).                                                                                                                                                                            
|10.9  |  | 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).                                                                                                                                                                                      
|10.10 |  | Credit Agreement as of January 30,1998, between the Company, Midwest
One Mortgage Services, Inc., and Harris Trust & Savings Bank
(incorporated by reference to Registrants Registration Statement on
Form S-1, Registration No. 333-42827).                                                                                                                                                                     
|10.11 |  | First Amendment and waiver to Credit Agreement dated as of September
28, 1998 between the Company, Midwest One Mortgage Services, Inc., and
Harris Trust and Savings Bank (incorporated by reference to
Registrants Form 10-K for the fiscal year ended 1999, File No.
0-29598).                                                                                                                                 
|10.12 |  | Second Amendment and waiver to Credit Agreement dated as of January 7,
1999 between the Company, Midwest One Mortgage Services, Inc., and
Harris Trust and                                                                                                                                                                                                                                                        

60



---



##### Table of Contents



|       |  |                                                                                                                                                                                                                                                                     
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  | Savings Bank (incorporated by reference to Registrants Form 10-K for
the fiscal year ended 1999, File No. 0-29598).                                                                                                                                                
|10.13  |  | Third Amendment and waiver to Credit Agreement dated as of January 17,
2000 between the Company and Harris Trust and Savings Bank
(incorporated by reference to Registrants Form 10-K for the fiscal
year ended 1999, File No. 0-29598).                           
|10.14  |  | Fourth Amendment to Credit Agreement dated January 17, 2000 between the
Company and Harris Trust and Savings Bank (incorporated by reference to
the Registrants Form 10-K for the year ended December 31, 2001, File
No. 001-13735)                                
|10.15  |  | Fifth Amendment and Waiver to Credit Agreement dated as of August 16,
2002 between the Company and Harris Trust and Savings Bank.                                                                                                                                   
|10.16  |  | Sixth Amendment and Waiver to Credit Agreement dated as of April 14,
2003 between the Company and Harris Trust and Savings Bank.                                                                                                                                    
|*10.17 |  | Form of Supplemental Executive Retirement Agreement (incorporated by
reference to Registrants Form 10-Q for the quarter ended September 30,
2001, File No. 001-13735).                                                                                             
|*10.18 |  | Form of Transitional Employment Agreement (Executive Officer Group)
(incorporated by reference to Registrants Form 10-Q for the quarter
ended September 30, 2001, File No. 001-13735).                                                                             
|10.19  |  | Agreement and Plan of Reorganization between the Company and Big Foot
Financial Corp. dated as of July 19, 2002 (incorporated by reference to
Annex A of the Registrants Proxy Statement/Prospectus dated October
23, 2002, Registration Statement No. 333-100090).
|10.20  |  | Agreement and Plan of Reorganization between the Company and CoVest
Bancshares, Inc. dated as of November 1, 2002 (incorporated by
reference to the Registrants Form 8-K dated November 1, 2002, File No.
001-13735).                                              
|21.1   |  | Subsidiaries.                                                                                                                                                                                                                                                       
|23.1   |  | Consent of Crowe Chizek and Company LLC.                                                                                                                                                                                                                            
|24.1   |  | Power of Attorney (included on signature page).                                                                                                                                                                                                                     
|99.1   |  | 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.                                                                                                 
|99.2   |  | 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 Financial Officer.                                                                                                 



---

|* |  | Indicates management contracts or compensatory plans or
arrangements required to be filed as an exhibit.
|- |  | --------------------------------------------------------------------------------------------------------



| | (b) |  | Reports on Form 8-K.                                                                                       
| | --- |  | -----------------------------------------------------------------------------------------------------------
|
| |     |  | The following current Reports of Form 8-K were filed by the Company
during the last quarter of fiscal 2002:



| |  |  | Form 8-K dated October 23, 2002;     
| | - |  | -------------------------------------
|
| |  |  | Form 8-K dated November 4, 2002;     
|
| |  |  | Form 8-K dated December 11, 2002; and
|
| |  |  | Form 8-K dated December 23, 2002.    

61



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|                     |  |                             |  |                                                     
|-------------------- |  | --------------------------- |  | ----------------------------------------------------
|                     |  | MIDWEST BANC HOLDINGS, INC.
|                     |  |                             |  |                                                     
|Date: April 15, 2003 |  | BY:                         |  | /s/ BRAD A. LUECKE                                  
|                     |  |                             |  |                                                     
|                     |  |                             |  | Brad A. Luecke
President and Chief Executive
Officer

Each person whose signature appears below constitutes and appoints Brad A.
Luecke and Daniel R. Kadolph his true and law attorneys-in-fact and agents,
each acting alone, with full powers of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any or all
amendments to this Annual Report on Form 10-K, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in order to effectuate
the filing of such report, as fully for all intents and purposes as he might or
could do in person, thereby ratifying and confirming all that said
attorneys-in-fact and agents, and each of them, or his substitutes, may
lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf in the
capacities and on the dates indicated:

|                                       |  |                                                                            |  |               
|-------------------------------------- |  | -------------------------------------------------------------------------- |  | --------------
|Signature                              |  | Title                                                                      |  | Date          
|                                       |  |                                                                            |  |               
|/s/ E.V. SILVERIE.V. Silveri           |  | Chairman of the Board, Director                                            |  | April 15, 2003
|                                      
|/s/ BRAD A. LUECKEBrad A. Luecke       |  | President, Chief Executive Officer, and Director                           |  | April 15, 2003
|                                      
|/s/ ANGELO A. DIPAOLOAngelo A. DiPaolo |  | Director                                                                   |  | April 15, 2003
|                                      
|/s/ DANIEL NAGLEDaniel Nagle           |  | Director                                                                   |  | April 15, 2003
|                                      
|Joseph Rizza                           |  | Director                                                                   |  |               
|                                      
|/s/ LEROY ROSASCOLeRoy Rosasco         |  | Director                                                                   |  | April 15, 2003
|                                      
|/s/ ROBERT D. SMALLRobert D. Small     |  | Director                                                                   |  | April 15, 2003
|                                      
|/s/ LEON WOLINLeon Wolin               |  | Director                                                                   |  | April 15, 2003
|                                      
|/s/ DANIEL R. KADOLPHDaniel R. Kadolph |  | Senior Vice President, Chief Financial Officer,
Comptroller, and Treasurer |  | April 15, 2003

62



---



##### Table of Contents






CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Brad A. Luecke, President and Chief Executive Officer, certify that:



|1) |  | I have reviewed this annual report on Form 10-K of Midwest Banc Holdings,
Inc.;                                                                                                                                                                                                                                         
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2) |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3) |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4) |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                               



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5) |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6) |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                         |  | 
|------------------------------------------------------------------------ |  | 
|Date: April 16, 2003                                                     |  | 
|                                                                         |  | 
|/s/ Brad A. Luecke

Brad A. Luecke
President and Chief Executive Officer |  | 

63



---



##### Table of Contents



CERTIFICATION OF PRINCIPAL FINANICAL OFFICER

I, Daniel R. Kadolph, Senior Vice President and Chief Financial Officer,
certify that:



|1) |  | I have reviewed this annual report on Form 10-K of Midwest Banc Holdings,
Inc.;                                                                                                                                                                                                                                         
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2) |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3) |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4) |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                               



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5) |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6) |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                           |  | 
|------------------------------------------------------------------------------------------ |  | 
|Date: April 16, 2003                                                                       |  | 
|                                                                                           |  | 
|/s/ Daniel R. Kadolph

Daniel R. Kadolph
Senior Vice President and Chief Financial Officer |  | 

64



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.

CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000

CONTENTS

|                               |                                                 |  |     |     | 
|------------------------------ | ----------------------------------------------- |  | --- | --- | 
|REPORT OF INDEPENDENT AUDITORS |                                                 |  | F-2 |    
|FINANCIAL STATEMENTS           |                                                 |  |     |    
|                               | CONSOLIDATED BALANCE SHEETS                     |  |     | F-3 | 
|                               | CONSOLIDATED STATEMENTS OF INCOME               |  |     | F-4 | 
|                               | CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY |  |     | F-6 | 
|                               | CONSOLIDATED STATEMENTS OF CASH FLOWS           |  |     | F-7 | 
|                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      |  |     | F-8 | 





---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

To the Stockholders and Board of Directors
Midwest Banc Holdings, Inc.

We have audited the accompanying consolidated balance sheets of Midwest Banc
Holdings, Inc. as of December 31, 2002 and 2001, and the related consolidated
statements of income, stockholders equity, and cash flows for each of the
three years in the period ended December 31, 2002. These financial statements
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Midwest Banc
Holdings, Inc. at December 31, 2002 and 2001 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States of America.

As disclosed in Note 2, during 2002, the Company adopted new accounting
guidance for goodwill and intangible assets.



| | Crowe Chizek and Company LLC
| | ----------------------------

Oak Brook, Illinois
January 17, 2003, except for Notes 12 and 27   as
to which the date is April 14, 2003

F-2



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)

|                                                                          |                                                                                                |                  |                            |                                            |           |              |           |           |           |           |           | 
|------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ---------------- | -------------------------- | ------------------------------------------ | --------- | ------------ | --------- | --------- | --------- | --------- | --------- | 
|                                                                          |                                                                                                |                  |                            |                                            |           | December 31,
|                                                                          |                                                                                                |                  |                            |                                            |           |             
|                                                                          |                                                                                                |                  |                            |                                            |           | 2002         |           | 2001     
|                                                                          |                                                                                                |                  |                            |                                            |           |              |           |          
|ASSETS                                                                    |                                                                                                |                  |                            |                                            |           |              |           |          
|Cash and cash equivalents                                                 |                                                                                                | $                | 49,687                     |                                            |           | $            | 49,812    |          
|Securities available-for-sale                                             |                                                                                                |                  | 651,873                    |                                            |           |              | 683,474   |          
|Securities held-to-maturity (fair value: 2002 - $120,421;
2001 - $21,865) |                                                                                                |                  | 118,620                    |                                            |           |              | 21,445    |          
|Loans                                                                     |                                                                                                |                  | 1,136,704                  |                                            |           |              | 1,003,386 |          
|Allowance for loan losses                                                 |                                                                                                |                  | (20,754                    | )                                          |           |              | (10,135   | )        
|                                                                          |                                                                                                |                  |                            |                                            |           |              |           |          
|                                                                          | Net loans                                                                                      |                  |                            | 1,115,950                                  |           |              |           | 993,251   |          
|Cash value of life insurance                                              |                                                                                                |                  | 20,634                     |                                            |           |              | 19,554    |          
|Premises and equipment, net                                               |                                                                                                |                  | 18,999                     |                                            |           |              | 19,477    |          
|Other real estate                                                         |                                                                                                |                  | 533                        |                                            |           |              | 355       |          
|Goodwill                                                                  |                                                                                                |                  | 4,604                      |                                            |           |              | 3,524     |          
|Other assets                                                              |                                                                                                |                  | 28,147                     |                                            |           |              | 19,530    |          
|                                                                          |                                                                                                |                  |                            |                                            |           |              |           |          
|                                                                          |                                                                                                | Total assets     |                            | $                                          | 2,009,047 |              |           | $         | 1,810,422 |          
|                                                                          |                                                                                                |                  |                            |                                            |           |              |           |          
|LIABILITIES AND STOCKHOLDERS EQUITY                                      |                                                                                                |                  |                            |                                            |           |              |           |          
|Liabilities
Deposits
Non-interest-bearing                                 |                                                                                                | $                | 134,858                    |                                            |           | $            | 134,707   |          
|                                                                          |                                                                                                | Interest-bearing |                            |                                            | 1,255,790 |              |           |           | 1,076,813 |          
|                                                                          |                                                                                                |                  |                            |                                            |           |              |           |          
|                                                                          |                                                                                                |                  | Total deposits             |                                            |           | 1,390,648    |           |           |           | 1,211,520 |          
|Federal funds purchased                                                   |                                                                                                |                  | 20,825                     |                                            |           |              | 24,350    |          
|Securities sold under agreements to repurchase                            |                                                                                                |                  | 185,057                    |                                            |           |              | 146,800   |          
|Advances from the Federal Home Loan Bank                                  |                                                                                                |                  | 219,500                    |                                            |           |              | 244,500   |          
|Junior subordinated debt                                                  |                                                                                                |                  | 35,000                     |                                            |           |              | 20,000    |          
|Note payable                                                              |                                                                                                |                  | 2,000                      |                                            |           |              | 6,500     |          
|Due to broker                                                             |                                                                                                |                  | 20,582                     |                                            |           |              | 46,432    |          
|Other liabilities                                                         |                                                                                                |                  | 20,484                     |                                            |           |              | 14,106    |          
|                                                                          |                                                                                                |                  |                            |                                            |           |              |           |          
|                                                                          | Total liabilities                                                                              |                  |                            | 1,894,096                                  |           |              |           | 1,714,208 |          
|Stockholders equity                                                      |                                                                                                |                  |                            |                                            |           |              |           |          
|                                                                          | Preferred stock, $.01 par value, 1,000,000 shares authorized;
none issued                      |                  |                            |                                           |           |              |           |          |          
|                                                                          | Common stock, $.01 par value, 24,000,000 shares authorized;
17,069,052 issued in 2002 and 2001 |                  |                            | 171                                        |           |              |           | 114       |          
|                                                                          | Surplus                                                                                        |                  |                            | 29,366                                     |           |              |           | 29,587    |          
|                                                                          | Retained earnings                                                                              |                  |                            | 87,105                                     |           |              |           | 77,256    |          
|                                                                          | Accumulated other comprehensive income (loss)                                                  |                  |                            | 7,145                                      |           |              |           | (1,057    | )        
|                                                                          | Treasury stock, at cost (2002  915,022 shares, 2001  1,000,500 shares)                       |                  |                            | (8,836                                     | )         |              |           | (9,686    | )        
|                                                                          |                                                                                                |                  |                            |                                            |           |              |           |          
|                                                                          |                                                                                                |                  | Total stockholders equity |                                            |           | 114,951      |           |           |           | 96,214    |          
|                                                                          |                                                                                                |                  |                            |                                            |           |              |           |          
|                                                                          |                                                                                                |                  |                            | Total liabilities and stockholders equity |           | $            | 2,009,047 |           |           | $         | 1,810,422 | 
|                                                                          |                                                                                                |                  |                            |                                            |           |              |           |          

See accompanying notes to consolidated financial statements.

F-3



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

|                                                    |                                                                            |                                  |        |                         |         |      |        |        |         |   |        |        |         | 
|--------------------------------------------------- | -------------------------------------------------------------------------- | -------------------------------- | ------ | ----------------------- | ------- | ---- | ------ | ------ | ------- | - | ------ | ------ | ------- | 
|                                                    |                                                                            |                                  |        | Year Ended December 31,
|                                                    |                                                                            |                                  |        |                        
|                                                    |                                                                            |                                  |        | 2002                    |         | 2001 |        | 2000  
|                                                    |                                                                            |                                  |        |                         |         |      |        |       
|Interest income                                     |                                                                            |                                  |        |                         |         |      |        |        |         |   |        |       
|                                                    | Loans                                                                      |                                  | $      | 74,433                  |         |      | $      | 76,429 |         |   | $      | 71,865 |        
|                                                    | Securities
Taxable                                                         |                                  |        | 35,529                  |         |      |        | 34,920 |         |   |        | 35,409 |        
|                                                    |                                                                            | Exempt from federal income taxes |        |                         | 2,621   |      |        |        | 1,508   |   |        |        | 1,854   | 
|                                                    | Trading account securities                                                 |                                  |        |                        |         |      |        | 25     |         |   |        | 3      |        
|                                                    | Federal funds sold and other short-term investments                        |                                  |        | 138                     |         |      |        | 250    |         |   |        | 661    |        
|                                                    |                                                                            |                                  |        |                         |         |      |        |        |         |   |        |        |        
|                                                    |                                                                            | Total interest income            |        |                         | 112,721 |      |        |        | 113,132 |   |        |        | 109,792 | 
|                                                    |                                                                            |                                  |        |                         |         |      |        |        |         |   |        |       
|Deposits                                            |                                                                            |                                  | 34,036 |                         |         |      | 47,519 |        |         |   | 47,680 |       
|                                                    | Advances from the Federal Home Loan Bank                                   |                                  |        | 13,004                  |         |      |        | 13,528 |         |   |        | 12,549 |        
|                                                    | Notes payable                                                              |                                  |        | 205                     |         |      |        | 397    |         |   |        | 661    |        
|                                                    | Federal funds purchased and securities sold under
agreements to repurchase |                                  |        | 4,518                   |         |      |        | 2,221  |         |   |        | 2,020  |        
|                                                    | Junior subordinated debt                                                   |                                  |        | 1,556                   |         |      |        | 2,000  |         |   |        | 1,122  |        
|                                                    |                                                                            |                                  |        |                         |         |      |        |        |         |   |        |        |        
|                                                    |                                                                            | Total interest expense           |        |                         | 53,319  |      |        |        | 65,665  |   |        |        | 64,032  | 
|                                                    |                                                                            |                                  |        |                         |         |      |        |        |         |   |        |        |        
|Net interest income                                 |                                                                            |                                  | 59,402 |                         |         |      | 47,467 |        |         |   | 45,760 |       
|Provision for loan losses                           |                                                                            |                                  | 18,532 |                         |         |      | 2,220  |        |         |   | 1,850  |       
|                                                    |                                                                            |                                  |        |                         |         |      |        |        |         |   |        |        |        
|Net interest income after provision for loan losses |                                                                            |                                  | 40,870 |                         |         |      | 45,247 |        |         |   | 43,910 |       
|Other income                                        |                                                                            |                                  |        |                         |         |      |        |        |         |   |        |       
|                                                    | Service charges on deposit accounts                                        |                                  |        | 5,691                   |         |      |        | 5,013  |         |   |        | 3,615  |        
|                                                    | Net gains on securities transactions                                       |                                  |        | 1,522                   |         |      |        | 2,761  |         |   |        | 1,190  |        
|                                                    | Net trading account profits (losses)                                       |                                  |        | 348                     |         |      |        | 899    |         |   |        | (120   | )      
|                                                    | Option income                                                              |                                  |        | 1,822                   |         |      |        | 508    |         |   |        | 58     |        
|                                                    | Mortgage banking fees                                                      |                                  |        | 693                     |         |      |        | 605    |         |   |        | 197    |        
|                                                    | Insurance and brokerage commissions                                        |                                  |        | 1,490                   |         |      |        | 795    |         |   |        | 759    |        
|                                                    | Trust income                                                               |                                  |        | 572                     |         |      |        | 628    |         |   |        | 653    |        
|                                                    | Increase in cash surrender value of life insurance                         |                                  |        | 1,080                   |         |      |        | 937    |         |   |        | 445    |        
|                                                    | Other income                                                               |                                  |        | 790                     |         |      |        | 656    |         |   |        | 898    |        
|                                                    |                                                                            |                                  |        |                         |         |      |        |        |         |   |        |        |        
|                                                    |                                                                            | Total other income               |        |                         | 14,008  |      |        |        | 12,802  |   |        |        | 7,695   | 
|Other expenses                                      |                                                                            |                                  |        |                         |         |      |        |        |         |   |        |       
|                                                    | Salaries and employee benefits                                             |                                  |        | 20,659                  |         |      |        | 18,770 |         |   |        | 16,534 |        
|                                                    | Occupancy and equipment                                                    |                                  |        | 4,818                   |         |      |        | 5,067  |         |   |        | 4,969  |        
|                                                    | Professional services                                                      |                                  |        | 2,825                   |         |      |        | 2,144  |         |   |        | 1,793  |        
|                                                    | Marketing                                                                  |                                  |        | 834                     |         |      |        | 848    |         |   |        | 1,166  |        
|                                                    | Other expenses                                                             |                                  |        | 4,773                   |         |      |        | 4,634  |         |   |        | 4,898  |        
|                                                    |                                                                            |                                  |        |                         |         |      |        |        |         |   |        |        |        
|                                                    |                                                                            | Total other expenses             |        |                         | 33,909  |      |        |        | 31,463  |   |        |        | 29,360  | 
|                                                    |                                                                            |                                  |        |                         |         |      |        |        |         |   |        |        |        
|Income before income taxes                          |                                                                            |                                  | 20,969 |                         |         |      | 26,586 |        |         |   | 22,245 |       
|Provision for income taxes                          |                                                                            |                                  | 4,661  |                         |         |      | 8,704  |        |         |   | 7,632  |       
|                                                    |                                                                            |                                  |        |                         |         |      |        |        |         |   |        |        |        
|Net income                                          |                                                                            | $                                | 16,308 |                         |         | $    | 17,882 |        |         | $ | 14,613 |       
|                                                    |                                                                            |                                  |        |                         |         |      |        |        |         |   |        |        |        
|Basic earnings per share                            |                                                                            | $                                | 1.01   |                         |         | $    | 1.11   |        |         | $ | .91    |       
|                                                    |                                                                            |                                  |        |                         |         |      |        |        |         |   |        |        |        
|Diluted earnings per share                          |                                                                            | $                                | .99    |                         |         | $    | 1.09   |        |         | $ | .90    |       
|                                                    |                                                                            |                                  |        |                         |         |      |        |        |         |   |        |        |        

