##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K

|   |  |                                                
|-- |  | -----------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  
|   |  | OF THE SECURITIES EXCHANGE ACT OF 1934         
|  
|   |  | For the fiscal year ended December 31,
    2003
|  
|OR

|  |  |                                                  
|- |  | -------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
|  |  | OF THE SECURITIES EXCHANGE ACT OF 1934           
| 
|  |  | 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 þ          No o

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 þ          No o

The aggregate market value of the voting and
nonvoting common equity held by nonaffiliates of the registrant
on June 30, 2003, 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 $207.9 million.

As of March 12, 2004, the number of shares
outstanding of the registrants common stock, par value
$0.01 per share, was 17,863,058.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Companys Proxy Statement
for the 2004 Annual Meeting of Stockholders are incorporated by
reference into Part III.



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MIDWEST BANC HOLDINGS, INC.

FORM 10-K

INDEX

|                                                 |  |                                                                                                         |     |      |    | 
|------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------- | --- | ---- | -- | 
|                                                 |  |                                                                                                         |     | Page
|                                                 |  |                                                                                                         |     | No. 
|                                                 |  |                                                                                                         |     |     
|PART I                                          
|Item 1.                                          |  | Business                                                                                                |     |      | 1  | 
|Item 2.                                          |  | Properties                                                                                              |     |      | 17 | 
|Item 3.                                          |  | Legal Proceedings                                                                                       |     |      | 19 | 
|Item 4.                                          |  | Submission of Matters to a
    Vote of Stockholders                                                     |     |      | 19 | 
|PART II                                         
|Item 5.                                          |  | Market for the
    Registrants Common Equity and Related Stockholder
    Matters                       |     |      | 19 | 
|Item 6.                                          |  | Selected Consolidated
    Financial Data                                                                |     |      | 21 | 
|Item 7.                                          |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations               |     |      | 22 | 
|Item 7A.                                         |  | Quantitative and Qualitative
    Disclosures about Market Risk                                          |     |      | 49 | 
|Item 8.                                          |  | Consolidated Financial
    Statements and Supplementary Data                                            |     |      | 51 | 
|Item 9.                                          |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                |     |      | 51 | 
|Item 9A.                                         |  | Controls and Procedures                                                                                 |     |      | 52 | 
|PART III                                        
|Item 10.                                         |  | Directors and Executive
    Officers of the Registrant                                                  |     |      | 52 | 
|Item 11.                                         |  | Executive Compensation                                                                                  |     |      | 52 | 
|Item 12.                                         |  | Security Ownership of
    Certain Beneficial Owners and Management and Related
    Stockholders Matters |     |      | 52 | 
|Item 13.                                         |  | Certain Relationships and
    Related Transactions                                                      |     |      | 52 | 
|Item 14.                                         |  | Principal Accounting Fees
    and Services                                                              |     |      | 52 | 
|PART IV                                         
|Item 15.                                         |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                     |     |      | 53 | 
|                                                 |  |                                                                                                         |     |      |    | 
|Signature(s) Page                                |  |                                                                                                         | 56  |     
|                                                 |  |                                                                                                         |     |      |    | 
|Contents of Consolidated Financial Statements    |  |                                                                                                         | F-1 |     
|Lease                                           
|Lease                                           
|Seventh Amendment and Waiver to Credit Agreement
|Subsidiaries                                    
|Consent                                         
|Consent                                         
|Certification                                   
|Certification                                   
|Certification                                   





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##### 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 which 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.

Certain information with respect to the Banks and
the Companys nonbank subsidiaries as of December 31,
2003, is set forth below:

|                                        |  |              |                   |             |  |                                                                                                                                                 |  |  |    | 
|--------------------------------------- |  | ------------ | ----------------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|                                        |  |              |                   |             |  | Number of                                                                                                                                      
|                                        |  |              |                   |             |  | Banking Centers                                                                                                                                
|Company Subsidiaries                    |  | Headquarters |                   | Market Area |  | 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      |             |  | Aledo, Galesburg, Kirkwood, Monmouth and Oquawka                                                                                                |  |  | 6  | 
|Nonbanks:                               |  |              |                   |             |  |                                                                                                                                                 |  |  |    | 
|                                       
|Porter Insurance Agency, Inc.           |  |              | Alexis, IL        |             |  | Western Illinois                                                                                                                                |  |  | 2  | 
|Midwest Bank Insurance Services, L.L.C. |  |              | Algonquin, IL     |             |  | *                                                                                                                                               |  |  | 1  | 

1



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|                                                    |  |              |                   |             |  |                 |  |  |   | 
|--------------------------------------------------- |  | ------------ | ----------------- | ----------- |  | --------------- |  |  | - | 
|                                                    |  |              |                   |             |  | Number of      
|                                                    |  |              |                   |             |  | Banking Centers
|Company Subsidiaries                                |  | Headquarters |                   | Market Area |  | or Offices     
|                                                    |  |              |                   |             |  |                
|MBTC Investment Company                             |  |              | Las Vegas, NV     |             |  | **              |  |  | 2 | 
|MBHI Capital Trust I                                |  |              | Melrose Park,  IL |             |  | ***             |  |  |  | 
|MBHI Capital Trust II                               |  |              | Melrose Park,  IL |             |  | ***             |  |  |  | 
|MBHI Capital Trust III                              |  |              | Melrose Park,  IL |             |  | ***             |  |  |  | 
|MBHI Capital Trust IV                               |  |              | Melrose Park,  IL |             |  | ***             |  |  |  | 
|Midwest Financial and Investment
    Services, Inc. |  |              | Elmwood Park,  IL |             |  | ****            |  |  | 4 | 



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| |   |                                                
| | - | -----------------------------------------------
| | * | 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.

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.

2



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##### Table of Contents



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. 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.

On January 3, 2003, the Company completed
the acquisition of Big Foot Financial Corp. (BFFC).
BFFC was the holding company for Fairfield Savings Bank, F.S.B.
(Fairfield) with approximately $200 million in
total assets at December 31, 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. Final
integration of systems and processes were completed in February
2003. The Company issued a total of 1,599,088 shares in the
transaction.



| |                     
| | --------------------
| | Nonbank Subsidiaries

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

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 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 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 10.0% 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 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 $15,000,000 in aggregate liquidation amount
of floating rate trust preferred securities in a private
placement offering.

3



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In December 2003, the Company formed MBHI Capital
Trust III (Trust III) and MBHI Capital
Trust IV (Trust IV), statutory trusts
formed under the laws of the State of Delaware and wholly owned
financing subsidiaries of the Company. In December 2003,
Trust III and Trust IV issued $9,000,000 and
$10,000,000, respectively in aggregate liquidation amount of
floating rate trust preferred securities in private placement
offerings.

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.

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 Addison and
Glenview, Illinois. 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

4



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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.


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; the personal guarantees of the principals are
also required. 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.

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.

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

5



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##### Table of Contents



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
purposes 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 29 ATM sites
generally located within the Banks local markets. All
except two off-site ATMs are owned by the Banks. Twenty 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, 2003, the Trust Department of
Midwest Bank and Trust Company maintained trust relationships
representing an aggregate market value of $3.5 million in
assets with an aggregate book value of $2.9 million. In
addition, the Trust Department of Midwest Bank and Trust Company
administered 1,808 land trust accounts as of
December 31, 2003. Midwest Bank of Western Illinois also
provides trust services to its customers and maintained trust
accounts with an aggregate market value of $42.8 million
and an aggregate book value of $30.7 million as of
December 31, 2003.



| |                   
| | ------------------
| | Insurance Services

Porter Insurance Agency, Inc.
(Porter) is a full line independent insurance
agency. Concentrating in agricultural-related insurance
products, Porter is one of the largest writers of crop insurance
in Illinois. Porter represents many regional and national
carriers offering programs for individual and group life and
health insurance, as well as property and casualty lines. Porter
maintains a strong portfolio of products for homeowners,
automobile, and business insurance, in addition to workers
compensation.

Midwest Bank Insurance Services, L.L.C. is an
independent insurance which concentrates in commercial insurance
products and fixed rate annuities.



| |                     
| | --------------------
| | Securities Brokerage

Securities brokerage services were provided
through arrangements with an independent regional brokerage
firm, Service 1st Financial Corp., which has been operating
for 13 years in our banking franchise. 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. Licensed
brokers are located at nine 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. This
acquisition is furthering one of the Companys strategic
goals of increasing revenues from nontraditional sources and to
enhance the Companys net income, though there is no
guaranty that actual results will be attained.

6



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##### Table of Contents



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, 2003, the Company and its
subsidiaries had 436 full-time equivalent employees.
Management considers its relationship with its employees to be
good.

Recent Regulatory Developments

On December 29, 2003, the Company and
Midwest Bank and Trust Company received a proposed written
agreement from the Federal Reserve and the Illinois Commissioner
which detailed recommended corrective actions in the
Companys over all risk management, lending and credit
review practices, including the engagement of third party
consultants. This agreement relates to the joint examination
which began on March 3, 2003 and ended on May 23,
2003. Following discussions with the regulators in late January
2004, the Company and Midwest Bank and Trust Company received a
revised written agreement from the Federal Reserve and the
Illinois Commissioner on March 11, 2004. The regulators
have requested the Company and Midwest Bank and Trust Company
take action on the proposed written agreement by March 15,
2004.

The written agreement outlines a series of steps
to address and strengthen the Companys risk management
practices. These steps include third-party reviews and the
submission of written plans in a number of areas. These areas
include the Companys and the Banks boards of
directors and management, corporate governance, internal
controls, risk management, lending and credit, including
allowance for loan and lease losses and loan review, and loan
policies and procedures. The proposed agreement does not relate
to the financial condition, capital, earnings or liquidity of
the Company or the Bank.

Management believes that compliance with the
proposed terms will not have a direct material effect upon the
Companys consolidated financial position or results of
operations. No restrictions have been proposed relating to the
payment of dividends.

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The proposed agreement requires submission of
written plans, programs and policies and procedures to the
regulators for review and approval within specified time frames.

Failure to satisfy the terms of the proposed
agreement could result in further regulatory actions against the
Company, Midwest Bank and Trust Company and their boards of
directors and management.

Since the joint examination of March 2003, the
Company and Midwest Bank and Trust Company have taken steps, and
continue to take steps, to address the recommendations proposed
by the regulators in their report dated August 1, 2003,
which are now incorporated into the proposed written agreement.
Beginning in late March 2004, the regulators will begin their
regularly scheduled joint examination of the Company and the
Bank.

Available Information

The Companys internet address is
www.midwestbanc.com. The Company posts the filings it
makes with the SEC on its website (which are available free of
charge) and on the same business day that it files these reports
with the SEC. The Company is a SEC registrant and is required to
annually file a Form 10-K and Forms 10-Q on a quarterly
basis and current reports on Form 8-K. These reports and
any amendments to such reports are posted on the Companys
website. The Company will also provide free copies of our
filings upon written request to: Chief Financial Officer, 501
West North Ave., Melrose Park, IL 60160.

The public may read and copy any materials filed
with the SEC at the SECs Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The Company is an
electronic filer. The SEC maintains an Internet site that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC at the SECs site: http://www.sec.gov.