See accompanying notes to consolidated financial statements.

F-4



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share and per share data)

|                                                                                    |                                                                                                                                 |                            |     |        |  |         |        |          |  |               |        |               |  |          |         |               |  |   |        |   |  |       |        |       |        | 
|----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | --- | ------ |  | ------- | ------ | -------- |  | ------------- | ------ | ------------- |  | -------- | ------- | ------------- |  | - | ------ | - |  | ----- | ------ | ----- | ------ | 
|                                                                                    |                                                                                                                                 |                            |     |        |  |         |        |          |  |               |        |               |  |          |         | Accumulated   |  |   |        |   |  |       |        |      
|                                                                                    |                                                                                                                                 |                            |     |        |  |         |        |          |  |               |        |               |  |          |         | Other         |  |   |        |   |  | Total
|                                                                                    |                                                                                                                                 |                            |     | Common |  |         |        |          |  | Retained      |        | Comprehensive |  | Treasury |         | Stockholders'
|                                                                                    |                                                                                                                                 |                            |     | Stock  |  | Surplus |        | Earnings |  | Income (Loss) |        | Stock         |  | Equity  
|                                                                                    |                                                                                                                                 |                            |     |        |  |         |        |          |  |               |        |               |  |         
|Balance, January 1, 2000                                                            |                                                                                                                                 | $                          | 114 |        |  | $       | 29,704 |          |  | $             | 56,848 |               |  | $        | (11,942 | )             |  | $ | (7,030 | ) |  | $     | 67,694 |      
|Cash dividends declared
($.35 per share)                                            |                                                                                                                                 |                            |    |        |  |         |       |          |  |               | (5,647 | )             |  |          |        |               |  |   |       |   |  |       | (5,647 | )    
|Purchase of 233,481 shares of treasury stock                                        |                                                                                                                                 |                            |    |        |  |         |       |          |  |               |       |               |  |          |        |               |  |   | (2,271 | ) |  |       | (2,271 | )    
|Issuance of common stock upon
exercise of 16,500 stock options, net
of tax benefit  |                                                                                                                                 |                            |    |        |  |         | (50    | )        |  |               |       |               |  |          |        |               |  |   | 156    |   |  |       | 106    |      
|Comprehensive income                                                                |                                                                                                                                 |                            |     |        |  |         |        |          |  |               |        |               |  |          |         |               |  |   |        |   |  |       |        |      
|Net income                                                                          |                                                                                                                                 |                            |    |        |  |         |       |          |  |               | 14,613 |               |  |          |        |               |  |   |       |   |  |       | 14,613 |      
|                                                                                    | Net increase in fair value of securities
classified as available-for-sale, net of
income taxes and reclassification
adjustments |                            |     |       |  |         |        |         |  |               |        |              |  |          |         | 8,081         |  |   |        |  |  |       |        | 8,081 |       
|                                                                                    |                                                                                                                                 |                            |     |        |  |         |        |          |  |               |        |               |  |          |         |               |  |   |        |   |  |       |        |      
|                                                                                    |                                                                                                                                 | Total comprehensive income |     |        |  |         |        |          |  |               |        |               |  |          |         |               |  |   |        |   |  |       |        |       | 22,694 | 
|                                                                                    |                                                                                                                                 |                            |     |        |  |         |        |          |  |               |        |               |  |          |         |               |  |   |        |   |  |       |        |      
|Balance, December 31, 2000                                                          |                                                                                                                                 |                            | 114 |        |  |         | 29,654 |          |  |               | 65,814 |               |  |          | (3,861  | )             |  |   | (9,145 | ) |  |       | 82,576 |      
|Cash dividends declared
($.40 per share)                                            |                                                                                                                                 |                            |    |        |  |         |       |          |  |               | (6,440 | )             |  |          |        |               |  |   |       |   |  |       | (6,440 | )    
|Purchase of 42,000 shares of treasury stock                                         |                                                                                                                                 |                            |    |        |  |         |       |          |  |               |       |               |  |          |        |               |  |   | (541   | ) |  |       | (541   | )    
|Issuance of common stock
upon exercise of 26,970 stock
options, net of tax benefits |                                                                                                                                 |                            |    |        |  |         | (67    | )        |  |               |       |               |  |          |        |               |  |   |       |   |  |       | (67    | )    
|Comprehensive income                                                                |                                                                                                                                 |                            |     |        |  |         |        |          |  |               |        |               |  |          |         |               |  |   |        |   |  |       |        |      
|Net income                                                                          |                                                                                                                                 |                            |    |        |  |         |       |          |  |               | 17,882 |               |  |          |        |               |  |   |       |   |  |       | 17,882 |      
|                                                                                    | Net increase in fair value of securities
classified as available-for-sale, net of
income taxes and reclassification
adjustments |                            |     |       |  |         |        |         |  |               |        |              |  |          |         | 2,804         |  |   |        |  |  |       |        | 2,804 |       
|                                                                                    |                                                                                                                                 |                            |     |        |  |         |        |          |  |               |        |               |  |          |         |               |  |   |        |   |  |       |        |      
|                                                                                    |                                                                                                                                 | Total comprehensive income |     |        |  |         |        |          |  |               |        |               |  |          |         |               |  |   |        |   |  |       |        |       | 20,686 | 
|                                                                                    |                                                                                                                                 |                            |     |        |  |         |        |          |  |               |        |               |  |          |         |               |  |   |        |   |  |       |        |      
|Balance, December 31, 2001                                                          |                                                                                                                                 |                            | 114 |        |  |         | 29,587 |          |  |               | 77,256 |               |  |          | (1,057  | )             |  |   | (9,686 | ) |  |       | 96,214 |      

(Continued)

F-5



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share and per share data)

|                                                                                      |                                                                                                                                           |                            |     |        |  |         |        |          |   |               |        |               |  |          |        |               |  |   |        |       |  |       |         |       |        | 
|------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | --- | ------ |  | ------- | ------ | -------- | - | ------------- | ------ | ------------- |  | -------- | ------ | ------------- |  | - | ------ | ----- |  | ----- | ------- | ----- | ------ | 
|                                                                                      |                                                                                                                                           |                            |     |        |  |         |        |          |   |               |        |               |  |          |        | Accumulated   |  |   |        |       |  |       |         |      
|                                                                                      |                                                                                                                                           |                            |     |        |  |         |        |          |   |               |        |               |  |          |        | Other         |  |   |        |       |  | Total
|                                                                                      |                                                                                                                                           |                            |     | Common |  |         |        |          |   | Retained      |        | Comprehensive |  | Treasury |        | Stockholders'
|                                                                                      |                                                                                                                                           |                            |     | Stock  |  | Surplus |        | Earnings |   | Income (Loss) |        | Stock         |  | Equity  
|                                                                                      |                                                                                                                                           |                            |     |        |  |         |        |          |   |               |        |               |  |         
|Balance, December 31, 2001                                                            |                                                                                                                                           | $                          | 114 |        |  | $       | 29,587 |          |   | $             | 77,256 |               |  | $        | (1,057 | )             |  | $ | (9,686 | )     |  | $     | 96,214  |      
|Issuance of 5,689,660 shares of stock in
conjunction with a three for two
stock split |                                                                                                                                           |                            | 57  |        |  |         | (57    | )        |   |               |       |               |  |          |       |               |  |   |       |       |  |       |        |      
|Cash dividends declared
($.40 per share)                                              |                                                                                                                                           |                            |    |        |  |         |       |          |   |               | (6,459 | )             |  |          |       |               |  |   |       |       |  |       | (6,459  | )    
|Purchase of 35,000 shares of treasury stock                                           |                                                                                                                                           |                            |    |        |  |         |       |          |   |               |       |               |  |          |       |               |  |   | (576   | )     |  |       | (576    | )    
|Issuance of 12,846 shares of common stock                                             |                                                                                                                                           |                            |     |        |  |         |        |          |   |               |        |               |  |          |        |               |  |   |        |       |  |       |         |      
|                                                                                      | upon acquisition of Service 1st Financial Corp.,
and issuance of common stock upon
exercise of 107,632 stock options, net of tax
benefits |                            |     |       |  |         |        | (164     | ) |               |        |              |  |          |        |              |  |   |        | 1,426 |  |       |         | 1,262 |       
|Comprehensive income                                                                  |                                                                                                                                           |                            |     |        |  |         |        |          |   |               |        |               |  |          |        |               |  |   |        |       |  |       |         |      
|Net income                                                                            |                                                                                                                                           |                            |    |        |  |         |       |          |   |               | 16,308 |               |  |          |       |               |  |   |       |       |  |       | 16,308  |      
|                                                                                      | Net increase in fair value of securities
classified as available-for-sale, net of
income taxes and reclassification
adjustments           |                            |     |       |  |         |        |         |   |               |        |              |  |          |        | 8,202         |  |   |        |      |  |       |         | 8,202 |       
|                                                                                      |                                                                                                                                           |                            |     |        |  |         |        |          |   |               |        |               |  |          |        |               |  |   |        |       |  |       |         |      
|                                                                                      |                                                                                                                                           | Total comprehensive income |     |        |  |         |        |          |   |               |        |               |  |          |        |               |  |   |        |       |  |       |         |       | 24,510 | 
|                                                                                      |                                                                                                                                           |                            |     |        |  |         |        |          |   |               |        |               |  |          |        |               |  |   |        |       |  |       |         |      
|Balance, December 31, 2002                                                            |                                                                                                                                           | $                          | 171 |        |  | $       | 29,366 |          |   | $             | 87,105 |               |  | $        | 7,145  |               |  | $ | (8,836 | )     |  | $     | 114,951 |      
|                                                                                      |                                                                                                                                           |                            |     |        |  |         |        |          |   |               |        |               |  |          |        |               |  |   |        |       |  |       |         |      

See accompanying notes to consolidated financial statements.

F-6



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

|                                                 |                                                                                                 |                                       |                                                         |                                           |          |                         |        |          |          |         |        |          |          |         |        | 
|------------------------------------------------ | ----------------------------------------------------------------------------------------------- | ------------------------------------- | ------------------------------------------------------- | ----------------------------------------- | -------- | ----------------------- | ------ | -------- | -------- | ------- | ------ | -------- | -------- | ------- | ------ | 
|                                                 |                                                                                                 |                                       |                                                         |                                           |          | Year Ended December 31,
|                                                 |                                                                                                 |                                       |                                                         |                                           |          |                        
|                                                 |                                                                                                 |                                       |                                                         |                                           |          | 2002                    |        | 2001     |          | 2000   
|                                                 |                                                                                                 |                                       |                                                         |                                           |          |                         |        |          |          |        
|Cash flows from operating activities             |                                                                                                 |                                       |                                                         |                                           |          |                         |        |          |          |         |        |         
|                                                 | Net income                                                                                      |                                       | $                                                       | 16,308                                    |          |                         | $      | 17,882   |          |         | $      | 14,613   |         
|                                                 | Adjustments to reconcile net income to net cash provided by
operating activities                |                                       |                                                         |                                           |          |                         |        |          |          |         |        |          |         
|                                                 |                                                                                                 |                                       | Depreciation                                            |                                           |          | 2,308                   |        |          |          | 2,474   |        |          |          | 2,683   |       
|                                                 |                                                                                                 |                                       | Provision for loan losses                               |                                           |          | 18,532                  |        |          |          | 2,220   |        |          |          | 1,850   |       
|                                                 |                                                                                                 |                                       | Proceeds from sales of trading account securities, net  |                                           |          | 348                     |        |          |          | 899     |        |          |          | (120    | )     
|                                                 |                                                                                                 |                                       | Net gain on sales of securities                         |                                           |          | (1,522                  | )      |          |          | (2,761  | )      |          |          | (1,190  | )     
|                                                 |                                                                                                 |                                       | Net loss (gain) on sales of trading account securities  |                                           |          | (348                    | )      |          |          | (899    | )      |          |          | 120     |       
|                                                 |                                                                                                 |                                       | Federal Home Loan Bank stock dividend                   |                                           |          | (671                    | )      |          |          | (864    | )      |          |          | (591    | )     
|                                                 |                                                                                                 |                                       | Net proceeds from real estate loans originated for sale |                                           |          | (1,510                  | )      |          |          | (2,798  | )      |          |          | (167    | )     
|                                                 |                                                                                                 |                                       | Increase in cash surrender value of life insurance      |                                           |          | (1,080                  | )      |          |          | (937    | )      |          |          | (445    | )     
|                                                 |                                                                                                 |                                       | Deferred income taxes                                   |                                           |          | (4,087                  | )      |          |          | 486     |        |          |          | (347    | )     
|                                                 |                                                                                                 |                                       | Change in other assets                                  |                                           |          | (11,406                 | )      |          |          | 291     |        |          |          | (4,743  | )     
|                                                 |                                                                                                 |                                       | Change in other liabilities                             |                                           |          | 8,353                   |        |          |          | 3,307   |        |          |          | 3,904   |       
|                                                 |                                                                                                 |                                       |                                                         |                                           |          |                         |        |          |          |         |        |          |         
|                                                 |                                                                                                 |                                       |                                                         | Net cash provided by operating activities |          |                         | 25,225 |          |          |         | 19,300 |          |          |         | 15,567 | 
|Cash flows from investing activities             |                                                                                                 |                                       |                                                         |                                           |          |                         |        |          |          |         |        |         
|                                                 | Sales of securities available-for-sale                                                          |                                       |                                                         | 319,952                                   |          |                         |        | 347,230  |          |         |        | 118,381  |         
|                                                 | Maturities of securities available-for-sale                                                     |                                       |                                                         | 4,190                                     |          |                         |        | 2,291    |          |         |        | 3,035    |         
|                                                 | Principal payments on securities                                                                |                                       |                                                         | 209,620                                   |          |                         |        | 132,915  |          |         |        | 55,105   |         
|                                                 | Purchases of securities available-for-sale                                                      |                                       |                                                         | (611,101                                  | )        |                         |        | (597,597 | )        |         |        | (186,097 | )       
|                                                 | Purchases of securities held-to-maturity                                                        |                                       |                                                         | (24,588                                   | )        |                         |        |         |          |         |        | (720     | )       
|                                                 | Maturities of securities held-to-maturity                                                       |                                       |                                                         | 26,290                                    |          |                         |        | 3,630    |          |         |        | 5,022    |         
|                                                 | Net increase in loans                                                                           |                                       |                                                         | (139,722                                  | )        |                         |        | (176,634 | )        |         |        | (178,834 | )       
|                                                 | Acquisition, net                                                                                |                                       |                                                         | (1,008                                    | )        |                         |        |         |          |         |        |         |         
|                                                 | Proceeds from sale of other real estate                                                         |                                       |                                                         | 347                                       |          |                         |        | 1,144    |          |         |        |         |         
|                                                 | Property and equipment expenditures                                                             |                                       |                                                         | (1,830                                    | )        |                         |        | (766     | )        |         |        | (2,200   | )       
|                                                 | Investment in life insurance                                                                    |                                       |                                                         |                                          |          |                         |        |         |          |         |        | (18,172  | )       
|                                                 |                                                                                                 |                                       |                                                         |                                           |          |                         |        |          |          |         |        |          |         
|                                                 |                                                                                                 | Net cash used in investing activities |                                                         |                                           | (217,850 | )                       |        |          | (287,787 | )       |        |          | (204,480 | )      
|Cash flows from financing activities             |                                                                                                 |                                       |                                                         |                                           |          |                         |        |          |          |         |        |         
|                                                 | Net increase in deposits                                                                        |                                       |                                                         | 179,128                                   |          |                         |        | 125,734  |          |         |        | 114,832  |         
|                                                 | Issuance of junior subordinated debt, net of debt issuance costs                                |                                       |                                                         | 14,525                                    |          |                         |        |         |          |         |        | 19,030   |         
|                                                 | Borrowings                                                                                      |                                       |                                                         | 9,300                                     |          |                         |        | 9,500    |          |         |        | 256,800  |         
|                                                 | Payments on borrowings                                                                          |                                       |                                                         | (38,800                                   | )        |                         |        | (3,300   | )        |         |        | (189,150 | )       
|                                                 | Dividends paid                                                                                  |                                       |                                                         | (6,450                                    | )        |                         |        | (6,440   | )        |         |        | (5,397   | )       
|                                                 | Change in short-term securities sold under agreements to repurchase
and federal funds purchased |                                       |                                                         | (116,789                                  | )        |                         |        | 146,857  |          |         |        | 5,368    |         
|                                                 | Proceeds from long-term securities sold under agreement
to repurchase                           |                                       |                                                         | 151,521                                   |          |                         |        |         |          |         |        |         |         
|                                                 | Repurchase of common stock                                                                      |                                       |                                                         | (576                                      | )        |                         |        | (541     | )        |         |        | (2,271   | )       
|                                                 | Proceeds from exercise of stock options                                                         |                                       |                                                         | 641                                       |          |                         |        | (67      | )        |         |        | 106      |         
|                                                 |                                                                                                 |                                       |                                                         |                                           |          |                         |        |          |          |         |        |          |         
|                                                 |                                                                                                 |                                       | Net cash provided by financing activities               |                                           |          | 192,500                 |        |          |          | 271,743 |        |          |          | 199,318 |       
|                                                 |                                                                                                 |                                       |                                                         |                                           |          |                         |        |          |          |         |        |          |         
|Increase (decrease) in cash and cash equivalents |                                                                                                 |                                       | (125                                                    | )                                         |          |                         | 3,256  |          |          |         | 10,405 |         
|Cash and cash equivalents at beginning of year   |                                                                                                 |                                       | 49,812                                                  |                                           |          |                         | 46,556 |          |          |         | 36,151 |         
|                                                 |                                                                                                 |                                       |                                                         |                                           |          |                         |        |          |          |         |        |          |         
|Cash and cash equivalents at end of year         |                                                                                                 | $                                     | 49,687                                                  |                                           |          | $                       | 49,812 |          |          | $       | 46,556 |         
|                                                 |                                                                                                 |                                       |                                                         |                                           |          |                         |        |          |          |         |        |          |         
|Supplemental disclosures                         |                                                                                                 |                                       |                                                         |                                           |          |                         |        |          |          |         |        |         
|                                                 | Cash paid during the year for
Interest                                                          |                                       | $                                                       | 53,511                                    |          |                         | $      | 66,105   |          |         | $      | 62,846   |         
|                                                 |                                                                                                 | Income taxes                          |                                                         |                                           | 11,175   |                         |        |          | 8,991    |         |        |          | 8,397    |        
|                                                 | Amount due to broker for purchases of securities                                                |                                       |                                                         | 20,582                                    |          |                         |        | 46,432   |          |         |        |         |         
|                                                 | Transfer from securities available-for-sale to held-to-maturity                                 |                                       |                                                         | 99,841                                    |          |                         |        |         |          |         |        |         |         