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, MBHI Capital
Trust III, MBHI Capital Trust IV, 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

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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 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

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internally or by making acquisitions, are
expected to maintain strong capital positions substantially
above the minimum levels.


As of December 31, 2003, 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 14.7% and a Tier 1 capital to
risk-weighted assets ratio of 13.7% and a leverage ratio of 8.9%
as of December 31, 2003.

As a bank 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.

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, continue to, 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
has involved further review of the adequacy of the Banks
overall risk management practices, including the proper
identification and classifications of problem loans. On
April 24, 2003, the Federal Reserve and the Illinois
Commissioner completed the on-site portion of their regularly
scheduled annual examination of the Companys banking
subsidiaries. The Company received the examination report during
the third quarter of

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2003. The Company is in discussions with the
regulators over some form of regulatory action. See Recent
Regulatory Developments on page 7 for more
information.


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 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, 2003 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 12.9% and a total
capital to risk-weighted assets ratio of 14.0%. 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

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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
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 and does not meet the definition of a well capitalized
bank.

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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 2003, the Banks were assessed deposit
insurance in the aggregate amount of $241,000. 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 $38.8 million of transaction accounts and 10% on the
remainder. The first $6.6 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.

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.

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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. Midwest Bank
Insurance Services, L.L.C. is an independent insurance agency
established by Midwest Bank and Trust Company in 1998. Porter
Insurance Agency, Inc. and Midwest Bank Insurance Services,
L.L.C. are 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.

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.

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.

14



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##### Table of Contents



Statement under the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995: The Company
and its representatives may, from time to time, make written or
oral statements that are forward-looking and provide
information other than historical information, including
statements contained in the Form 10-K, the Companys
other filings with the Securities and Exchange Commission or in
communications to its stockholders. These statements involve
known and unknown risks, uncertainties and other factors that
may cause actual results to be materially different from any
results, levels of activity, performance or achievements
expressed or implied by any forward-looking statement. These
factors include, among other things, the factors listed below.


In some cases, the Company has identified
forward-looking statements by such words or phrases as
will likely result, is confident that,
expects, should, could,
may, will continue to,
believes, anticipates,
predicts, forecasts,
estimates, projects,
potential, intends, or similar
expressions identifying forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995, including the negative of those words and phrases.
These forward-looking statements are based on managements
current views and assumptions regarding future events, future
business conditions, and the outlook for the Company based on
currently available information. These forward-looking
statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those
expressed in, or implied by, these statements. The Company
wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date
made.

In connection with the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995, the
Company is hereby identifying important factors that could
affect the Companys financial performance and could cause
the Companys actual results for future periods to differ
materially from any opinions or statements expressed with
respect to future periods in any forward-looking statements.

Among the factors that could have an impact on
the Companys ability to achieve operating results, growth
plan goals, and the beliefs expressed or implied in
forward-looking statements are:



| |   |                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Managements ability to reduce and
    effectively manage interest rate risk and the impact of interest
    rates in general on the volatility of the Companys net
    interest income;                                                                                                                                                                    
|
| |  | Fluctuations in the value of the Companys
    investment securities;                                                                                                                                                                                                                                                                                       
|
| |  | The ability to attract and retain senior
    management experienced in banking and financial services;                                                                                                                                                                                                                                                      
|
| |  | The sufficiency of allowances for loan losses to
    absorb the amount of actual losses inherent in the existing
    portfolio of loans;                                                                                                                                                                                                                    
|
| |  | The Companys ability to adapt successfully
    to technological changes to compete effectively in the
    marketplace;                                                                                                                                                                                                                                     
|
| |  | Credit risks and risks from concentrations (by
    geographic area and by industry) within the Banks loan
    portfolio;                                                                                                                                                                                                                                   
|
| |  | The effects of competition from other commercial
    banks, thrifts, mortgage banking firms, consumer finance
    companies, credit unions, securities brokerage firms, insurance
    companies, money market and other mutual funds, and other
    financial institutions operating in the Companys market or
    elsewhere or providing similar services;
|
| |  | The failure of assumptions underlying the
    establishment of allowances for loan losses and estimation of
    values of collateral and various financial assets and
    liabilities;                                                                                                                                                                      
|
| |  | Volatility of rate sensitive deposits;                                                                                                                                                                                                                                                                                                                      
|
| |  | Operational risks, including data processing
    system failures or fraud;                                                                                                                                                                                                                                                                                  
|
| |  | Asset/liability matching risks and liquidity
    risks;                                                                                                                                                                                                                                                                                                     
|
| |  | Changes in the economic environment, competition,
    or other factors that may influence the anticipated growth rate
    of loans and deposits, the quality of the loan portfolio and
    loan and deposit pricing, and the                                                                                                                                

15



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##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Companys ability to successfully pursue
    acquisition and expansion strategies and integrate any acquired
    companies;                                                                                                                                                                                                                                            
|
| |  | The impact from liabilities arising from legal or
    administrative proceedings on the financial condition of the
    Company;                                                                                                                                                                                                                                        
|
| |  | Possible administrative or enforcement actions of
    banking regulators in connection with any material failure of
    the Banks to comply with banking laws, rules or regulations,
    including the failure of Midwest Bank and Trust Company to
    comply with any written agreement it may enter into with the
    Federal Reserve and the Illinois Commissioner;
|
| |  | Governmental monetary and fiscal policies, as
    well as legislative and regulatory changes, that may result in
    the imposition of costs and constraints on the Company through
    higher FDIC insurance premiums, significant fluctuations in
    market interest rates, increases in capital requirements, and
    operational limitations;                     
|
| |  | Changes in general economic or industry
    conditions, nationally or in the communities in which the
    Company conducts business;                                                                                                                                                                                                                                   
|
| |  | Changes in accounting principles, policies, or
    guidelines affecting the businesses conducted by the Company;                                                                                                                                                                                                                                                       
|
| |  | Acts of war or terrorism; and                                                                                                                                                                                                                                                                                                                                          
|
| |  | Other economic, competitive, governmental,
    regulatory, and technical factors affecting the Companys
    operations, products, services, and prices.                                                                                                                                                                                                               

The Company wishes to caution that the foregoing
list of important factors may not be all-inclusive and
specifically declines to undertake any obligation to publicly
revise any forward-looking statements that have been made to
reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or
unanticipated events.

With respect to forward-looking statements set
forth in the notes to consolidated financial statements,
including those relating to contingent liabilities and legal
proceedings, some of the factors that could affect the ultimate
disposition of those contingencies are changes in applicable
laws, the development of facts in individual cases, settlement
opportunities, and the actions of plaintiffs, judges, and juries.

EXECUTIVE OFFICERS OF THE REGISTRANT

Listed below are the executive officers of the
Company as of March 12, 2004.

Brad A. Luecke (53) 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 Investment
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.

Daniel R. Kadolph, CPA (41) 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 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 (55) 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

16



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##### Table of Contents



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 was
named Executive Vice President  Retail Banking at
Midwest Bank and Trust Company in 2004. 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 (46) 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.

Michelle T. Holman (44) 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.

Sheldon Bernstein (57) was named a Senior
Vice President of the Company in 2001. Mr. Bernstein has
served as President 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 (46) 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 (46) was named a Senior
Vice President of the Company in 2000. Mr. Karaba was named
President 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 (42) 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.

17



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##### Table of Contents








|        |           
|------- | ----------
|Item 2. | Properties

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

|                                                          |  |                |      |                   |  |           |       |  |  |  |        | 
|--------------------------------------------------------- |  | -------------- | ---- | ----------------- |  | --------- | ----- |  |  |  | ------ | 
|                                                          |  | Date           |      | Net Book Value at |  | Leased or
|Location                                                  |  | Acquired       |      | December 31, 2003 |  | Owned    
|                                                          |  |                |      |                   |  |          
|                                                          |  |               
|                                                          |  | (In Thousands)
|Principal Office                                          |  |                |      |                   |  |           |       |  |  |  |        | 
|501 West North Avenue
    Melrose Park, Illinois 60160    |  |                | 1987 |                   |  | $         | 1,221 |  |  |  | Owned  | 
|                                                         
|Midwest Bank and Trust Company Banking
    Offices        |  |                |      |                   |  |           |       |  |  |  |        | 
|                                                         
|Cook County Region                                        |  |                |      |                   |  |           |       |  |  |  |        | 
|1606 North Harlem Avenue
    Elmwood Park, Illinois 60607 |  |                | 1959 |                   |  |           | 1,660 |  |  |  | Owned  | 
|300 South Michigan Avenue
    Chicago, Illinois 60604     |  |                | 1986 |                   |  |           |      |  |  |  | Leased | 
|4012 North Pulaski Road
    Chicago, Illinois 60641       |  |                | 1993 |                   |  |           | 975   |  |  |  | Owned  | 
|7227 West Addison Street
    Chicago, Illinois 60634      |  |                | 1996 |                   |  |           | 1,155 |  |  |  | Owned  | 
|1601 North Milwaukee Avenue*
    Chicago, Illinois 60647  |  |                | 1980 |                   |  |           | 182   |  |  |  | Owned  | 
|8301 West Lawrence*
    Norridge, Illinois 60656          |  |                | 1976 |                   |  |           | 5     |  |  |  | **     | 
|                                                         
|DuPage County Region                                      |  |                |      |                   |  |           |       |  |  |  |        | 
|500 West Chestnut Street
    Hinsdale, Illinois 60521     |  |                | 1991 |                   |  |           | 1,615 |  |  |  | Owned  | 
|927 Curtiss Street
    Downers Grove, Illinois 60515      |  |                | 1996 |                   |  |           | 3     |  |  |  | Leased | 
|505 North Roselle Road
    Roselle, Illinois 60172        |  |                | 1999 |                   |  |           | 2,078 |  |  |  | Owned  | 
|                                                         
|McHenry County Region                                     |  |                |      |                   |  |           |       |  |  |  |        | 
|17622 Depot Street
    Union, Illinois 60180              |  |                | 1987 |                   |  |           | 50    |  |  |  | Owned  | 
|2045 East Algonquin Road
    Algonquin, Illinois 60102    |  |                | 1994 |                   |  |           | 741   |  |  |  | Owned  | 
|204 E. State Road
    Island Lake, Illinois 60042         |  |                | 1998 |                   |  |           | 328   |  |  |  | Owned  | 
|5555 Bull Valley Road
    McHenry, Illinois 60050         |  |                | 1998 |                   |  |           | 1,244 |  |  |  | Owned  | 
|Old McHenry Road*
    Long Grove, Illinois                |  |                | 1980 |                   |  |           | 2,941 |  |  |  | Owned  | 
|                                                         
|Midwest Bank of Western Illinois Banking
    Offices      |  |                |      |                   |  |           |       |  |  |  |        | 
|200 East Broadway
    Monmouth, Illinois 61462            |  |                | 1993 |                   |  |           | 2,346 |  |  |  | Owned  | 
|612 West Main Street
    Galesburg, Illinois 61401        |  |                | 1996 |                   |  |           | 515   |  |  |  | Owned  | 
|Schuyler Street
    Oquawka, Illinois 61469               |  |                | 1991 |                   |  |           | 61    |  |  |  | Owned  | 

18



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##### Table of Contents



|                                                   |  |                |      |                   |  |           |     |  |  |  |        | 
|-------------------------------------------------- |  | -------------- | ---- | ----------------- |  | --------- | --- |  |  |  | ------ | 
|                                                   |  | Date           |      | Net Book Value at |  | Leased or
|Location                                           |  | Acquired       |      | December 31, 2003 |  | Owned    
|                                                   |  |                |      |                   |  |          
|                                                   |  |               
|                                                   |  | (In Thousands)
|104 S.E. 3rd Avenue
    Aledo, Illinois 61231      |  |                | 1999 |                   |  |           | 150 |  |  |  | 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.