See accompanying notes to consolidated financial statements.

F-7



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000



---

NOTE 1  NATURE OF OPERATIONS

Midwest Banc Holdings, Inc. (Midwest Banc or the Company) is a bank holding
company organized under the laws of the State of Delaware. Through its
commercial bank and nonbank subsidiaries, the Company provides a full line of
financial services to corporate and individual customers located in the greater
Chicago metropolitan area and in Warren, Knox, Henderson, and Mercer Counties
in western Illinois. These services include demand, time, and savings
deposits; lending; mortgage banking; insurance products; and trust services.
While the Companys management monitors the revenue streams of the various
products and services, operations are managed and financial performance is
evaluated on a Company-wide basis. Accordingly, all of the Companys banking
operations are considered by management to be aggregated in one reportable
operating segment.

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The consolidated financial statements of Midwest Banc
include the accounts of Midwest Banc and its wholly owned subsidiaries, Midwest
Bank and Trust Company (MBTC), Midwest Bank of Western Illinois (MBWI), MBHI
Capital Trust I, MBHI Capital Trust II, and Midwest Financial and Investment
Services, Inc. (MFIS). Significant intercompany balances and transactions have
been eliminated. Effective August 19, 2002, Midwest Bank of Hinsdale and
Midwest Bank of McHenry County merged into MBTC. Since these entities were
under common control, they were accounted for at their carrying amounts which
had no impact on the consolidated financial statements.

The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America and
with general practices in the banking industry. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The allowance for loan
losses is particularly subject to change.

Securities: Securities are classified as held-to-maturity when the Company has
the ability and management has the positive intent to hold those securities to
maturity. Accordingly, they are stated at cost adjusted for amortization of
premiums and accretion of discounts. Securities are classified as
available-for-sale when the Company may decide to sell those securities for
changes in market interest rates, liquidity needs, changes in yields or
alternative investments, and for other reasons. They are carried at fair value
with unrealized gains and losses, net of taxes, reported in other comprehensive
income (loss). Interest income is reported net of amortization of premium and
accretion of discount. Realized gains and losses on disposition of



---

(Continued)

F-8



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000



---

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

securities available-for-sale are based on the net proceeds and the adjusted
carrying amounts of the securities sold, using the specific identification
method. Trading account securities are carried at fair value. Realized and
unrealized gains and losses on trading account securities are recognized in the
statement of income as they occur. No trading securities were held at December
31, 2002 or 2001.

Derivatives: The Company is involved in certain derivative transactions that
are intended to protect the fair value of certain asset values and to improve
the predictability of certain future transactions. If derivative instruments
are designated as hedges of fair values, both the change in the fair value of
the hedge and the hedged item are included in current earnings. Fair value
adjustments related to cash flow hedges are recorded in other comprehensive
income and reclassified to earnings when the hedged transaction is reflected in
earnings. Ineffective portions of hedges are reflected in earnings as they
occur.

Loans: Loans are reported net of the allowance for loan losses and unearned
discount. Impaired loans are carried at the present value of expected future
cash flows or the fair value of the related collateral, if the loan is
considered to be collateral dependent. Interest on loans is included in
interest income over the term of the loan based upon the principal balance
outstanding. Where serious doubt exists as to the collectibility of a loan,
the accrual of interest is discontinued. Loan fees and direct loan origination
costs are deferred and amortized over the term of the loan as a yield
adjustment.

Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost, net of deferred loan fees, or estimated fair
value in the aggregate.

Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required based on past loan loss experience, the nature
and volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in managements judgment, should be
charged off. Loan losses are charged against the allowance when management
believes that the uncollectibility of a loan balance is confirmed.



---

(Continued)

F-9



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000



---

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage and consumer loans and on an individual basis for
other loans. If a loan is impaired, a portion of the allowance is allocated so
that the loan is reported, net, at the present value of estimated future cash
flows using the loans existing rate or at the fair value of collateral if
repayment is expected solely from the collateral.

Premises and Equipment: Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Provisions for depreciation and
amortization, included in operating expenses, are computed on the straight-line
method over the estimated useful lives of the assets. The cost of maintenance
and repairs is charged to income as incurred; significant improvements are
capitalized.

Other Real Estate: Real estate acquired in settlement of loans is recorded at
fair value when acquired, establishing a new cost basis. If fair value
declines, a valuation allowance is recorded through expense. Costs after
acquisition are expensed.

Bank-Owned Life Insurance: The Company has purchased life insurance policies
on certain key executives. Bank-owned life insurance is recorded at its cash
surrender value, or the amount that can be realized.

Goodwill: Goodwill results from prior business acquisitions and represents the
excess of the purchase price over the fair value of acquired tangible assets
and liabilities and identified intangible assets. Upon adopting new accounting
guidance on January 1, 2002 and September 30, 2002, the Company ceased
amortizing all of its goodwill. Goodwill is assessed at least annually for
impairment and any such impairment will be recognized in the period identified.
The effect on net income of ceasing goodwill amortization in 2002 was not
material.

Income Taxes: Deferred tax assets and liabilities are recognized for temporary
differences between the financial reporting basis and the tax basis of the
Companys assets and liabilities. Deferred taxes are recognized for the
estimated taxes ultimately payable or recoverable based on enacted tax laws.
Changes in enacted tax rates and laws are reflected in the financial statements
in the periods they occur.

Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise plan equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings
per share if expense was measured using the fair value recognition provisions
of FASB



---

(Continued)

F-10



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000



---

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

Statement No. 123, Accounting for Stock-Based Compensation.Certain
adjustments were made to the pro forma calculations in prior years to be
consistent with the current year presentation.

|                                                                                  |  |      |        |      |  |      |        |  |  |   |        | 
|--------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|(In thousands, except per share data)                                             |  | 2002 |        | 2001 |  | 2000
|                                                                                  |  |      |        |      |  |     
|Net income as reported                                                            |  | $    | 16,308 |      |  | $    | 17,882 |  |  | $ | 14,613 | 
|Deduct: Stock-based compensation expense
determined under fair value-based method |  |      | 321    |      |  |      | 242    |  |  |   | 415    | 
|                                                                                  |  |      |        |      |  |      |        |  |  |   |        | 
|Pro forma net income                                                              |  | $    | 15,987 |      |  | $    | 17,640 |  |  | $ | 14,198 | 
|                                                                                  |  |      |        |      |  |      |        |  |  |   |        | 
|Basic earnings per share as reported                                              |  | $    | 1.01   |      |  | $    | 1.11   |  |  | $ | .91    | 
|Pro forma basic earnings per share                                                |  |      | .99    |      |  |      | 1.10   |  |  |   | .88    | 
|Diluted earnings per share as reported                                            |  |      | .99    |      |  |      | 1.09   |  |  |   | .90    | 
|Pro forma diluted earnings per share                                              |  |      | .97    |      |  |      | 1.08   |  |  |   | .88    | 

The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.

|                                |  |         |       |         |  |         |       |   |  |   |       |  
|------------------------------- |  | ------- | ----- | ------- |  | ------- | ----- | - |  | - | ----- | -
|                                |  | 2002    |       | 2001    |  | 2000   
|                                |  |         |       |         |  |        
|Fair value                      |  | $       | 4.83  |         |  | $       | 2.99  |   |  | $ | 3.27  |  
|Risk-free interest rate         |  |         | 4.84  | %       |  |         | 4.64  | % |  |   | 6.20  | %
|Expected option life            |  | 5 years |       | 5 years |  | 5 years
|Expected stock price volatility |  |         | 36.68 | %       |  |         | 22.15 | % |  |   | 27.00 | %
|Dividend yield                  |  |         | 2.27  |         |  |         | 3.18  |   |  |   | 3.50  |  

Comprehensive Income: Comprehensive income includes both net income and other
comprehensive income elements, including the change in unrealized gains and
losses on securities available-for-sale, net of tax, and the portion related to
securities transferred from available-for-sale to held-to-maturity.



---

(Continued)

F-11



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000



---

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

Earnings Per Common Share: Basic earnings per common share is net income
divided by the weighted average number of common shares outstanding during the
year. Diluted earnings per common share includes the dilutive effect of
additional potential common shares issuable under stock options. Earnings and
dividends per share are restated for all stock splits and dividends through the
date of issue of the financial statements.

Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when
the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated. Management does not believe there now are such matters
that will have a material effect on the financial statements.

Dividend Restriction: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the subsidiary banks to the Company
or by the Company to the stockholders.

Statement of Cash Flows: Amounts due from banks and federal funds sold are
considered to be cash equivalents. Loan disbursements and collections,
short-term repurchase agreements, and transactions in deposit accounts are
reported net.

Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more
fully disclosed in a separate note. Fair value estimates involve uncertainties
and matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.

Newly Issued But Not Yet Effective Accounting Standards: New accounting
standards on asset retirement obligations, restructuring activities and exit
costs, operating leases, and early extinguishment of debt were issued in 2002.
Management determined that when the new accounting standards are adopted in
2003, they will not have a material impact on the Companys financial condition
or results of operations.

Reclassifications: Some items in the prior year financial statements were
reclassified to conform to the current presentation.



---

(Continued)

F-12



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000



---

NOTE 3  SECURITIES

The amortized cost and fair value of securities available-for-sale and
held-to-maturity are as follows:

|                              |                                                  |                                     |         |                   |         |            |       |            |        |       |    |      |        |   |         |         |         | 
|----------------------------- | ------------------------------------------------ | ----------------------------------- | ------- | ----------------- | ------- | ---------- | ----- | ---------- | ------ | ----- | -- | ---- | ------ | - | ------- | ------- | ------- | 
|                              |                                                  |                                     |         | December 31, 2002
|                              |                                                  |                                     |         |                  
|                              |                                                  |                                     |         |                   |         |            |       | Gross      |        | Gross |    |      |        |  
|                              |                                                  |                                     |         | Amortized         |         | Unrealized |       | Unrealized |        | Fair 
|(In thousands)                |                                                  | Cost                                |         | Gains             |         | Losses     |       | Value     
|                              |                                                  |                                     |         |                   |         |            |       |           
|Securities available-for-sale |                                                  |                                     |         |                   |         |            |       |            |        |       |    |      |        |   |         |        
|                              | Obligations of U.S. government agencies          |                                     | $       | 23,856            |         |            | $     | 19         |        |       | $  | (331 | )      |   | $       | 23,544  |        
|                              | Obligations of states and political subdivisions |                                     |         | 55,109            |         |            |       | 2,611      |        |       |    |     |        |   |         | 57,720  |        
|                              | Mortgage-backed securities                       |                                     |         | 495,569           |         |            |       | 8,959      |        |       |    | (96  | )      |   |         | 504,432 |        
|                              | Equity securities                                |                                     |         | 59,369            |         |            |       | 177        |        |       |    | (182 | )      |   |         | 59,364  |        
|                              | Corporate and other debt securities              |                                     |         | 7,194             |         |            |       | 82         |        |       |    | (463 | )      |   |         | 6,813   |        
|                              |                                                  |                                     |         |                   |         |            |       |            |        |       |    |      |        |   |         |        
|                              |                                                  | Total securities available-for-sale |         | $                 | 641,097 |            |       | $          | 11,848 |       |    | $    | (1,072 | ) |         | $       | 651,873 | 
|                              |                                                  |                                     |         |                   |         |            |       |            |        |       |    |      |        |   |         |        
|Securities held-to-maturity   |                                                  |                                     |         |                   |         |            |       |            |        |       |    |      |        |   |         |        
|                              | Obligations of states and political subdivisions |                                     | $       | 17,706            |         |            | $     | 960        |        |       | $  |     |        |   | $       | 18,666  |        
|                              | Mortgage-backed securities                       |                                     |         | 100,914           |         |            |       | 850        |        |       |    | (9   | )      |   |         | 101,755 |        
|                              |                                                  |                                     |         |                   |         |            |       |            |        |       |    |      |        |   |         |        
|                              |                                                  | $                                   | 118,620 |                   |         | $          | 1,810 |            |        | $     | (9 | )    |        | $ | 120,421 |        
|                              |                                                  |                                     |         |                   |         |            |       |            |        |       |    |      |        |   |         |        
|                              |                                                  |                                     |         |                   |         |            |       |            |        |       |    |      |        |   |         |        

|                              |                                                  |                                     |   |                   |         |            |   |            |       |       |   |        |        |   |   |         |         | 
|----------------------------- | ------------------------------------------------ | ----------------------------------- | - | ----------------- | ------- | ---------- | - | ---------- | ----- | ----- | - | ------ | ------ | - | - | ------- | ------- | 
|                              |                                                  |                                     |   | December
31, 2001
|                              |                                                  |                                     |   |                  
|                              |                                                  |                                     |   |                   |         |            |   | Gross      |       | Gross |   |        |        |  
|                              |                                                  |                                     |   | Amortized         |         | Unrealized |   | Unrealized |       | Fair 
|(In thousands)                |                                                  | Cost                                |   | Gains             |         | Losses     |   | Value     
|                              |                                                  |                                     |   |                   |         |            |   |           
|Securities available-for-sale |                                                  |                                     |   |                   |         |            |   |            |       |       |   |        |        |   |   |        
|                              | Obligations of U.S. government agencies          |                                     | $ | 505               |         |            | $ | 11         |       |       | $ |       |        |   | $ | 516     |        
|                              | Obligations of states and political subdivisions |                                     |   | 12,872            |         |            |   | 245        |       |       |   | (109   | )      |   |   | 13,008  |        
|                              | Mortgage-backed securities                       |                                     |   | 597,902           |         |            |   | 926        |       |       |   | (2,681 | )      |   |   | 596,147 |        
|                              | Equity securities                                |                                     |   | 72,007            |         |            |   | 455        |       |       |   | (229   | )      |   |   | 72,233  |        
|                              | Corporate and other debt securities              |                                     |   | 1,941             |         |            |   |           |       |       |   | (371   | )      |   |   | 1,570   |        
|                              |                                                  |                                     |   |                   |         |            |   |            |       |       |   |        |        |   |   |        
|                              |                                                  | Total securities available-for-sale |   | $                 | 685,227 |            |   | $          | 1,637 |       |   | $      | (3,390 | ) |   | $       | 683,474 | 
|                              |                                                  |                                     |   |                   |         |            |   |            |       |       |   |        |        |   |   |        
|Securities held-to-maturity   |                                                  |                                     |   |                   |         |            |   |            |       |       |   |        |        |   |   |        
|                              | Obligations of states and political subdivisions |                                     | $ | 21,445            |         |            | $ | 421        |       |       | $ | (1     | )      |   | $ | 21,865  |        
|                              |                                                  |                                     |   |                   |         |            |   |            |       |       |   |        |        |   |   |        

During the third quarter of 2002, the Company reclassified approximately $100
million of mortgage-backed securities from the available-for-sale category to
the held-to-maturity category. This transfer was required to be at fair value,
which results in the unrealized gain and accumulated other comprehensive income
at the time of transfer, $1,396,000 and $842,000, respectively, being
amortized/accreted to expense/income over the remaining life of the securities
as a yield adjustment.