Management believes that the facilities are of
sound construction, in good operating condition, appropriately
insured, and adequately equipped for carrying on the business of
the Company.






|        |                  
|------- | -----------------
|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.




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 March 12, 2004, 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 Company
repurchased 35,000 common shares in 2002, and no common shares
were purchased in 2003. 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  
|     |                |      |   |      
|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 | 
|2003 |                |      |   |       |  |  |   |      
|     | First Quarter  |      | $ | 21.13 |  |  | $ | 16.01 | 
|     | Second Quarter |      |   | 20.55 |  |  |   | 16.81 | 
|     | Third Quarter  |      |   | 23.20 |  |  |   | 19.42 | 
|     | Fourth Quarter |      |   | 24.15 |  |  |   | 21.84 | 

19



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##### Table of Contents



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

|     |                |  |   |      |  |  |  |  | 
|---- | -------------- |  | - | ---- |  |  |  |  | 
|2002 |                |  |   |      |  |  |  | 
|     | First Quarter  |  | $ | 0.10 |  |  |  |  | 
|     | Second Quarter |  |   | 0.10 |  |  |  |  | 
|     | Third Quarter  |  |   | 0.10 |  |  |  |  | 
|     | Fourth Quarter |  |   | 0.10 |  |  |  |  | 
|2003 |                |  |   |      |  |  |  | 
|     | First Quarter  |  | $ | 0.10 |  |  |  |  | 
|     | Second Quarter |  |   | 0.10 |  |  |  |  | 
|     | Third Quarter  |  |   | 0.12 |  |  |  |  | 
|     | Fourth Quarter |  |   | 0.12 |  |  |  |  | 

Holders of common stock are entitled to receive
such dividends 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 Companys obligated
mandatory redeemable trust preferred securities. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity.
While the Board of Directors expects to continue to declare
dividends quarterly, there can be no assurance that dividends
will be paid in the future.

The Company has formed four statutory trusts
between June 2000 and December 2003 to issue a combination of
$20.0 million in fixed rate trust preferred securities
through one statutory trust and $34.0 million in floating
rate trust preferred securities through three statutory trusts.
The fixed rate offering was a retail placement filed with the
SEC. The three floating rate offerings were pooled private
placements exempt from registration under the Securities Act
pursuant to Section 4(2) thereunder. The Company has
provided a full, irrevocable, and unconditional subordinated
guarantee of the obligations of the four trusts under the
preferred securities. The Company is obligated to fund dividends
on these securities before it can pay dividends on its shares of
common stock. See Note 13 to the consolidated financial
statements. These four trusts are detailed below as follows:

|                       |  |            |                   |        |  |      |            |            |  |            |            |   |  |  |                   |  |  |  |                   | 
|---------------------- |  | ---------- | ----------------- | ------ |  | ---- | ---------- | ---------- |  | ---------- | ---------- | - |  |  | ----------------- |  |  |  | ----------------- | 
|                       |  |            |                   |        |  |      |            | Mandatory  |  | Optional  
|                       |  |            |                   |        |  |      |            | Redemption |  | Redemption
|Issuer                 |  | Issue Date |                   | Amount |  | Rate |            | Date       |  | Date      
|                       |  |            |                   |        |  |      |            |            |  |           
|MBHI Capital Trust I   |  |            | June 7, 2000      |        |  | $    | 20,000,000 |            |  |            | 10.0%      |   |  |  | June 7, 2030      |  |  |  | June 7, 2005      | 
|MBHI Capital Trust II  |  |            | October 29, 2002  |        |  | $    | 15,000,000 |            |  |            | LIBOR+3.45 | % |  |  | November 7, 2032  |  |  |  | November 7, 2007  | 
|MBHI Capital Trust III |  |            | December 19, 2003 |        |  | $    | 9,000,000  |            |  |            | LIBOR+3.00 | % |  |  | December 30, 2033 |  |  |  | December 30, 2008 | 
|MBHI Capital Trust IV  |  |            | December 19, 2003 |        |  | $    | 10,000,000 |            |  |            | LIBOR+2.85 | % |  |  | January 23, 2034  |  |  |  | January 23, 2008  | 