---

(Continued)

F-13



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000



---

NOTE 3  SECURITIES(Continued)

Equity securities consist of $31 million and $55 million of callable preferred
stock issued by the Federal Home Loan Mortgage Corporation at December 31, 2002
and 2001. The remaining equity securities consist primarily of Federal Home
Loan Bank (FHLB) stock, Federal National Mortgage Association preferred
stock and Federal Reserve Bank stock, as well as various other equity issues.

At December 31, 2002, included in securities available-for-sale are
approximately $20.6 million of securities that have a trade date in 2002 and a
settlement date in 2003. These securities are comprised primarily of
mortgage-backed securities.

Securities with an approximate carrying value of $524 million and $505 million
at December 31, 2002 and 2001 were pledged to secure public deposits,
borrowings, and for other purposes as required or permitted by law. Included
in securities pledged at December 31, 2002 and 2001 is $177 million and $252
million, which has been pledged for FHLB borrowings.

The amortized cost and fair value of securities by contractual maturity at
December 31, 2002 are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.

|                              |                                        |                                     |        |           |         |      |        |         |         | 
|----------------------------- | -------------------------------------- | ----------------------------------- | ------ | --------- | ------- | ---- | ------ | ------- | ------- | 
|                              |                                        |                                     |        | Amortized |         | Fair
|(In thousands)                |                                        | Cost                                |        | Value    
|                              |                                        |                                     |        |          
|Securities available-for-sale |                                        |                                     |        |           |         |      |        |        
|                              | Due in one year or less                |                                     | $      | 1,133     |         |      | $      | 1,130   |        
|                              | Due after one year through five years  |                                     |        | 12,604    |         |      |        | 13,181  |        
|                              | Due after five years through ten years |                                     |        | 50,512    |         |      |        | 51,507  |        
|                              | Due after ten years                    |                                     |        | 21,910    |         |      |        | 22,259  |        
|                              |                                        |                                     |        |           |         |      |        |        
|                              |                                        |                                     | 86,159 |           |         |      | 88,077 |        
|                              | Mortgage-backed securities             |                                     |        | 495,569   |         |      |        | 504,432 |        
|                              |                                        |                                     |        |           |         |      |        |        
|                              |                                        | Total debt securities               |        |           | 581,728 |      |        |         | 592,509 | 
|                              | Equity securities                      |                                     |        | 59,369    |         |      |        | 59,364  |        
|                              |                                        |                                     |        |           |         |      |        |        
|                              |                                        | Total securities available-for-sale |        | $         | 641,097 |      |        | $       | 651,873 | 
|                              |                                        |                                     |        |           |         |      |        |        
|Securities held-to-maturity   |                                        |                                     |        |           |         |      |        |        
|                              | Due in one year or less                |                                     | $      | 4,706     |         |      | $      | 4,785   |        
|                              | Due after one year through five years  |                                     |        | 12,750    |         |      |        | 13,605  |        
|                              | Due after five years through ten years |                                     |        | 250       |         |      |        | 276     |        
|                              | Mortgage-backed securities             |                                     |        | 100,914   |         |      |        | 101,755 |        
|                              |                                        |                                     |        |           |         |      |        |        
|                              |                                        | Total securities held-to-maturity   |        | $         | 118,620 |      |        | $       | 120,421 | 
|                              |                                        |                                     |        |           |         |      |        |        



---

(Continued)

F-14



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000



---

NOTE 3  SECURITIES(Continued)

Proceeds from sales of securities available-for-sale and the realized gross
gains and losses are as follows:

|                      |  |                         |         |      |  |      |         |   |  |   |         |  
|--------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                      |  | Year Ended December 31,
|                      |  |                        
|(In thousands)        |  | 2002                    |         | 2001 |  | 2000
|                      |  |                         |         |      |  |     
|Proceeds from sales   |  | $                       | 319,952 |      |  | $    | 347,230 |   |  | $ | 118,381 |  
|Gross realized gains  |  |                         | 2,069   |      |  |      | 3,552   |   |  |   | 1,242   |  
|Gross realized losses |  |                         | (547    | )    |  |      | (791    | ) |  |   | (52     | )

NOTE 4  FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. The methods and assumptions used to determine
fair values for each class of financial instrument are presented below.

Carrying amount is the estimated fair value for cash and cash equivalents,
securities sold under agreements to repurchase, federal funds purchased, FHLB
stock, accrued interest receivable and payable, due to broker, demand deposits,
short-term debt, and variable rate loans or deposits that reprice frequently
and fully. Security, derivative, and swap fair values are based on market
prices or dealer quotes, and if no such information is available, on the rate
and term of the item or information about the issuer. For fixed rate loans or
deposits and for variable rate loans or deposits with infrequent repricing or
repricing limits, fair value is based on discounted cash flows using current
market rates applied to the estimated life and credit risk. Fair values for
impaired loans are estimated using discounted cash flow analysis or underlying
collateral values. The fair value of fixed rate debt is based on current rates
for similar financing. The fair value of off-balance-sheet items is not
material.



---

(Continued)

F-15



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000

NOTE 4  FAIR VALUE OF FINANCIAL INSTRUMENTS(Continued)

The estimated fair values of the Companys financial instruments were as
follows:

|                      |                                                                            |                      |   |              |            |       |   |           |            |       |   |          |            |           |   |          |            |  
|--------------------- | -------------------------------------------------------------------------- | -------------------- | - | ------------ | ---------- | ----- | - | --------- | ---------- | ----- | - | -------- | ---------- | --------- | - | -------- | ---------- | -
|                      |                                                                            |                      |   | December 31,
|                      |                                                                            |                      |   |             
|                      |                                                                            |                      |   | 2002         |            | 2001 
|                      |                                                                            |                      |   |              |            |      
|                      |                                                                            |                      |   |              |            |       |   | Estimated |            |       |   |          |            | Estimated
|                      |                                                                            |                      |   | Carrying     |            | Fair  |   | Carrying  |            | Fair 
|                      |                                                                            |                      |   | Amount       |            | Value |   | Amount    |            | Value
|                      |                                                                            |                      |   |              |            |       |   |           |            |      
|(In thousands)        |                                                                            |                      |   |              |            |       |   |           |            |       |   |          |            |           |   |         
|Financial assets      |                                                                            |                      |   |              |            |       |   |           |            |       |   |          |            |           |   |         
|                      | Cash and cash equivalents                                                  |                      | $ | 49,687       |            |       | $ | 49,687    |            |       | $ | 49,812   |            |           | $ | 49,812   |           
|                      | Securities available-for-sale                                              |                      |   | 651,873      |            |       |   | 651,873   |            |       |   | 683,474  |            |           |   | 683,474  |           
|                      | Securities held-to-maturity                                                |                      |   | 118,620      |            |       |   | 120,421   |            |       |   | 21,445   |            |           |   | 21,865   |           
|                      | Loans, net of allowance for
loan losses                                    |                      |   | 1,115,950    |            |       |   | 1,117,992 |            |       |   | 993,251  |            |           |   | 998,405  |           
|                      | Accrued interest receivable                                                |                      |   | 10,899       |            |       |   | 10,899    |            |       |   | 9,718    |            |           |   | 9,718    |           
|                      | Interest rate swaps                                                        |                      |   | 1,097        |            |       |   | 1,097     |            |       |   |         |            |           |   |         |           
|Financial liabilities |                                                                            |                      |   |              |            |       |   |           |            |       |   |          |            |           |   |         
|                      | Deposits                                                                   |                      |   |              |            |       |   |           |            |       |   |          |            |           |   |          |           
|                      |                                                                            | Non-interest-bearing |   |              | (134,858   | )     |   |           | (134,858   | )     |   |          | (134,707   | )         |   |          | (134,707   | )
|                      |                                                                            | Interest-bearing     |   |              | (1,255,790 | )     |   |           | (1,258,779 | )     |   |          | (1,076,813 | )         |   |          | (1,085,904 | )
|                      | Securities sold under
agreements to repurchase
and federal funds purchased |                      |   | (205,882     | )          |       |   | (210,242  | )          |       |   | (171,150 | )          |           |   | (171,150 | )         
|                      | Borrowings                                                                 |                      |   | (221,500     | )          |       |   | (223,825  | )          |       |   | (251,000 | )          |           |   | (255,918 | )         
|                      | Junior subordinated debt                                                   |                      |   | (35,000      | )          |       |   | (34,994   | )          |       |   | (20,000  | )          |           |   | (20,073  | )         
|                      | Accrued interest payable                                                   |                      |   | (3,618       | )          |       |   | (3,618    | )          |       |   | (3,809   | )          |           |   | (3,809   | )         
|                      | Due to broker                                                              |                      |   | (20,582      | )          |       |   | (20,582   | )          |       |   | (46,432  | )          |           |   | (46,432  | )         
|                      | Put and call option and credit
derivatives                                 |                      |   | (645         | )          |       |   | (645      | )          |       |   | (535     | )          |           |   | (535     | )         

Other assets and liabilities of the Company not defined as financial
instruments, such as property and equipment, are not included in the above
disclosures. Also not included are nonfinancial instruments such as the value
of core deposits, loan servicing rights, customer goodwill, and similar items.

There is no ready market for a significant portion of the Companys financial
instruments. Accordingly, fair values are based on various factors relative to
expected loss experience, current economic conditions, risk characteristics,
and other factors. The assumptions and estimates used in the fair value
determination process are subjective in nature and involve uncertainties and
significant judgment and, therefore, fair values cannot be determined with
precision. Changes in assumptions could significantly affect these estimated
values.

(Continued)

F-16



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000

NOTE 5  LOANS

Major classifications of loans are summarized as follows:

|               |                        |                    |   |              |           |      |   |         |           | 
|-------------- | ---------------------- | ------------------ | - | ------------ | --------- | ---- | - | ------- | --------- | 
|               |                        |                    |   | December 31,
|               |                        |                    |   |             
|               |                        |                    |   | 2002         |           | 2001
|               |                        |                    |   |              |           |     
|(In thousands) |                        |                    |   |              |           |      |   |        
|               | Commercial             |                    | $ | 229,764      |           |      | $ | 220,801 |          
|               | Commercial real estate |                    |   | 730,836      |           |      |   | 612,687 |          
|               | Agricultural           |                    |   | 57,426       |           |      |   | 48,772  |          
|               | Consumer real estate   |                    |   | 105,391      |           |      |   | 109,329 |          
|               | Consumer installment   |                    |   | 14,573       |           |      |   | 13,375  |          
|               |                        |                    |   |              |           |      |   |         |          
|               |                        | Total loans, gross |   |              | 1,137,990 |      |   |         | 1,004,964 | 
|               | Unearned discount      |                    |   | (1,286       | )         |      |   | (1,578  | )        
|               |                        |                    |   |              |           |      |   |         |          
|               |                        | Total loans        |   | $            | 1,136,704 |      |   | $       | 1,003,386 | 
|               |                        |                    |   |              |           |      |   |         |          

Included in consumer real estate are $4,924,000 and $3,414,000 of loans held
for sale at December 31, 2002 and 2001.

NOTE 6  ALLOWANCE FOR LOAN LOSSES

The following is a summary of changes in the allowance for loan losses:

|               |                                            |                        |   |                         |        |      |   |       |        |  |   |        |       | 
|-------------- | ------------------------------------------ | ---------------------- | - | ----------------------- | ------ | ---- | - | ----- | ------ |  | - | ------ | ----- | 
|               |                                            |                        |   | Year Ended December 31,
|               |                                            |                        |   |                        
|               |                                            |                        |   | 2002                    |        | 2001 |   | 2000 
|               |                                            |                        |   |                         |        |      |   |      
|(In thousands) |                                            |                        |   |                         |        |      |   |       |        |  |   |       
|               | Balance at beginning of year               |                        | $ | 10,135                  |        |      | $ | 8,593 |        |  | $ | 7,567  |      
|               | Provision for loan losses                  |                        |   | 18,532                  |        |      |   | 2,220 |        |  |   | 1,850  |      
|               | Loans charged off                          |                        |   | (8,206                  | )      |      |   | (877  | )      |  |   | (1,107 | )    
|               | Recoveries on loans previously charged off |                        |   | 293                     |        |      |   | 199   |        |  |   | 283    |      
|               |                                            |                        |   |                         |        |      |   |       |        |  |   |        |      
|               |                                            | Balance at end of year |   | $                       | 20,754 |      |   | $     | 10,135 |  |   | $      | 8,593 | 
|               |                                            |                        |   |                         |        |      |   |       |        |  |   |        |      

(Continued)

F-17



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000

NOTE 6  ALLOWANCE FOR LOAN LOSSES(Continued)

A portion of the allowance for loan losses is allocated to impaired loans.
Refer to Note 27 for additional discussion regarding the allowance for loan
losses. Information with respect to impaired loans and the related allowance
for loan losses is as follows:

|               |                                                                    |                      |   |              |        |      |   |     |       | 
|-------------- | ------------------------------------------------------------------ | -------------------- | - | ------------ | ------ | ---- | - | --- | ----- | 
|               |                                                                    |                      |   | December 31,
|               |                                                                    |                      |   |             
|               |                                                                    |                      |   | 2002         |        | 2001
|               |                                                                    |                      |   |              |        |     
|(In thousands) |                                                                    |                      |   |              |        |      |   |    
|               | Impaired loans for which no allowance for loan losses
is allocated |                      | $ | 146          |        |      | $ | 992 |      
|               | Impaired loans with an allocation of the allowance for
loan losses |                      |   | 29,998       |        |      |   | 352 |      
|               |                                                                    |                      |   |              |        |      |   |     |      
|               |                                                                    | Total impaired loans |   | $            | 30,144 |      |   | $   | 1,344 | 
|               |                                                                    |                      |   |              |        |      |   |     |      
|               | Allowance for loan losses allocated to impaired loans              |                      | $ | 14,286       |        |      | $ | 97  |      
|               |                                                                    |                      |   |              |        |      |   |     |      

|               |                                                              |  |                         |        |      |  |      |       |  |  |   |       | 
|-------------- | ------------------------------------------------------------ |  | ----------------------- | ------ | ---- |  | ---- | ----- |  |  | - | ----- | 
|               |                                                              |  | Year Ended December 31,
|               |                                                              |  |                        
|               |                                                              |  | 2002                    |        | 2001 |  | 2000
|               |                                                              |  |                         |        |      |  |     
|(In thousands) |                                                              |  |                         |        |      |  |      |       |  |  |   |      
|               | Average impaired loans                                       |  | $                       | 13,677 |      |  | $    | 1,327 |  |  | $ | 1,230 | 
|               | Interest income recognized on impaired loans                 |  |                         | 207    |      |  |      | 69    |  |  |   | 67    | 
|               | Interest income recognized on impaired loans
on a cash basis |  |                         | 207    |      |  |      | 69    |  |  |   | 67    | 

Interest payments on impaired loans are generally applied to principal, unless
the loan principal is considered to be fully collectible, in which case,
interest is recognized on the cash basis.

Nonperforming loans were as follows:

|                                             |  |      |        |      |  |   |       | 
|-------------------------------------------- |  | ---- | ------ | ---- |  | - | ----- | 
|                                             |  | 2002 |        | 2001
|                                             |  |      |        |     
|(In thousands)                               |  |      |        |      |  |   |       | 
|Loans past due over 90 days still on accrual |  | $    | 2,514  |      |  | $ | 595   | 
|Nonaccrual loans                             |  |      | 29,035 |      |  |   | 1,774 | 

Nonperforming loans and impaired loans are defined differently. Some loans may
be included in both categories, whereas other loans may only be included in one
category.