20



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##### 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,                      
|                           |                                                                 |                                              
|                           |                                                                 | 2003                                          |   | 2002    |   | 2001 |   | 2000    |   | 1999
|                           |                                                                 |                                               |   |         |   |      |   |         |   |     
|                           |                                                                 |                                              
|                           |                                                                 | (Dollars in thousands, except per share data)
|Statement of Income Data:  |                                                                 |                                               |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |       
|                           | Total interest income                                           |                                               | $ | 112,079 |   |      | $ | 112,721 |   |      | $ | 113,132 |   |  | $ | 109,792 |   |  | $ | 84,146 |  
|                           | Total interest expense                                          |                                               |   | 49,797  |   |      |   | 53,319  |   |      |   | 65,665  |   |  |   | 64,032  |   |  |   | 44,262 |  
|                           |                                                                 |                                               |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |       
|                           | Net interest income                                             |                                               |   | 62,282  |   |      |   | 59,402  |   |      |   | 47,467  |   |  |   | 45,760  |   |  |   | 39,884 |  
|                           | Provision for loan losses                                       |                                               |   | 10,205  |   |      |   | 18,532  |   |      |   | 2,220   |   |  |   | 1,850   |   |  |   | 2,203  |  
|                           | Other income                                                    |                                               |   | 23,086  |   |      |   | 14,008  |   |      |   | 12,802  |   |  |   | 7,695   |   |  |   | 6,734  |  
|                           | Other expenses                                                  |                                               |   | 43,495  |   |      |   | 33,909  |   |      |   | 31,463  |   |  |   | 29,360  |   |  |   | 25,774 |  
|                           |                                                                 |                                               |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |       
|                           | Income before income taxes                                      |                                               |   | 31,668  |   |      |   | 20,969  |   |      |   | 26,586  |   |  |   | 22,245  |   |  |   | 18,641 |  
|                           | Provision for income taxes                                      |                                               |   | 8,887   |   |      |   | 4,661   |   |      |   | 8,704   |   |  |   | 7,632   |   |  |   | 6,750  |  
|                           |                                                                 |                                               |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |       
|                           | Net income                                                      |                                               | $ | 22,781  |   |      | $ | 16,308  |   |      | $ | 17,882  |   |  | $ | 14,613  |   |  | $ | 11,891 |  
|                           |                                                                 |                                               |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |       
|Per Share Data(1):         |                                                                 |                                               |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |       
|                           | Earnings per share (basic)                                      |                                               | $ | 1.28    |   |      | $ | 1.01    |   |      | $ | 1.11    |   |  | $ | 0.91    |   |  | $ | 0.72   |  
|                           | Earnings per share (diluted)                                    |                                               |   | 1.25    |   |      |   | 0.99    |   |      |   | 1.09    |   |  |   | 0.90    |   |  |   | 0.71   |  
|                           | Cash dividends declared                                         |                                               |   | 0.44    |   |      |   | 0.40    |   |      |   | 0.40    |   |  |   | 0.35    |   |  |   | 0.23   |  
|                           | Book value at end of year                                       |                                               |   | 8.01    |   |      |   | 7.12    |   |      |   | 5.99    |   |  |   | 5.13    |   |  |   | 4.15   |  
|                           | Tangible book value at end of year                              |                                               |   | 7.77    |   |      |   | 6.83    |   |      |   | 5.87    |   |  |   | 4.99    |   |  |   | 4.00   |  
|Selected Financial Ratios: |                                                                 |                                               |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |       
|                           | Return on average assets(5)                                     |                                               |   | 1.02    | % |      |   | 0.86    | % |      |   | 1.12    | % |  |   | 1.07    | % |  |   | 1.04   | %
|                           | Return on average equity(6)                                     |                                               |   | 15.45   |   |      |   | 14.81   |   |      |   | 19.50   |   |  |   | 20.57   |   |  |   | 16.39  |  
|                           | Dividend payout ratio                                           |                                               |   | 34.43   |   |      |   | 39.61   |   |      |   | 36.02   |   |  |   | 38.64   |   |  |   | 32.28  |  
|                           | Average equity to average assets                                |                                               |   | 6.60    |   |      |   | 5.83    |   |      |   | 5.75    |   |  |   | 5.18    |   |  |   | 6.31   |  
|                           | Tier 1 risk-based capital                                       |                                               |   | 13.68   |   |      |   | 10.49   |   |      |   | 9.93    |   |  |   | 11.02   |   |  |   | 11.11  |  
|                           | Total risk-based capital                                        |                                               |   | 14.74   |   |      |   | 11.74   |   |      |   | 10.82   |   |  |   | 11.94   |   |  |   | 12.20  |  
|                           | Net interest margin (tax equivalent)(7)(8)                      |                                               |   | 3.17    |   |      |   | 3.46    |   |      |   | 3.31    |   |  |   | 3.65    |   |  |   | 3.75   |  
|                           | Loan to deposit ratio                                           |                                               |   | 68.16   |   |      |   | 81.74   |   |      |   | 82.82   |   |  |   | 75.95   |   |  |   | 66.58  |  
|                           | Net overhead expense to average assets(2)                       |                                               |   | 1.15    |   |      |   | 1.15    |   |      |   | 1.40    |   |  |   | 1.66    |   |  |   | 1.70   |  
|                           | Efficiency ratio(3)                                             |                                               |   | 50.74   |   |      |   | 47.40   |   |      |   | 52.21   |   |  |   | 53.90   |   |  |   | 55.84  |  
|Loan Quality Ratios:       |                                                                 |                                               |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |       
|                           | Allowance for loan losses to total loans at the
    end of year |                                               |   | 1.45    |   |      |   | 1.83    |   |      |   | 1.01    |   |  |   | 1.04    |   |  |   | 1.17   |  
|                           | Provision for loan losses to total loans                        |                                               |   | 0.94    |   |      |   | 1.63    |   |      |   | 0.22    |   |  |   | 0.22    |   |  |   | 0.34   |  
|                           | Net loans charged off to average total loans                    |                                               |   | 0.79    |   |      |   | 0.73    |   |      |   | 0.07    |   |  |   | 0.11    |   |  |   | 0.21   |  
|                           | Nonperforming loans to total loans at the end of
    year(4)    |                                               |   | 1.45    |   |      |   | 2.78    |   |      |   | 0.24    |   |  |   | 0.26    |   |  |   | 0.37   |  
|                           | Nonperforming assets to total assets(9)                         |                                               |   | 1.00    |   |      |   | 1.60    |   |      |   | 0.15    |   |  |   | 0.23    |   |  |   | 0.40   |  
|                           | Allowance for loan losses to nonperforming loans                |                                               |   | 1.00    | x |      |   | 0.66    | x |      |   | 4.28    | x |  |   | 3.82    | x |  |   | 3.19   | x

21



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##### Table of Contents



|                    |                                   |                        |   |           |  |      |   |           |  |      |   |           |  |  |   |           |  |  |   |           | 
|------------------- | --------------------------------- | ---------------------- | - | --------- |  | ---- | - | --------- |  | ---- | - | --------- |  |  | - | --------- |  |  | - | --------- | 
|                    |                                   |                       
|                    |                                   | December 31,          
|                    |                                   |                       
|                    |                                   | 2003                   |   | 2002      |  | 2001 |   | 2000      |  | 1999
|                    |                                   |                        |   |           |  |      |   |           |  |     
|                    |                                   |                       
|                    |                                   | (Dollars in thousands)
|Balance Sheet Data: |                                   |                        |   |           |  |      |   |           |  |      |   |           |  |  |   |           |  |  |   |          
|                    | Total assets                      |                        | $ | 2,264,149 |  |      | $ | 2,009,047 |  |      | $ | 1,810,422 |  |  | $ | 1,467,770 |  |  | $ | 1,256,462 | 
|                    | Total earning assets              |                        |   | 2,061,747 |  |      |   | 1,908,533 |  |      |   | 1,711,030 |  |  |   | 1,371,519 |  |  |   | 1,184,546 | 
|                    | Year-to-date average assets       |                        |   | 2,234,293 |  |      |   | 1,889,511 |  |      |   | 1,593,939 |  |  |   | 1,370,386 |  |  |   | 1,148,675 | 
|                    | Total loans                       |                        |   | 1,081,296 |  |      |   | 1,136,704 |  |      |   | 1,003,386 |  |  |   | 824,632   |  |  |   | 646,455   | 
|                    | Allowance for loan losses         |                        |   | 15,714    |  |      |   | 20,754    |  |      |   | 10,135    |  |  |   | 8,593     |  |  |   | 7,567     | 
|                    | Total deposits                    |                        |   | 1,586,411 |  |      |   | 1,390,648 |  |      |   | 1,211,520 |  |  |   | 1,085,786 |  |  |   | 970,954   | 
|                    | Total borrowings                  |                        |   | 512,160   |  |      |   | 462,382   |  |      |   | 442,150   |  |  |   | 289,093   |  |  |   | 196,075   | 
|                    | Stockholders equity              |                        |   | 143,081   |  |      |   | 114,951   |  |      |   | 96,214    |  |  |   | 82,576    |  |  |   | 67,694    | 
|                    | Tangible stockholders equity(10) |                        |   | 138,721   |  |      |   | 111,929   |  |      |   | 94,272    |  |  |   | 80,463    |  |  |   | 65,320    | 



---



|    |                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Restated for 3-for-2 stock split paid on
    July 9, 2002.                                                                                                                                                             
|   
|(2) | Noninterest income, excluding security gains and
    trading account profits or losses, less noninterest expense
    divided by average assets.                                                                        
|   
|(3) | Noninterest income, excluding security gains and
    trading account profits or losses, plus net interest income on a
    fully tax-equivalent basis divided by noninterest expense
    excluding amortization expense.
|   
|(4) | Includes total nonaccrual, impaired and all other
    loans 90 days or more past due.                                                                                                                                  
|   
|(5) | Net income divided by year-to-date average assets.                                                                                                                                                                     
|   
|(6) | Net income divided by year-to-date average equity.                                                                                                                                                                     
|   
|(7) | Net interest income, on a fully tax-equivalent
    basis, divided by year-to-date average earning assets.                                                                                                              
|   
|(8) | The following table reconciles reported net
    interest income on a tax-equivalent basis for the periods
    presented:                                                                                               

|                                                 |  |      |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|------------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                 |  | 2003 |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                                 |  |      |        |      |  |      |        |      |  |     
|Net interest income                              |  | $    | 62,282 |      |  | $    | 59,402 |      |  | $    | 47,467 |  |  | $ | 45,760 |  |  | $ | 39,884 | 
|Tax-equivalent adjustment to net interest income |  |      | 4,333  |      |  |      | 2,890  |      |  |      | 2,624  |  |  |   | 1,304  |  |  |   | 974    | 
|                                                 |  |      |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Net interest income, fully tax-equivalent basis  |  | $    | 66,615 |      |  | $    | 62,292 |      |  | $    | 50,091 |  |  | $ | 47,064 |  |  | $ | 40,858 | 
|                                                 |  |      |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 



|    |                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------
|(9) | Includes total nonaccrual, all other loans
    90 days or more past due, and other real estate owned.



|     |                                                                                                                                                                                                
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Stockholders equity less goodwill net of
    deposit premium. The following table reconciles reported
    stockholders equity to tangible stockholders equity
    for the periods presented:

|                              |  |      |         |      |  |      |         |      |  |      |        |  |  |   |        |  |  |   |        | 
|----------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                              |  | 2003 |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                              |  |      |         |      |  |      |         |      |  |     
|Stockholders equity          |  | $    | 143,081 |      |  | $    | 114,951 |      |  | $    | 96,214 |  |  | $ | 82,576 |  |  | $ | 67,694 | 
|Goodwill                      |  |      | 4,360   |      |  |      | 3,022   |      |  |      | 1,942  |  |  |   | 2,113  |  |  |   | 2,374  | 
|                              |  |      |         |      |  |      |         |      |  |      |        |  |  |   |        |  |  |   |        | 
|Tangible stockholders equity |  | $    | 138,721 |      |  | $    | 111,929 |      |  | $    | 94,272 |  |  | $ | 80,463 |  |  | $ | 65,320 | 
|                              |  |      |         |      |  |      |         |      |  |      |        |  |  |   |        |  |  |   |        | 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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

22



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##### Table of Contents



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 income, increase in cash surrender value of
life insurance, and other income. Other expenses include
salaries and employee benefits, occupancy and equipment
expenses, professional services, 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 is dependent on the Companys asset/liability
management procedures to cope with such changes. The provision
for loan losses is based 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.