(Continued)

F-18



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000

NOTE 7  PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

|               |                           |                             |   |              |        |      |   |         |        | 
|-------------- | ------------------------- | --------------------------- | - | ------------ | ------ | ---- | - | ------- | ------ | 
|               |                           |                             |   | December 31,
|               |                           |                             |   |             
|               |                           |                             |   | 2002         |        | 2001
|               |                           |                             |   |              |        |     
|(In thousands) |                           |                             |   |              |        |      |   |        
|               | Land and improvements     |                             | $ | 5,194        |        |      | $ | 5,186   |       
|               | Building and improvements |                             |   | 20,138       |        |      |   | 20,070  |       
|               | Furniture and equipment   |                             |   | 17,001       |        |      |   | 15,324  |       
|               | Furniture and equipment   |                             |   |              |        |      |   |         |       
|               |                           | Total cost                  |   |              | 42,333 |      |   |         | 40,580 | 
|               | Accumulated depreciation  |                             |   | (23,334      | )      |      |   | (21,103 | )     
|               | Furniture and equipment   |                             |   |              |        |      |   |         |       
|               |                           | Premises and equipment, net |   | $            | 18,999 |      |   | $       | 19,477 | 
|               | Furniture and equipment   |                             |   |              |        |      |   |         |       

NOTE 8  GOODWILL

The change in the carrying amount of goodwill for the year is as follows:

|                                                                                             |             |   |       |       | 
|-------------------------------------------------------------------------------------------- | ----------- | - | ----- | ----- | 
|(In
thousands)                                                                               |             |   |       |      
|Beginning of year                                                                            |             | $ | 3,524 |      
|Goodwill from acquisition during year and
from installment payments on previous
transactions |             |   | 1,080 |      
|                                                                                             |             |   |       |      
|                                                                                             | End of year |   | $     | 4,604 | 
|                                                                                             |             |   |       |      

Goodwill is no longer amortized starting in 2002. The effect of not amortizing
goodwill is summarized as follows:

|                                      |                       |   |        |      |      |   |        |      |  |   |        |     | 
|------------------------------------- | --------------------- | - | ------ | ---- | ---- | - | ------ | ---- |  | - | ------ | --- | 
|                                      |                       |   | 2002   |      | 2001 |   | 2000  
|                                      |                       |   |        |      |      |   |       
|(In thousands, except per share data) |                       |   |        |      |      |   |        |      |  |   |        |    
|Reported net income                   |                       | $ | 16,308 |      |      | $ | 17,882 |      |  | $ | 14,613 |    
|Add back: goodwill amortization       |                       |   |       |      |      |   | 200    |      |  |   | 199    |    
|                                      |                       |   |        |      |      |   |        |      |  |   |        |    
|Adjusted net income                   |                       | $ | 16,308 |      |      | $ | 18,082 |      |  | $ | 14,812 |    
|                                      |                       |   |        |      |      |   |        |      |  |   |        |    
|Basic earnings per share:             |                       |   |        |      |      |   |        |      |  |   |        |    
|                                      | Reported net income   |   | $      | 1.01 |      |   | $      | 1.11 |  |   | $      | .91 | 
|                                      | Goodwill amortization |   |        |     |      |   |        | .01  |  |   |        | .01 | 
|                                      |                       |   |        |      |      |   |        |      |  |   |        |    
|                                      | Adjusted net income   |   | $      | 1.01 |      |   | $      | 1.12 |  |   | $      | .92 | 
|                                      |                       |   |        |      |      |   |        |      |  |   |        |    
|Diluted earnings per share:           |                       |   |        |      |      |   |        |      |  |   |        |    
|                                      | Reported net income   |   | $      | .99  |      |   | $      | 1.09 |  |   | $      | .90 | 
|                                      | Goodwill amortization |   |        |     |      |   |        | .01  |  |   |        | .01 | 
|                                      |                       |   |        |      |      |   |        |      |  |   |        |    
|                                      | Adjusted net income   |   | $      | .99  |      |   | $      | 1.10 |  |   | $      | .91 | 
|                                      |                       |   |        |      |      |   |        |      |  |   |        |    

(Continued)

F-19



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000

NOTE 9  INCOME TAXES

The provision for income taxes consists of the following:

|                |       |                                  |        |                         |       |      |       |      |       |   |       |       |       | 
|--------------- | ----- | -------------------------------- | ------ | ----------------------- | ----- | ---- | ----- | ---- | ----- | - | ----- | ----- | ----- | 
|                |       |                                  |        | Year Ended December 31,
|                |       |                                  |        |                        
|                |       |                                  |        | 2002                    |       | 2001 |       | 2000
|                |       |                                  |        |                         |       |      |       |     
|(In thousands)  |       |                                  |        |                         |       |      |       |      |       |   |       |      
|Current
Federal |       | $                                | 7,761  |                         |       | $    | 7,245 |      |       | $ | 6,441 |      
|                | State |                                  |        | 987                     |       |      |       | 973  |       |   |       | 1,538 |      
|Deferred        |       |                                  | (4,087 | )                       |       |      | 486   |      |       |   | (347  | )    
|                |       |                                  |        |                         |       |      |       |      |       |   |       |      
|                |       | Total provision for income taxes |        | $                       | 4,661 |      |       | $    | 8,704 |   |       | $     | 7,632 | 
|                |       |                                  |        |                         |       |      |       |      |       |   |       |      

The difference between the provision for income taxes in the financial
statements and amounts computed by applying the current federal income tax rate
of 35% to income before income taxes is reconciled as follows:

|                                                                |                                  |   |                         |       |      |   |       |       |  |   |       |       | 
|--------------------------------------------------------------- | -------------------------------- | - | ----------------------- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                                                |                                  |   | Year Ended December 31,
|                                                                |                                  |   |                        
|                                                                |                                  |   | 2002                    |       | 2001 |   | 2000 
|                                                                |                                  |   |                         |       |      |   |      
|(In thousands)                                                  |                                  |   |                         |       |      |   |       |       |  |   |       |      
|Income taxes computed at the statutory rate                     |                                  | $ | 7,339                   |       |      | $ | 9,305 |       |  | $ | 7,786 |      
|Decrease in state income taxes due to
Illinois audit settlement |                                  |   | (821                    | )     |      |   |      |       |  |   |      |      
|Tax-exempt interest income on securities
and loans              |                                  |   | (1,021                  | )     |      |   | (652  | )     |  |   | (684  | )    
|Amortization of goodwill                                        |                                  |   |                        |       |      |   | 87    |       |  |   | 91    |      
|State income taxes, net of federal tax benefit                  |                                  |   | 378                     |       |      |   | 620   |       |  |   | 957   |      
|Cash surrender value increase, net of premiums                  |                                  |   | (376                    | )     |      |   | (324  | )     |  |   | (150  | )    
|Excess charitable contributions                                 |                                  |   |                        |       |      |   |      |       |  |   | (121  | )    
|Dividends received deduction                                    |                                  |   | (818                    | )     |      |   | (755  | )     |  |   | (200  | )    
|Other                                                           |                                  |   | (20                     | )     |      |   | 423   |       |  |   | (47   | )    
|                                                                |                                  |   |                         |       |      |   |       |       |  |   |       |      
|                                                                | Total provision for income taxes |   | $                       | 4,661 |      |   | $     | 8,704 |  |   | $     | 7,632 | 
|                                                                |                                  |   |                         |       |      |   |       |       |  |   |       |      

The net deferred tax asset (liability), included in other assets (other
liabilities) in the accompanying balance sheets, consisted of the following
components:

|                                                                           |                           |                                 |   |              |       |      |     |       |       | 
|-------------------------------------------------------------------------- | ------------------------- | ------------------------------- | - | ------------ | ----- | ---- | --- | ----- | ----- | 
|                                                                           |                           |                                 |   | December 31,
|                                                                           |                           |                                 |   |             
|                                                                           |                           |                                 |   | 2002         |       | 2001
|                                                                           |                           |                                 |   |              |       |     
|(In thousands)                                                             |                           |                                 |   |              |       |      |     |      
|Gross deferred tax assets
Unrealized loss on securities available-for-sale |                           | $                               |  |              |       | $    | 695 |      
|                                                                           | Allowance for loan losses |                                 |   | 8,233        |       |      |     | 4,021 |      
|                                                                           | Amortizable assets        |                                 |   | 64           |       |      |     | 86    |      
|                                                                           | Other real estate         |                                 |   |             |       |      |     | 10    |      
|                                                                           | Depreciation              |                                 |   | 214          |       |      |     | 130   |      
|                                                                           | Deferred compensation     |                                 |   | 279          |       |      |     | 161   |      
|                                                                           |                           |                                 |   |              |       |      |     |      
|                                                                           |                           | Total gross deferred tax assets |   |              | 8,790 |      |     |       | 5,103 | 

(Continued)

F-20



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000



---

NOTE 9  INCOME TAXES(Continued)

|                               |                                                                                                 |                                      |                        |        |              |       |   |      |      |       | 
|------------------------------ | ----------------------------------------------------------------------------------------------- | ------------------------------------ | ---------------------- | ------ | ------------ | ----- | - | ---- | ---- | ----- | 
|                               |                                                                                                 |                                      |                        |        | December 31,
|                               |                                                                                                 |                                      |                        |        |             
|(In thousands)                 |                                                                                                 | 2002                                 |                        | 2001  
|                               |                                                                                                 |                                      |                        |       
|Gross deferred tax liabilities |                                                                                                 |                                      |                        |        |              |       |   |     
|                               | Unrealized gain on securities available-for-sale
and securities transferred to held-to-maturity |                                      | $                      | (4,566 | )            |       | $ |     |     
|                               | FHLB stock dividends                                                                            |                                      |                        | (918   | )            |       |   | (654 | )   
|                               | Other                                                                                           |                                      |                        | (103   | )            |       |   | (72  | )   
|                               |                                                                                                 |                                      |                        |        |              |       |   |     
|                               |                                                                                                 | Total gross deferred tax liabilities |                        |        | (5,587       | )     |   |      | (726 | )    
|                               |                                                                                                 |                                      |                        |        |              |       |   |     
|                               |                                                                                                 |                                      | Net deferred tax asset |        | $            | 3,203 |   |      | $    | 4,377 | 
|                               |                                                                                                 |                                      |                        |        |              |       |   |     

NOTE 10  SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

The Company has retail repurchase agreements with customers within its local
market areas. These borrowings are collateralized with securities owned by the
Company and held in safekeeping at independent correspondent banks. In
addition, the Company has repurchase agreements with brokerage firms, which are
in possession of the underlying securities. The same securities are returned
to the Company at the maturity of the agreements. At December 31, 2002,
repurchase agreements with brokerage firms approximated $176,571,000. The
following summarizes certain information relative to these borrowings:

|                                                  |  |      |         |      |  |      |         |   |  |   |        |  
|------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|(In thousands)                                    |  | 2002 |         | 2001 |  | 2000
|                                                  |  |      |         |      |  |     
|Outstanding at end of year                        |  | $    | 185,057 |      |  | $    | 146,800 |   |  | $ | 20,463 |  
|Weighted average interest at year end             |  |      | 2.95    | %    |  |      | 2.04    | % |  |   | 6.35   | %
|Maximum amount outstanding as of any month end    |  | $    | 204,830 |      |  | $    | 146,800 |   |  | $ | 36,005 |  
|Average amount outstanding                        |  |      | 155,635 |      |  |      | 37,070  |   |  |   | 23,935 |  
|Approximate weighted average rate during the year |  |      | 2.70    | %    |  |      | 3.85    | % |  |   | 6.00   | %



---

(Continued)

F-21



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000



---

NOTE 10  SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE(Continued)

At December 31, 2002, securities sold under agreements to repurchase are
summarized below:

|                   |  |            |         |          |  |           |      |                       |  |                 |         |  |  |   |         | 
|------------------ |  | ---------- | ------- | -------- |  | --------- | ---- | --------------------- |  | --------------- | ------- |  |  | - | ------- | 
|(In thousands)     |  |            |         |          |  |           |      |                       |  | Collateral     
|                   |  |            |         |          |  |           |      |                       |  | Mortgage-Backed
|                   |  |            |         |          |  | Weighted  |      | and Equity Securities
|                   |  |            |         |          |  | Average   |      |                      
|Original           |  | Repurchase |         | Interest |  | Amortized |      | Fair                 
|Term               |  | Liability  |         | Rate     |  | Cost      |      | Value                
|                   |  |            |         |          |  |           |      |                      
|Up to 30 days      |  | $          | 4,263   |          |  |           | 0.56 | %                     |  | $               | 4,995   |  |  | $ | 5,065   | 
|30 to 90 days      |  |            | 1,482   |          |  |           | 2.00 |                       |  |                 | 1,511   |  |  |   | 1,504   | 
|90 to 180 days     |  |            | 1,448   |          |  |           | 2.15 |                       |  |                 | 1,511   |  |  |   | 1,503   | 
|180 days to 1 year |  |            | 26,343  |          |  |           | 2.32 |                       |  |                 | 28,139  |  |  |   | 28,953  | 
|1 to 2 years       |  |            | 48,072  |          |  |           | 3.70 |                       |  |                 | 54,206  |  |  |   | 55,426  | 
|2 to 3 years       |  |            | 48,827  |          |  |           | 2.96 |                       |  |                 | 49,820  |  |  |   | 50,386  | 
|Over 3 years       |  |            | 54,622  |          |  |           | 2.81 |                       |  |                 | 58,285  |  |  |   | 58,756  | 
|                   |  |            |         |          |  |           |      |                       |  |                 |         |  |  |   |         | 
|                   |  | $          | 185,057 |          |  |           | 2.95 | %                     |  | $               | 198,467 |  |  | $ | 201,593 | 
|                   |  |            |         |          |  |           |      |                       |  |                 |         |  |  |   |         | 

NOTE 11  ADVANCES FROM THE FEDERAL HOME LOAN BANK

Advances from the FHLB are summarized as follows:

|                                             |      |       |  |              |      |        |   |         |         |          |  |      |      |   |   |         |         | 
|-------------------------------------------- | ---- | ----- |  | ------------ | ---- | ------ | - | ------- | ------- | -------- |  | ---- | ---- | - | - | ------- | ------- | 
|                                             |      |       |  | December 31,
|                                             |      |       |  |             
|                                             |      |       |  | 2002         |      | 2001  
|                                             |      |       |  |              |      |       
|                                             |      |       |  | Weighted     |      |        |   |         |         | Weighted |  |      |      |  
|                                             |      |       |  | Average      |      |        |   |         |         | Average  |  |      |      |  
|                                             |      |       |  | Rate         |      | Amount |   | Rate    |         | Amount  
|                                             |      |       |  |              |      |        |   |         |         |         
|(In thousands)                              
|Advances from the Federal
Home Loan Bank due |      |       |  |              |      |        |   |         |         |          |  |      |      |   |   |        
|                                             | 2002 |       |  |             | %    |        | $ |        |         |          |  | 5.78 | %    |   | $ | 27,000  |        
|                                             | 2004 |       |  | 5.63         |      |        |   | 4,500   |         |          |  | 5.63 |      |   |   | 4,500   |        
|                                             | 2005 |       |  | 6.07         |      |        |   | 32,500  |         |          |  | 6.07 |      |   |   | 32,500  |        
|                                             | 2006 |       |  | 1.46         |      |        |   | 2,000   |         |          |  |     |      |   |   |        |        
|                                             | 2008 |       |  | 5.00         |      |        |   | 42,000  |         |          |  | 5.00 |      |   |   | 42,000  |        
|                                             | 2010 |       |  | 4.38         |      |        |   | 137,500 |         |          |  | 5.45 |      |   |   | 137,500 |        
|                                             | 2011 |       |  | 4.08         |      |        |   | 1,000   |         |          |  | 4.08 |      |   |   | 1,000   |        
|                                             |      |       |  |              |      |        |   |         |         |          |  |      |      |   |   |        
|                                             |      | Total |  |              | 4.75 | %      |   | $       | 219,500 |          |  |      | 5.47 | % |   | $       | 244,500 | 
|                                             |      |       |  |              |      |        |   |         |         |          |  |      |      |   |   |        



---

(Continued)

F-22



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000



---

NOTE 11  ADVANCES FROM THE FEDERAL HOME LOAN BANK(Continued)

In addition to the above, the Company has $500,000 at December 31, 2002 of
letters of credit with the FHLB. These letters of credit are pledged to secure
public deposits.

At December 31, 2002, $206,500,000 of the FHLB advances have various call
provisions and $2,000,000 have adjustable rates. The Company maintains a
collateral pledge agreement covering secured advances whereby the Company has
specifically pledged $17,680,000 of mortgages on agricultural property, free of
all other pledges, liens, and encumbrances (not more than 90 days delinquent).
Various securities are also pledged as collateral as discussed in Note 3. In
addition the Company also has

NOTE 12  NOTES PAYABLE

Notes payable consisted of the following:

|                                                                                                                                                                                                                                                                                                               |  |              |       |      |  |   |       | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|(Table amounts in thousands)                                                                                                                                                                                                                                                                                   |  | December 31,
|                                                                                                                                                                                                                                                                                                               |  |             
|                                                                                                                                                                                                                                                                                                               |  | 2002         |       | 2001
|                                                                                                                                                                                                                                                                                                               |  |              |       |     
|Revolving line of credit ($25,000,000) maturing
on January 30, 2004, interest payments due
quarterly at the 30-, 60-, 90-, or 180-day
LIBOR plus 95 basis points or prime rate less
25 basis points (weighted average rate of 2.37%
at December 31, 2002); secured by all common
stock of the subsidiary banks |  | $            | 2,000 |      |  | $ | 6,500 | 

The revolving line of credit includes the following covenants at December 31,
2002: (1) the banks must not have nonperforming assets in excess of 25% of
Tier 1 capital plus the loan loss allowance; (2) the Company and each
subsidiary bank must be considered well capitalized; (3) the Company must
maintain consolidated tangible net worth (as defined in the credit agreement)
of not less than $70 million; and (4) consolidated net income for the four
previous quarters combined must be at least $5.5 million. The Company has
complied with all of these debt covenants, except for the non-performing asset
covenant, at December 31, 2002. On April 14, 2003 the Company received a debt
covenant waiver for the nonperforming asset covenant. As a condition to the
grant of the waiver relating to the covenant regarding nonperforming assets the
lender has reduced the available line amount to $10 million and increased the
interest rate on existing and future borrowings by 25 basis points.



---

(Continued)

F-23



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000



---

NOTE 13  ISSUANCE OF TRUST PREFERRED SECURITIES

In May 2000, the Company formed MBHI Capital Trust I (Trust I). Trust I is a
statutory business trust formed under the laws of the State of Delaware and is
wholly owned by the Company. In June 2000, Trust I issued 10% preferred
securities with an aggregate liquidation amount of $20,000,000 ($25 per
preferred security) to third-party investors. The Company then issued 10%
junior subordinated debentures aggregating $20,000,000 to Trust I. The junior
subordinated debentures are the sole assets of the Trust. The junior
subordinated debentures and the preferred securities pay interest and
dividends, respectively, on a quarterly basis. The junior subordinated
debentures will mature on June 7, 2030, at which time the preferred securities
must be redeemed. The junior subordinated debentures and preferred securities
can be redeemed contemporaneously, in whole or in part, beginning June 7, 2005
at a redemption price of $25 per preferred security. The Company has provided
a full, irrevocable, and unconditional guarantee on a subordinated basis of the
obligations of Trust I under the preferred securities in the event of the
occurrence of an event of default, as defined in such guarantee. Debt issuance
costs totaling $270,000 and underwriting fees of $700,000 were capitalized
related to the offering and are being amortized over the estimated life of the
junior subordinated debentures.

In October 2002, the Company formed MBHI Capital Trust II (Trust II), a
statutory trust formed under the laws of the State of Delaware and a wholly
owned financing subsidiary of the Company. In October 2002, Trust II issued
$15 million in aggregate liquidation amount of trust preferred securities in a
private placement offering. Simultaneously with the issuance of the trust
preferred securities by Trust II, the Company issued an equivalent amount of
junior subordinated debentures to Trust II. The junior subordinated debentures
are the sole assets of Trust II. The junior subordinated debentures and the
trust preferred securities pay distributions and dividends, respectively, on a
quarterly basis, which are included in interest expense. The interest rate
payable on the debentures and the trust preferred securities resets quarterly
and is equal to LIBOR plus 3.45% (5.27% at December 31, 2002), provided that
this rate cannot exceed 12.5% through the interest payment date in November
2007. The junior subordinated debentures will mature on November 7, 2032, at
which time the preferred securities must be redeemed. The Company has provided
a full, irrevocable, and unconditional guarantee on a subordinated basis of the
obligations of Trust II under the preferred securities as set forth in such
guarantee agreement. Debt issuance costs totaling $25,000 and underwriting
fees of $450,000 were capitalized related to the offering and are being
amortized over the estimated life of the junior subordinated debentures.



---

(Continued)

F-24



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000



---

NOTE 14  EMPLOYEE BENEFIT PLANS

The Company maintains a 401(k) salary reduction plan covering substantially all
employees. Eligible employees may elect to make tax deferred contributions
within a specified range of their compensation as defined in the plan. The
Company contributes 1% more than the employees contribution up to a maximum 5%
employer contribution. Contributions to the plan are expensed currently and
were $519,000, $459,000, and $431,000 for the years ended December 31, 2002,
2001, and 2000.

The Company and various members of senior management have entered into a
Supplemental Executive Retirement Plan (SERP). The SERP provides for
guaranteed payments, based on a percentage of the individuals final salary,
for 15 years after age 65. The benefit amount is reduced if the individual
retires prior to age 65. The liability is being accrued over the vesting
period. Expense of $297,000 and $406,000 was recorded for the years ended
December 31, 2002 and 2001 and has been included in compensation and benefits.

During 2000, the Company purchased life insurance policies on various members
of senior management. The Company is the beneficiary of these life insurance
policies, which have an aggregate death benefit of approximately $56.5 million
at December 31, 2002. In addition, the policies had aggregate cash surrender
values of approximately $20.6 million at December 31, 2002 and $19.6 million at
December 31, 2001.

NOTE 15  TIME DEPOSITS

Interest-bearing deposits in denominations of $100,000 and over were
$291,929,000 as of December 31, 2002 and $235,634,000 as of December 31, 2001.
Interest expense related to deposits in denominations of $100,000 and over was
$6,432,000 for 2002, $8,334,000 for 2001, and $7,284,000 for 2000.

Certificates of deposit have scheduled maturities for the years 2003 through
2007 and thereafter as follows:

|               |  |   |         | 
|-------------- |  | - | ------- | 
|(In thousands) |  |  
|               |  |  
|2003           |  | $ | 718,689 | 
|2004           |  |   | 54,621  | 
|2005           |  |   | 71,011  | 
|2006           |  |   | 1,152   | 
|2007           |  |   | 4,528   | 
|Thereafter     |  |   | 31      | 
|               |  |   |         | 
|               |  | $ | 850,032 | 
|               |  |   |         | 



---

(Continued)

F-25



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000



---

NOTE 16  RELATED PARTY TRANSACTIONS

Certain executive officers, directors, and their related interests are loan
customers of the Companys subsidiary banks. A summary of loans made by the
subsidiary banks to or for the benefit of directors and executive officers is
as follows:

|                             |                              |   |        |        | 
|---------------------------- | ---------------------------- | - | ------ | ------ | 
|(In thousands)               |                              |  
|                             |                              |  
|Balance at December 31, 2001 |                              | $ | 16,154 |       
|New loans                    |                              |   | 6,416  |       
|Repayments                   |                              |   | (3,837 | )     
|                             |                              |   |        |       
|                             | Balance at December 31, 2002 |   | $      | 18,733 | 
|                             |                              |   |        |       

NOTE 17  CAPITAL REQUIREMENTS

The Company and its subsidiary banks are subject to regulatory capital
requirements administered by the federal banking agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
banks must meet specific capital guidelines that involve quantitative measures
of assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices.

Quantitative measures established by regulation to ensure capital adequacy
require banks and bank holding companies to maintain minimum amounts and ratios
of total and Tier 1 capital to risk-weighted assets and Tier 1 capital to
average assets. If banks do not meet these minimum capital requirements, as
defined, bank regulators can initiate certain actions that could have a direct
material effect on a banks financial statements. Management believes that, as
of December 31, 2002 and 2001, the Company and its subsidiary banks met all
capital adequacy requirements to which they were subject.



---

(Continued)

F-26



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000



---

NOTE 17  CAPITAL REQUIREMENTS(Continued)

As of December 31, 2002 and 2001, the most recent Federal Deposit Insurance
Corporation notification categorized the subsidiary banks as well capitalized
under the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have
changed the institutions categories. To be categorized as well capitalized,
banks must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios. The actual capital amounts and ratios for the Company and
subsidiary banks are presented in the following table.

|                                         |         |        |        |         |             |        |             |       |   |                  |                  |         |            |  |  |     |   |  |   |         |  |  |  |      |  
|---------------------------------------- | ------- | ------ | ------ | ------- | ----------- | ------ | ----------- | ----- | - | ---------------- | ---------------- | ------- | ---------- |  |  | --- | - |  | - | ------- |  |  |  | ---- | -
|(In thousands)                           |         |        |        |         |             |        |             |       |   | Minimum Required
|                                         |         |        |        |         |             |        |             |       |   |                 
|                                         |         |        |        |         |             |        |             |       |   |                  | To Be Adequately |         | To Be Well
|                                         |         |        | Actual |         | Capitalized |        | Capitalized
|                                         |         |        |        |         |             |        |            
|As of December 31, 2002                  |         | Amount |        | Ratio   |             | Amount |             | Ratio |   | Amount           |                  | Ratio  
|                                         |         |        |        |         |             |        |             |       |   |                  |                  |        
|Total Capital (to risk-weighted
assets)  |         |        |        |         |             |        |             |       |   |                  |                  |         |            |  |  |     |   |  |   |         |  |  |  |     
|                                         | Company |        | $      | 154,740 |             |        |             | 11.7  | % |                  | $                | 105,876 |            |  |  | 8.0 | % |  | $ | 132,345 |  |  |  | 10.0 | %
|                                         | MBTC    |        |        | 129,364 |             |        |             | 11.1  |   |                  |                  | 93,568  |            |  |  | 8.0 |   |  |   | 116,960 |  |  |  | 10.0 |  
|                                         | MBWI    |        |        | 19,615  |             |        |             | 13.2  |   |                  |                  | 11,871  |            |  |  | 8.0 |   |  |   | 14,838  |  |  |  | 10.0 |  
|Tier 1 Capital (to risk-weighted
assets) |         |        |        |         |             |        |             |       |   |                  |                  |         |            |  |  |     |   |  |   |         |  |  |  |     
|                                         | Company |        |        | 138,197 |             |        |             | 10.4  |   |                  |                  | 52,938  |            |  |  | 4.0 |   |  |   | 79,407  |  |  |  | 6.0  |  
|                                         | MBTC    |        |        | 114,744 |             |        |             | 9.8   |   |                  |                  | 46,784  |            |  |  | 4.0 |   |  |   | 70,176  |  |  |  | 6.0  |  
|                                         | MBWI    |        |        | 18,400  |             |        |             | 12.4  |   |                  |                  | 5,935   |            |  |  | 4.0 |   |  |   | 8,903   |  |  |  | 6.0  |  
|Tier 1 Capital (to average assets)       |         |        |        |         |             |        |             |       |   |                  |                  |         |            |  |  |     |   |  |   |         |  |  |  |     
|                                         | Company |        |        | 138,197 |             |        |             | 7.0   |   |                  |                  | 78,872  |            |  |  | 4.0 |   |  |   | 98,590  |  |  |  | 5.0  |  
|                                         | MBTC    |        |        | 114,744 |             |        |             | 6.8   |   |                  |                  | 67,472  |            |  |  | 4.0 |   |  |   | 84,341  |  |  |  | 5.0  |  
|                                         | MBWI    |        |        | 18,400  |             |        |             | 6.7   |   |                  |                  | 10,984  |            |  |  | 4.0 |   |  |   | 13,730  |  |  |  | 5.0  |  
|As of December 31, 2001                  |         |        |        |         |             |        |             |       |   |                  |                  |         |            |  |  |     |   |  |   |         |  |  |  |     
|Total Capital (to risk-weighted
assets)  |         |        |        |         |             |        |             |       |   |                  |                  |         |            |  |  |     |   |  |   |         |  |  |  |     
|                                         | Company |        | $      | 123,984 |             |        |             | 10.8  | % |                  | $                | 91,628  |            |  |  | 8.0 | % |  | $ | 114,535 |  |  |  | 10.0 | %
|                                         | MBTC    |        |        | 110,553 |             |        |             | 11.0  |   |                  |                  | 80,318  |            |  |  | 8.0 |   |  |   | 100,398 |  |  |  | 10.0 |  
|                                         | MBWI    |        |        | 16,307  |             |        |             | 11.6  |   |                  |                  | 11,256  |            |  |  | 8.0 |   |  |   | 14,069  |  |  |  | 10.0 |  
|Tier 1 Capital (to risk-weighted
assets) |         |        |        |         |             |        |             |       |   |                  |                  |         |            |  |  |     |   |  |   |         |  |  |  |     
|                                         | Company |        |        | 113,747 |             |        |             | 9.9   |   |                  |                  | 45,814  |            |  |  | 4.0 |   |  |   | 68,721  |  |  |  | 6.0  |  
|                                         | MBTC    |        |        | 101,565 |             |        |             | 10.1  |   |                  |                  | 40,159  |            |  |  | 4.0 |   |  |   | 60,239  |  |  |  | 6.0  |  
|                                         | MBWI    |        |        | 15,004  |             |        |             | 10.7  |   |                  |                  | 5,628   |            |  |  | 4.0 |   |  |   | 8,442   |  |  |  | 6.0  |  
|Tier 1 Capital (to average assets)       |         |        |        |         |             |        |             |       |   |                  |                  |         |            |  |  |     |   |  |   |         |  |  |  |     
|                                         | Company |        |        | 113,747 |             |        |             | 6.6   |   |                  |                  | 68,652  |            |  |  | 4.0 |   |  |   | 85,815  |  |  |  | 5.0  |  
|                                         | MBTC    |        |        | 101,565 |             |        |             | 6.9   |   |                  |                  | 58,841  |            |  |  | 4.0 |   |  |   | 73,551  |  |  |  | 5.0  |  
|                                         | MBWI    |        |        | 15,004  |             |        |             | 6.3   |   |                  |                  | 9,589   |            |  |  | 4.0 |   |  |   | 11,986  |  |  |  | 5.0  |  



---

(Continued)

F-27



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000



---

NOTE 18  OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet financing needs of customers. Since many
commitments to extend credit expire without being used, the amounts below do
not necessarily represent future cash commitments. These financial instruments
include commitments to extend credit, standby letters of credit, and unused
lines of credit. Included in the commitments to extend credit are the notional
amounts of the credit derivative transactions discussed in Note 20. These are
summarized as follows:

|                                                                   |                              |              |      |         |      |  |   |         | 
|------------------------------------------------------------------ | ---------------------------- | ------------ | ---- | ------- | ---- |  | - | ------- | 
|(In thousands)                                                     |                              | December 31,
|                                                                   |                              |             
|                                                                   |                              |              | 2002 |         | 2001
|                                                                   |                              |              |      |         |     
|Financial instruments whose contract amounts
represent credit risk |                              |              |      |         |      |  |   |        
|                                                                   | Unused lines of credit       |              | $    | 249,988 |      |  | $ | 265,931 | 
|                                                                   | Commitments to extend credit |              |      | 94,594  |      |  |   | 89,771  | 
|                                                                   | Letters of credit            |              |      | 20,329  |      |  |   | 16,181  | 

At December 31, 2002 and 2001, commitments to extend credit consisted of
$18,933,000 and $29,681,000 of fixed rate loan commitments. These commitments
are due to expire within 30 to 90 days of issuance and have rates ranging
primarily from 5.25% to 7.75%. Substantially all of the unused lines of credit
are at adjustable rates of interest.

The Company also had Community Reinvestment Act (CRA) investment commitments
outstanding of $3.5 million. These commitments include $1.5 million and $1
million to be funded over seven and six years for investment in the Chicago
Equity Fund and $1 million to be funded over nine years for investment in the
Illinois Equity Fund.

The credit risk amounts represent the maximum accounting loss that would be
recognized at the reporting date if counterparties failed completely to perform
as contracted and any collateral or security proved to be of no value. Midwest
Banc has experienced little difficulty in accessing collateral when necessary.
The amounts of credit risk shown therefore greatly exceed expected losses.

NOTE 19  STOCK OPTION PLAN

The 1996 Stock Option Plan (the Plan) became effective on November 19, 1996.
Under the Plan, officers, directors, and key employees may be granted incentive
stock options to purchase the Companys common stock at no less than 100% of
the market price on the date the option is granted. Options can be granted to
become exercisable immediately or options can be granted to become exercisable
in installments of 25% a year on each of the first through the fourth
anniversaries of the grant date. In all cases, the options have a maximum term
of ten years. The Plan also permits nonqualified stock options to be issued.
Currently, the Plan authorizes a total of 1,425,000 shares for issuance.



---

(Continued)

F-28



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000



---

NOTE 19  STOCK OPTION PLAN(Continued)

Information about option grants follows:

|                                 |  |         |           |                |  |          |       | 
|-------------------------------- |  | ------- | --------- | -------------- |  | -------- | ----- | 
|                                 |  |         |           |                |  | Weighted
|                                 |  | Number  |           | Average       
|                                 |  | of      |           | Exercise Price
|                                 |  | Options |           | Per Share     
|                                 |  |         |           |               
|Outstanding at January 1, 2000   |  |         | 547,548   |                |  | $        | 9.97  | 
|Granted during 2000              |  |         | 363,864   |                |  |          | 8.94  | 
|Exercised during 2000            |  |         | (19,371   | )              |  |          | 6.80  | 
|Forfeited during 2000            |  |         | (63,279   | )              |  |          | 9.67  | 
|                                 |  |         |           |                |  |          |       | 
|Outstanding at December 31, 2000 |  |         | 828,762   |                |  |          | 9.61  | 
|Granted during 2001              |  |         | 211,500   |                |  |          | 10.21 | 
|Exercised during 2001            |  |         | (26,970   | )              |  |          | 6.54  | 
|Forfeited during 2001            |  |         |          |                |  |          |      | 
|                                 |  |         |           |                |  |          |       | 
|Outstanding at December 31, 2001 |  |         | 1,013,292 |                |  |          | 9.77  | 
|Granted during 2002              |  |         | 235,500   |                |  |          | 14.90 | 
|Exercised during 2002            |  |         | (137,717  | )              |  |          | 9.40  | 
|Forfeited during 2002            |  |         | (11,278   | )              |  |          | 10.76 | 
|                                 |  |         |           |                |  |          |       | 
|Outstanding at December 31, 2002 |  |         | 1,099,797 |                |  | $        | 10.90 | 
|                                 |  |         |           |                |  |          |       | 

Options exercisable at year end are as follows:

|     |  |         |         |                |  |          |      | 
|---- |  | ------- | ------- | -------------- |  | -------- | ---- | 
|     |  |         |         |                |  | Weighted
|     |  | Number  |         | Average       
|     |  | of      |         | Exercise Price
|     |  | Options |         | Per Share     
|     |  |         |         |               
|2000 |  |         | 452,825 |                |  | $        | 9.33 | 
|2001 |  |         | 649,346 |                |  |          | 9.75 | 
|2002 |  |         | 539,981 |                |  |          | 9.89 | 

Options outstanding at December 31, 2002 were as follows:

|                        |  |             |           |             |  |             |      |       |  |  |         |          |  |   |       | 
|----------------------- |  | ----------- | --------- | ----------- |  | ----------- | ---- | ----- |  |  | ------- | -------- |  | - | ----- | 
|                        |  | Outstanding |           | Exercisable
|                        |  |             |           |            
|                        |  |             |           |             |  | Weighted    |      |       |  |  |         |          |  |  
|                        |  |             |           |             |  | Average     |      |       |  |  |         | Weighted
|                        |  |             |           |             |  | Remaining   |      |       |  |  |         | Average 
|                        |  |             |           |             |  | Contractual |      |       |  |  |         | Exercise
|Range of Exercise Price |  | Number      |           | Life        |  | Number      |      | Price
|                        |  |             |           |             |  |             |      |      
|$5.42-8.50              |  |             | 99,500    |             |  |             | 4.47 |       |  |  | 99,500  |          |  | $ | 7.18  | 
|$8.83-10.59             |  |             | 552,360   |             |  |             | 7.53 |       |  |  | 242,668 |          |  |   | 9.57  | 
|$10.75-14.90            |  |             | 447,937   |             |  |             | 7.48 |       |  |  | 197,813 |          |  |   | 11.63 | 
|                        |  |             |           |             |  |             |      |       |  |  |         |          |  |   |       | 
|Outstanding at year end |  |             | 1,099,797 |             |  |             | 7.23 |       |  |  | 539,981 |          |  | $ | 9.89  | 
|                        |  |             |           |             |  |             |      |       |  |  |         |          |  |   |       | 



---

(Continued)

F-29



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000




NOTE 20  DERIVATIVE INSTRUMENTS

The Company entered into interest rate swaps to reduce exposure to declining
interest rates. As of December 31, 2002, the Company has various interest
rate swap transactions, which results in the Company converting $67.5 million
of its Federal Home Loan Bank Advance fixed rate debt to floating rate debt.
The swap transactions require payment of interest by the Company at the
one-month LIBOR plus a spread and, in turn, the Company receives a fixed rate.
The Company has documented these to be fair value hedges qualifying for the
shortcut method of accounting.

Summary information about interest rate swaps at year-end follows:

|                                      |  |            |        |      |   |   |   | 
|------------------------------------- |  | ---------- | ------ | ---- | - | - | - | 
|(In thousands)                        |  | 2002       |        | 2001
|                                      |  |            |        |     
|Notional amounts                      |  | $          | 67,500 |      |   | $ |  | 
|Weighted average fixed rates received |  |            | 5.91   | %    |   |   |  | 
|Weighted average variable rates paid  |  |            | 3.74   |      |   |   |  | 
|Weighted average maturity             |  | 7.25 years |        |      |  |  
|Fair value                            |  | $          | 1,097  |      |   |   |  | 

The Company has also bought and sold various put and call options with terms
less than 90 days on mortgage-backed securities. These are stand-alone
derivatives that are carried at their estimated fair value with the
corresponding gain or loss recorded in option income. The outstanding amounts
at December 31, are as follows:

|                          |  |             |      |             |  |   |      |  
|------------------------- |  | ----------- | ---- | ----------- |  | - | ---- | -
|                          |  | 2002        |      | 2001       
|                          |  |             |      |            
|Notional amounts          |  | $75 million |      | $60 million
|Weighted average maturity |  | 60 days     |      | 90 days    
|Fair value                |  | $           | (145 | )           |  | $ | (535 | )

In August 2002, the Company entered into a credit derivative transaction with a
notional amount of $20 million for a term of five years, maturing August 30,
2007. The credit swap has a credit rating of Aa2/AA by Moodys and Standard
and Poors. In November 2002, the Company entered a credit derivative
transaction with a notional amount of $30 million for a term of five years,
maturing November 27, 2002. The credit swap has a credit rating of Aa1/AAA by Moodys and
Standard and Poors. These are stand-alone derivatives with changes in the
market value charged or credited to earnings on a quarterly basis. The notional amount, which is the Companys
maximum credit risk, represents the maximum accounting loss that could be
recognized at the reporting date if actual defaults exceeded certain
thresholds. The Company
receives fee income quarterly (1.25% of the notional amount on an annual basis)
to cover potential credit losses in the event that actual defaults incurred by
each underlying instrument exceed certain thresholds. On inception date, the
Company received 1% of the






(Continued)

F-30



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000




NOTE 20  DERIVATIVE INSTRUMENTS(Continued)

notional amount as payment for entering into each contract. There has been no
material change in the fair value of $500,000 since the Company entered into
these credit derivatives. In both transactions, the underlying asset-backed
security is $1 billion and is diversified amongst 100 companies.

NOTE 21  PARENT COMPANY FINANCIAL STATEMENTS

The following are condensed balance sheets and statements of income and cash
flows for Midwest Banc Holdings, Inc., without subsidiaries:

CONDENSED BALANCE SHEETS

|                                     |                               |                                            |   |              |         |  |   |         |         | 
|------------------------------------ | ----------------------------- | ------------------------------------------ | - | ------------ | ------- |  | - | ------- | ------- | 
|                                     |                               |                                            |   | December 31,
|                                     |                               |                                            |   |             
|(In thousands)                       |                               | 2002                                       |   | 2001        
|                                     |                               |                                            |   |             
|ASSETS                               |                               |                                            |   |              |         |  |   |        
|                                     | Cash                          |                                            | $ | 2,355        |         |  | $ | 2,788   |        
|                                     | Securities available-for-sale |                                            |   | 5,318        |         |  |   | 976     |        
|                                     | Investment in subsidiaries    |                                            |   | 146,340      |         |  |   | 119,596 |        
|                                     | Other assets                  |                                            |   | 2,997        |         |  |   | 2,883   |        
|                                     |                               |                                            |   |              |         |  |   |        
|                                     |                               | Total assets                               |   | $            | 157,010 |  |   | $       | 126,243 | 
|                                     |                               |                                            |   |              |         |  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY |                               |                                            |   |              |         |  |   |        
|                                     | Borrowings                    |                                            | $ | 2,000        |         |  | $ | 6,500   |        
|                                     | Junior subordinated debt      |                                            |   | 35,000       |         |  |   | 20,000  |        
|                                     | Other liabilities             |                                            |   | 5,059        |         |  |   | 3,529   |        
|                                     | Stockholders equity          |                                            |   | 114,951      |         |  |   | 96,214  |        
|                                     |                               |                                            |   |              |         |  |   |        
|                                     |                               | Total liabilities and stockholders equity |   | $            | 157,010 |  |   | $       | 126,243 | 
|                                     |                               |                                            |   |              |         |  |   |        






(Continued)

F-31



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000




NOTE 21  PARENT COMPANY FINANCIAL STATEMENTS(Continued)

CONDENSED STATEMENTS OF INCOME

|                                                                              |                                 |      |              |        |   |      |        |        |   |   |        |        |  
|----------------------------------------------------------------------------- | ------------------------------- | ---- | ------------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|                                                                              |                                 |      | December 31,
|                                                                              |                                 |      |             
|(In thousands)                                                                |                                 | 2002 |              | 2001   |   | 2000
|                                                                              |                                 |      |              |        |   |     
|Operating income                                                              |                                 |      |              |        |   |      |        |        |   |   |        |       
|                                                                              | Dividends from subsidiary banks |      | $            | 7,303  |   |      | $      | 8,658  |   |   | $      | 7,689  |  
|                                                                              | Fees from subsidiaries          |      |              | 1,705  |   |      |        | 1,524  |   |   |        | 1,503  |  
|                                                                              | Other income                    |      |              | 350    |   |      |        | 167    |   |   |        | 234    |  
|                                                                              | Interest expense                |      |              | (1,827 | ) |      |        | (2,459 | ) |   |        | (1,783 | )
|                                                                              | Other expense                   |      |              | (4,862 | ) |      |        | (4,899 | ) |   |        | (4,472 | )
|                                                                              |                                 |      |              |        |   |      |        |        |   |   |        |       
|Income before income taxes and equity in
undistributed income of subsidiaries |                                 |      | 2,669        |        |   |      | 2,991  |        |   |   | 3,171  |       
|Income tax benefit                                                            |                                 |      | 2,054        |        |   |      | 2,347  |        |   |   | 1,751  |       
|Equity in undistributed income of subsidiaries                                |                                 |      | 11,585       |        |   |      | 12,544 |        |   |   | 9,691  |       
|                                                                              |                                 |      |              |        |   |      |        |        |   |   |        |       
|Net income                                                                    |                                 | $    | 16,308       |        |   | $    | 17,882 |        |   | $ | 14,613 |       
|                                                                              |                                 |      |              |        |   |      |        |        |   |   |        |       






(Continued)

F-32



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000




NOTE 21  PARENT COMPANY FINANCIAL STATEMENTS(Continued)

CONDENSED STATEMENTS OF CASH FLOWS

|                                                 |                                                                                  |                                                     |                                           |        |              |      |       |        |         |       |       |         |         |       | 
|------------------------------------------------ | -------------------------------------------------------------------------------- | --------------------------------------------------- | ----------------------------------------- | ------ | ------------ | ---- | ----- | ------ | ------- | ----- | ----- | ------- | ------- | ----- | 
|                                                 |                                                                                  |                                                     |                                           |        | December 31,
|                                                 |                                                                                  |                                                     |                                           |        |             
|(In thousands)                                   |                                                                                  | 2002                                                |                                           | 2001   |              | 2000
|                                                 |                                                                                  |                                                     |                                           |        |              |     
|Cash flows from operating activities             |                                                                                  |                                                     |                                           |        |              |      |       |        |         |       |       |        
|                                                 | Net income                                                                       |                                                     | $                                         | 16,308 |              |      | $     | 17,882 |         |       | $     | 14,613  |        
|                                                 | Adjustments to reconcile net income to
net cash provided by operating activities |                                                     |                                           |        |              |      |       |        |         |       |       |         |        
|                                                 |                                                                                  | Equity in undistributed income of
subsidiaries      |                                           |        | (11,585      | )    |       |        | (12,544 | )     |       |         | (9,691  | )    
|                                                 |                                                                                  | Depreciation                                        |                                           |        | 71           |      |       |        | 84      |       |       |         | 113     |      
|                                                 |                                                                                  | Decrease (increase) in other assets                 |                                           |        | (4,458       | )    |       |        | 1,167   |       |       |         | (778    | )    
|                                                 |                                                                                  | Increase in other liabilities                       |                                           |        | 341          |      |       |        | 279     |       |       |         | 378     |      
|                                                 |                                                                                  |                                                     |                                           |        |              |      |       |        |         |       |       |        
|                                                 |                                                                                  |                                                     | Net cash provided by operating activities |        |              | 677  |       |        |         | 6,868 |       |         |         | 4,635 | 
|Cash flows from investing activities             |                                                                                  |                                                     |                                           |        |              |      |       |        |         |       |       |        
|                                                 | Investment in subsidiaries                                                       |                                                     |                                           | (4,700 | )            |      |       |       |         |       |       | (12,500 | )      
|                                                 | Property and equipment expenditures                                              |                                                     |                                           | (50    | )            |      |       | (58    | )       |       |       | (25     | )      
|                                                 |                                                                                  |                                                     |                                           |        |              |      |       |        |         |       |       |        
|                                                 |                                                                                  | Net cash used in investing activities               |                                           |        | (4,750       | )    |       |        | (58     | )     |       |         | (12,525 | )    
|Cash flows from financing activities             |                                                                                  |                                                     |                                           |        |              |      |       |        |         |       |       |        
|                                                 | Issuance of junior subordinated debt,
net of debt issuance costs                 |                                                     |                                           | 14,525 |              |      |       |       |         |       |       | 19,030  |        
|                                                 | Borrowings                                                                       |                                                     |                                           |       |              |      |       | 1,500  |         |       |       | 7,800   |        
|                                                 | Payments on borrowings                                                           |                                                     |                                           | (4,500 | )            |      |       | (300   | )       |       |       | (10,075 | )      
|                                                 | Dividends paid                                                                   |                                                     |                                           | (6,450 | )            |      |       | (6,440 | )       |       |       | (5,397  | )      
|                                                 | Repurchase of common stock                                                       |                                                     |                                           | (576   | )            |      |       | (541   | )       |       |       | (2,271  | )      
|                                                 | Proceeds from exercise of stock options                                          |                                                     |                                           | 641    |              |      |       | (67    | )       |       |       | 106     |        
|                                                 |                                                                                  |                                                     |                                           |        |              |      |       |        |         |       |       |        
|                                                 |                                                                                  | Net cash provided by (used in) financing
activities |                                           |        | 3,640        |      |       |        | (5,848  | )     |       |         | 9,193   |      
|                                                 |                                                                                  |                                                     |                                           |        |              |      |       |        |         |       |       |        
|Increase (decrease) in cash and cash equivalents |                                                                                  |                                                     | (433                                      | )      |              |      | 962   |        |         |       | 1,303 |        
|Cash and cash equivalents at beginning of year   |                                                                                  |                                                     | 2,788                                     |        |              |      | 1,826 |        |         |       | 523   |        
|                                                 |                                                                                  |                                                     |                                           |        |              |      |       |        |         |       |       |        
|Cash and cash equivalents at end of year         |                                                                                  | $                                                   | 2,355                                     |        |              | $    | 2,788 |        |         | $     | 1,826 |        
|                                                 |                                                                                  |                                                     |                                           |        |              |      |       |        |         |       |       |        






(Continued)

F-33



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000




NOTE 22  EARNINGS PER SHARE

|                                      |                                            |      |   |        |  |      |   |        |  |  |   |        | 
|------------------------------------- | ------------------------------------------ | ---- | - | ------ |  | ---- | - | ------ |  |  | - | ------ | 
|(In thousands, except per share data) |                                            | 2002 |   | 2001   |  | 2000
|                                      |                                            |      |   |        |  |     
|Basic                                 |                                            |      |   |        |  |      |   |        |  |  |   |       
|                                      | Net income                                 |      | $ | 16,308 |  |      | $ | 17,882 |  |  | $ | 14,613 | 
|                                      |                                            |      |   |        |  |      |   |        |  |  |   |       
|                                      | Weighted average common
shares outstanding |      |   | 16,122 |  |      |   | 16,104 |  |  |   | 16,149 | 
|                                      |                                            |      |   |        |  |      |   |        |  |  |   |       
|                                      | Basic earnings per common share            |      | $ | 1.01   |  |      | $ | 1.11   |  |  | $ | .91    | 
|                                      |                                            |      |   |        |  |      |   |        |  |  |   |       
|Diluted                               |                                            |      |   |        |  |      |   |        |  |  |   |       
|                                      | Net income                                 |      | $ | 16,308 |  |      | $ | 17,882 |  |  | $ | 14,613 | 
|                                      |                                            |      |   |        |  |      |   |        |  |  |   |       
|                                      | Weighted average common
shares outstanding |      |   | 16,122 |  |      |   | 16,104 |  |  |   | 16,149 | 
|                                      | Dilutive effect of stock options           |      |   | 379    |  |      |   | 226    |  |  |   | 38     | 
|                                      |                                            |      |   |        |  |      |   |        |  |  |   |       
|                                      | Dilutive average common shares
outstanding |      |   | 16,501 |  |      |   | 16,330 |  |  |   | 16,187 | 
|                                      |                                            |      |   |        |  |      |   |        |  |  |   |       
|                                      | Diluted earnings per common
share          |      | $ | .99    |  |      | $ | 1.09   |  |  | $ | .90    | 
|                                      |                                            |      |   |        |  |      |   |        |  |  |   |       

NOTE 23  OTHER COMPREHENSIVE INCOME

Changes in other comprehensive income components and related taxes are as
follows:

|                                                                                                    |                            |      |                          |        |  |      |        |       |  |   |        |        | 
|--------------------------------------------------------------------------------------------------- | -------------------------- | ---- | ------------------------ | ------ |  | ---- | ------ | ----- |  | - | ------ | ------ | 
|                                                                                                    |                            |      | Years Ended December 31,
|                                                                                                    |                            |      |                         
|(In thousands)                                                                                      |                            | 2002 |                          | 2001   |  | 2000
|                                                                                                    |                            |      |                          |        |  |     
|Unrealized holding gains
on securities available-for-sale                                           |                            | $    | 14,051                   |        |  | $    | 7,406  |       |  | $ | 14,328 |       
|Reclassification adjustment for gains
recognized in income                                          |                            |      | (1,522                   | )      |  |      | (2,761 | )     |  |   | (1,190 | )     
|Unrealized holding gains on securities
transferred from available-for-sale to
held-to-maturity      |                            |      | 1,396                    |        |  |      |       |       |  |   |       |       
|Accretion of unrealized gains on securities
transferred from available-for-sale to
held-to-maturity |                            |      | (331                     | )      |  |      |       |       |  |   |       |       
|                                                                                                    |                            |      |                          |        |  |      |        |       |  |   |        |       
|                                                                                                    | Net unrealized gains       |      |                          | 13,594 |  |      |        | 4,645 |  |   |        | 13,138 | 
|Tax expense                                                                                         |                            |      | 5,392                    |        |  |      | 1,841  |       |  |   | 5,057  |       
|                                                                                                    |                            |      |                          |        |  |      |        |       |  |   |        |       
|                                                                                                    | Other comprehensive income |      | $                        | 8,202  |  |      | $      | 2,804 |  |   | $      | 8,081  | 
|                                                                                                    |                            |      |                          |        |  |      |        |       |  |   |        |       






(Continued)

F-34



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000




NOTE 24  QUARTERLY RESULTS OF OPERATIONS(UNAUDITED)

(In thousands, except per share data)

|                                     |            |          |                    |         |  |                 |        |             |  |   |        |      |  |   |        |      | 
|------------------------------------ | ---------- | -------- | ------------------ | ------- |  | --------------- | ------ | ----------- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                                     |            |          | Three Months Ended
|                                     |            |          |                   
|2002                                 |            | March 31 |                    | June 30 |  | September 30(d) |        | December 31
|                                     |            |          |                    |         |  |                 |        |            
|Interest income                      |            | $        | 28,083             |         |  | $               | 28,904 |             |  | $ | 28,353 |      |  | $ | 27,381 |     
|Interest expense                     |            |          | 13,250             |         |  |                 | 13,406 |             |  |   | 13,337 |      |  |   | 13,326 |     
|                                     |            |          |                    |         |  |                 |        |             |  |   |        |      |  |   |        |     
|Net interest income                  |            |          | 14,833             |         |  |                 | 15,498 |             |  |   | 15,016 |      |  |   | 14,055 |     
|Provision for loan losses            |            |          | 662                |         |  |                 | 815    |             |  |   | 10,915 | (d)  |  |   | 6,140  | (c) 
|Other income                         |            |          | 3,560              |         |  |                 | 3,323  |             |  |   | 3,047  |      |  |   | 4,078  |     
|Other expense                        |            |          | 8,198              |         |  |                 | 8,464  |             |  |   | 8,305  |      |  |   | 8,942  |     
|                                     |            |          |                    |         |  |                 |        |             |  |   |        |      |  |   |        |     
|Income/(loss) before income taxes    |            |          | 9,533              |         |  |                 | 9,542  |             |  |   | (1,157 | )    |  |   | 3,051  |     
|Provision/(benefit) for income taxes |            |          | 3,220              |         |  |                 | 3,154  |             |  |   | (1,487 | )(b) |  |   | (226   | )(c)
|                                     |            |          |                    |         |  |                 |        |             |  |   |        |      |  |   |        |     
|Net income                           |            | $        | 6,313              |         |  | $               | 6,388  |             |  | $ | 330    |      |  | $ | 3,277  |     
|                                     |            |          |                    |         |  |                 |        |             |  |   |        |      |  |   |        |     
|Earnings per common share            |            |          |                    |         |  |                 |        |             |  |   |        |      |  |   |        |     
|                                     | Basic      |          | $                  | .39     |  |                 | $      | .40         |  |   | $      | .02  |  |   | $      | .20  | 
|                                     | Diluted(a) |          |                    | .39     |  |                 |        | .39         |  |   |        | .02  |  |   |        | .20  | 



|(a) |  | Earnings per share for the quarters and fiscal years have been calculated
separately. Accordingly, quarterly amounts may not add to the annual
amounts because of differences in the average common shares outstanding
during each period.                                                                                                                                                                                                                        
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | The decrease in the provision for income taxes is partially attributed to
a new regulation issued by the Illinois Department of Revenue related to
the apportionment of business income of financial organizations and the
settlement of an Illinois audit.                                                                                                                                                                                                       
|   
|(c) |  | The increase in the provision for loan losses for the three months ended
December 31, 2002 is due to the impact of various identified problem
credits. See Note 27 for additional discussion. In addition, to this the
provision/(benefit) for income taxes was also impacted by a new regulation
issued by the Illinois Department of Revenue related to the apportionment
of business income of financial organizations and the settlement of an
Illinois audit.
|   
|(d) |  | The provision for loan losses, interest income and income taxes were
restated for the three months ended September 30, 2002 as a result of the
impact of various identified problem credits. See Note 27 for additional
discussion.                                                                                                                                                                                                                               






(Continued)

F-35



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000




NOTE 24  QUARTERLY RESULTS OF OPERATIONS(UNAUDITED) (CONTINUED)

(In thousands, except per share data)

|                           |         |          |                    |         |  |              |        |             |  |   |        |     |  |   |        |     | 
|-------------------------- | ------- | -------- | ------------------ | ------- |  | ------------ | ------ | ----------- |  | - | ------ | --- |  | - | ------ | --- | 
|                           |         |          | Three Months Ended
|                           |         |          |                   
|2001                       |         | March 31 |                    | June 30 |  | September 30 |        | December 31
|                           |         |          |                    |         |  |              |        |            
|Interest income            |         | $        | 28,647             |         |  | $            | 28,304 |             |  | $ | 28,493 |     |  | $ | 27,688 |    
|Interest expense           |         |          | 17,325             |         |  |              | 16,913 |             |  |   | 16,651 |     |  |   | 14,776 |    
|                           |         |          |                    |         |  |              |        |             |  |   |        |     |  |   |        |    
|Net interest income        |         |          | 11,322             |         |  |              | 11,391 |             |  |   | 11,842 |     |  |   | 12,912 |    
|Provision for loan losses  |         |          | 509                |         |  |              | 695    |             |  |   | 346    |     |  |   | 670    |    
|Other income               |         |          | 2,223              |         |  |              | 3,766  |             |  |   | 3,599  |     |  |   | 3,214  |    
|Other expense              |         |          | 7,393              |         |  |              | 7,836  |             |  |   | 7,985  |     |  |   | 8,249  |    
|                           |         |          |                    |         |  |              |        |             |  |   |        |     |  |   |        |    
|Income before income taxes |         |          | 5,643              |         |  |              | 6,626  |             |  |   | 7,110  |     |  |   | 7,207  |    
|Provision for income taxes |         |          | 1,781              |         |  |              | 2,390  |             |  |   | 2,324  |     |  |   | 2,209  |    
|                           |         |          |                    |         |  |              |        |             |  |   |        |     |  |   |        |    
|Net income                 |         | $        | 3,862              |         |  | $            | 4,236  |             |  | $ | 4,786  |     |  | $ | 4,998  |    
|                           |         |          |                    |         |  |              |        |             |  |   |        |     |  |   |        |    
|Earnings per common share  |         |          |                    |         |  |              |        |             |  |   |        |     |  |   |        |    
|                           | Basic   |          | $                  | .24     |  |              | $      | .26         |  |   | $      | .30 |  |   | $      | .31 | 
|                           | Diluted |          |                    | .24     |  |              |        | .26         |  |   |        | .29 |  |   |        | .30 | 






(Continued)

F-36



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000




NOTE 25  ACQUISITIONS

In March 2002, the Company acquired Service 1st Financial Corp. through its
subsidiary, MFIS. The transaction was not material to the consolidated
financial statements.

On July 22, 2002, the Company jointly announced with Big Foot Financial Corp.
(BFFC), the execution of a definitive agreement providing for the acquisition
of BFFC by the Company in a stock merger. The transaction closed on January 3,
2003, and the Company issued approximately 1,599,088 shares at $19.03 per
share. Midwest believes that this acquisition is in the best interest of its
shareholders in that it allows the Company to continue its community banking
strategy by entering into desirable markets. The merger, subject to a final
allocation of purchase price, is not expected to result in a material amount of
goodwill. At December 31, 2002, BFFC had approximately $200 million in total
assets, $135 million of deposits, and $28 million of equity.

In addition, on November 1, 2002, the Company entered into an agreement with
CoVest Bancshares, Inc. and its subsidiary, CoVest Bank N.A. (CoVest) for a
cash and stock merger transaction. The Company will issue .925 shares of its
stock and $10.25 in cash for each share of CoVest for an estimated acquisition
price of $105.2 million. The Company expects to merge CoVest, a $600 million,
three-office bank, into MBTC. The transaction is subject to regulatory approval
as well as CoVest stockholder approval. The merger application has been filed
with the regulators, but the regulators have not yet acted on the merger
application. If the Company is unable to obtain the necessary regulatory
approval, or, as a result of delays in consummating the transaction the other
conditions to closing cannot be satisfied, the merger will not occur. The
Company has capitalized costs of $ 425,000 as of December 31, 2002 for this
transaction.

NOTE 26  STOCK DIVIDEND

On July 9, 2002, the Company effected a three-for-two stock split payable in
the form of a stock dividend. All references to number of shares issued,
outstanding (basic and diluted), held in treasury, and earnings per share for
all periods presented have been restated as if the three-for-two stock split
had actually occurred on January 1, 2000.






F-37



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000




NOTE 27  SUBSEQUENT EVENT

On March 5, 2003 one of the Companys subsidiary banks, Midwest Bank and Trust
Company received a joint letter from the Federal Reserve Bank of Chicago (the
FRB) and the Illinois Office of Banks and Real Estate (the OBRE) regarding
additional provisions for loan losses that the FRB and OBRE determined were
appropriate based on their review of a series of loans to an
individual and certain affiliated companies. The total relationship approximated $19.6
million.

In response to the letter, the Company obtained an independent
valuation of the primary collateral for the largest portion of the relationship
which is two companies in bankruptcy (the affiliated companies).

As a result of further communication with the FRB
and OBRE additional analysis completed by
the Company, and the receipt of a supplemental letter from the FRB and OBRE as of
April 10, 2003, the Company determined it would provide an additional $ 14.7
million to the allowance for loan losses, charge off approximately $ 5.6
million in loans and reverse out $1 million of interest. Thus the Companys
2002 net income differs from the amounts initially reported in its January 27,
2003 earnings release to reflect this change.

On March 26, 2003, the Bank received proceeds of approximately $13.3 million
from the nonrecourse sale of a 2 of 3 of the loans reclassified as nonaccrual
as of September 30, 2002 to a newly formed entity that will be the sole owner
of the Affiliated Companies following the emergence of these companies from
bankruptcy. The purchase price for the portion of the loans sold was equal to
the stated principal amount of $10.8 million as of
September 30, 2002, plus $1.7
million of additional financing as of December 31, 2002, plus accrued interest
and late charges. The purchaser of the loans is indirectly owned 50% by current
management officials of the Affiliated Companies, and 50% by 400 VC, LLC (400
VC), an entity owned by the adult son of Leon Wolin, a director
of the Company, the adult
son of Leroy Rosasco, a director of the Company and Angelo DiPaolo, a director
of the Company. E.V. Silveri, Chairman of the Board of the Company, is
managing member of 400 VC. Pursuant to an agreement with 400 VC and its
present owners, Mr. Silveri and Brad Luecke, President and Chief Executive
Officer of the Company, will acquire equity ownership interests in 400 VC in
the near future. The funds used by the purchaser to purchase the identified
credits from the Bank were borrowed from 400 VC. 400 VC obtained those funds
from the proceeds of loans extended by an unrelated financial institution to
400 VC and Mr. Silveri ($3,000,000), Mr. Luecke ($3,000,000), Michael Wolin






F-38



---



##### Table of Contents



MIDWEST BANC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000




NOTE 27  SUBSEQUENT EVENT(CONTINUED)

($1,500,000), Angelo DiPaolo ($2,000,000) and Lee Paul Rosasco ($4,000,000), as
co-borrowers. The Company is currently evaluating how the sale of the
identified credits will be treated for financial reporting purposes,
which could include some or all of the repayment being categorized as
a capital contribution.

A plan of reorganization was submitted to the bankruptcy court on March 27,
2003, and a hearing on the plan is scheduled for May 8, 2003. Effectiveness of
the plan of reorganization is dependent upon, among other things, the purchaser
of the loans from the Bank obtaining additional credit in the amount of $8
million to fund the payment of certain additional indebtedness of the
Affiliated Companies. During March 2003, the Board of Directors of the Bank
considered and approved a proposal for extension of such credit, but management
of the Bank has indicated that no commitment to extend such credit has been
issued and that the Bank presently has no plans to extend such credit. In an
April 10, 2003 letter to the Company, the Federal Reserve and the OBRE
indicated that they would require the Bank to reserve (which could be
treated as an other expense for financial reporting purposes) as of March 31, 2003, on
a dollar for dollar basis up to $8 million, if the Bank had issued a commitment
to extend such loan or if representations had been made to the bankruptcy court
of the Banks willingness to provide credit to fund a plan of reorganization
for the borrowers. The Company is presently in discussions with the Federal
Reserve and OBRE concerning this matter.

On March 3, 2003, the banking regulators commenced a
regularly scheduled examination of the Banks which is not yet completed. The
ongoing examination has involved further review of the adequacy of
the Banks
overall risk management practices. There can be no assurance that the Federal
Reserve and OBRE will not identify other items, which may have an impact on the
financial statements of the Company.






F-39



---



##### Table of Contents



|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                    |  |  |  | 
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  | 
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                    |  | 
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                    |  | 
|ExhibitNo. |  | Description of Exhibits                                                                                                                                                                                                                                                                                                                                                                                            |  |  |  | 
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                    |  |  |  | 
|3.1        |  | Restated Certificate of Incorporation, as amended
(incorporated by reference to Registrants Registration Statement on
Form S-1, Registration No. 333-42827).                                                                                                                                                                                                                                                     
|3.2        |  | Certificate of Amendment of Restated Certificate of
Incorporation (incorporated by reference to Registrants Form 10-Q
for quarter ended June 30, 2002, File No. 001-13735).                                                                                                                                                                                                                                      
|3.3        |  | Restated By-Laws, as amended (incorporated by reference to
Registrants Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998, File No. 0-29652).                                                                                                                                                                                                                                                     
|3.4        |  | Amendment of Restated By-Laws (incorporated by reference to
Registrants Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000, File No. 0-29598).                                                                                                                                                                                                                                                    
|3.5        |  | Certificate of Amendment of Restated By-laws (incorporated by
reference to the Registrants Form 10-Q for the quarter ended
September 30, 2002, File No. 001-13735).                                                                                                                                                                                                                                              
|4.1        |  | Specimen Common Stock Certificate (incorporated by reference
to Registrants Registration Statement on Form S-1, Registration No.
333-42827).                                                                                                                                                                                                                                                                     
|4.2        |  | Certain instruments defining the rights of the holders of
long-term debt of the Company and certain of its subsidiaries, none
of which authorize a total amount of indebtedness in excess of 10%
of the total assets of the Company and its subsidiaries on a
consolidated basis, have not been filed as Exhibits. The Company
hereby agrees to furnish a copy of any of these agreements to the
SEC upon request.
|*10.3      |  | Midwest Banc Holdings, Inc. 1996 Stock Option Plan (incorporated by
reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).                                                                                                                                                                                                                                                    
|*10.4      |  | Amendment to the Midwest Banc Holdings, Inc. 1996 Stock Option Plan
(incorporated by reference to Registrants Annual Report on Form
10-K for the year ended December 31, 1998, File No. 0-29652).                                                                                                                                                                                                                
|*10.5      |  | Form of Transitional Employment Agreements (incorporated by
reference to Registrants Registration Statement on Form S-1,
Registration No. 333-42827).                                                                                                                                                                                                                                                            
|10.6       |  | 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).                                                                                                                                                                           
|10.7       |  | Britannica Centre Lease, dated as of May 1, 1994, between
Chicago Title and Trust Company, as Trustee under Trust Agreement
dated November 2, 1977 and known as Trust No. 1070932 and Midwest
Bank & Trust Company (incorporated by reference to Registrants
Registration Statement on Form S-1, Registration No. 333-42827).                                                                                    
|10.8       |  | 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).                                                                                                                                                                            
|10.9       |  | 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).                                                                                                                                                                                      
|10.10      |  | Credit Agreement as of January 30, 1998, between the Company,
Midwest One Mortgage Services, Inc., and Harris Trust & Savings Bank
(incorporated by reference to Registrants Registration Statement on
Form S-1, Registration No. 333-42827).                                                                                                                                                                    
|10.11      |  | First Amendment and waiver to Credit Agreement dated as of
September 28, 1998 between the Company, Midwest One Mortgage Services,
Inc., and Harris Trust and Savings Bank (incorporated by reference to
Registrants Form 10-K for the fiscal year ended 1999, File No.
0-29598).                                                                                                                                 
|10.12      |  | Second Amendment and waiver to Credit Agreement dated as of
January 7, 1999 between the Company, Midwest One Mortgage Services,
Inc., and Harris Trust and Savings Bank (incorporated by reference to
Registrants Form 10-K for the fiscal year ended 1999, File No.
0-29598).                                                                                                                                   





---



##### Table of Contents



|       |  |                                                                                                                                                                                                                                                                     |  |  |  | 
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|       |  |                                                                                                                                                                                                                                                                     |  | 
|       |  |                                                                                                                                                                                                                                                                     |  | 
|10.13  |  | Third Amendment and waiver to Credit Agreement dated as of
January 17, 2000 between the Company and Harris Trust and Savings Bank
(incorporated by reference to Registrants Form 10-K for the fiscal
year ended 1999, File No. 0-29598).                          
|10.14  |  | Fourth Amendment and Waiver to Credit Agreement dated January
17, 2000 between the Company and Harris Trust and Savings Bank
(incorporated by reference to the Registrants Form 10-K for the year
ended December 31, 2001, File No. 001-13735).                   
|10.15  |  | Fifth Amendment and Waiver to Credit Agreement dated as of
August 16, 2002 between the Company and Harris Trust and Savings Bank.                                                                                                                                  
|10.16  |  | Sixth Amendment and Waiver to Credit Agreement dated as of
April 14, 2003 between the Company and Harris Trust and Savings Bank.                                                                                                                                   
|*10.17 |  | Form of Supplemental Executive Retirement Agreement (incorporated by
reference to Registrants Form 10-Q for the quarter ended September
30, 2001, File No. 001-13735).                                                                                            
|*10.18 |  | Form of Transitional Employment Agreement (Executive Officer Group)
(incorporated by reference to Registrants Form 10-Q for the quarter
ended September 30, 2001, File No. 001-13735).                                                                            
|10.19  |  | Agreement and Plan of Reorganization between the Company and Big
Foot Financial Corp. dated as of July 19, 2002 (incorporated by
reference to Amex A of the Registrants Proxy Statement/Prospectus
dated October 23, 2002, Registration Statement No. 333-100090).
|10.20  |  | Agreement and Plan of Reorganization between the Company and
CoVest Bancshares, Inc. dated as of November 1, 2002 (incorporated by
reference to the Registrants Form 8-K dated November 1, 2002, File
No. 001-13735).                                             
|21.1   |  | Subsidiaries.                                                                                                                                                                                                                                                      
|23.1   |  | Consent of Crowe, Chizek and Company LLP.                                                                                                                                                                                                                          
|24.1   |  | Power of Attorney (included on signature page).                                                                                                                                                                                                                    
|99.1   |  | 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.                                                                                                
|99.2   |  | 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 Financial Officer.                                                                                                



|* |  | Indicates management contracts or compensatory plans or
arrangements required to be filed as an exhibit.
|- |  | --------------------------------------------------------------------------------------------------------