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 the 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
represents managements estimate of probable credit losses
inherent in the loan portfolio. Estimating the amount of the
allowance for loan losses requires significant judgment and the
use of estimates related to the amount and timing of expected
future cash flows on impaired loans, estimated losses on pools
of homogeneous loans based on historical loss experience, and
consideration of current economic trends and conditions, all of
which may be susceptible to significant change. The loan
portfolio also represents the largest asset type on the
consolidated balance sheet. Loan losses are charged off against
the allowance, while recoveries of amounts previously charged
off are credited to the allowance. A provision for loan losses
is charged to operations based on managements periodic
evaluation of the factors previously mentioned, as well as other
pertinent factors.

The allowance for loan losses consists of an
allocated component and an unallocated component. The components
of the allowance represent an estimation pursuant to either
Statement of Financial Accounting Standards No.
(SFAS) 5, Accounting for Contingencies, or
SFAS 114, Accounting by Creditors for Impairment of a Loan.
The allocated component of the allowance for loan losses
reflects expected losses resulting from analyses developed
through specific credit allocations for individual loans and
historical loss experience for each loan category. The specific
credit allocations are based on regular analyses of all loans
over a fixed-dollar amount where the internal credit rating is
at or below a predetermined classification. These analyses
involve a high degree of judgment in estimating the amount of
loss associated with specific loans, including estimating the
amount and timing of future cash flows and collateral values.
The Companys historical loss experience is updated
quarterly. The allocated component of the allowance for loan
losses also includes consideration of concentrations and changes
in portfolio mix and volume, and other qualitative factors.

23



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##### Table of Contents



There are many factors affecting the allowance
for loan losses; some are quantitative while others require
qualitative judgment. The process for determining the allowance
(which management believes adequately considers all of the
potential factors which potentially result in credit losses)
includes subjective elements and, therefore, may be susceptible
to significant change. To the extent actual outcomes differ from
management estimates, additional provision for credit losses
could be required that could adversely affect earnings or
financial position in future periods.

Evaluation of Securities for
Impairment: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 securities
available-for-sale are based on the net proceeds and the
adjusted carrying amounts of the securities sold, using the
specific identification method. Declines in the fair value of
held-to-maturity and available-for-sale securities below their
cost that are deemed to be other than temporary are reflected in
earnings as realized losses. In estimating other than temporary
losses, management considers (1) the length of time and
extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the
issuer, and (3) the intent and ability of the Company to
retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
The evaluation also considers the impact that impairment may
have on future capital, earnings, and liquidity.

Fair Value of Financial Instruments and
Derivatives:Fair values of financial
instruments, including derivatives, 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 the
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
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. As a consequence, fair values cannot be determined
with precision. Changes in assumptions or in market conditions
could significantly affect these estimates.

Consolidated Results of Operations

Set forth below are some highlights of 2003
results compared to 2002.



| |   |                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Net income increased $6.5 million, or 39.7%,
    to $22.8 million for the year ended December 31, 2003
    compared to $16.3 million for the year ended
    December 31, 2002.                                                                      
|
| |  | The return on average assets was 1.02% for 2003,
    0.86% for 2002, and 1.12% for 2001.                                                                                                                                                            
|
| |  | The return on average equity increased to 15.45%
    in 2003 from 14.81% in 2002 due to the increase in earnings,
    while decreasing from 19.50% in 2001 due to increased lower
    incremental increases in earnings and larger amount of equity.
|
| |  | Total assets increased $255.1 million, or
    12.7%, to $2.3 billion as of December 31, 2003 from
    $2.0 billion as of December 31, 2002.                                                                                                         



| |                      
| | ---------------------
| | 2003 Compared to 2002

Net Interest Income.Net interest income on a fully tax-equivalent basis increased
$4.3 million, or 6.94%, to $66.6 million in 2003 from
$62.3 million in 2002, despite a modest increase in
interest income on total earning assets of $801,000 in 2003. The
driving force behind the increase in net interest income was a
$3.5 million decrease in interest expense. Interest income
on loans (on a fully tax-equivalent basis) decreased
$2.2 million to $72.7 million in 2003 from
$74.9 million in 2002 due to a decrease in average rates
paid on

24



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##### Table of Contents



loans from 6.87% to 6.52%. Interest income on
securities (on a fully tax-equivalent basis) increased
$2.8 million to $43.4 million in 2003 from
$40.6 million in 2002 even though yields on securities
decreased from 5.81% in 2002 to 4.53% in 2003 due to the
recognition of premium amortization expense associated with the
mortgage-backed securities the Company holds in its investment
securities portfolio as a result of the low interest rate
environment. The increase in interest income on securities
occurred due to a significant increase in average securities
from $698.9 million in 2002 to $959.8 million in 2003.


Interest expense on interest-bearing liabilities
decreased $3.5 million to $49.8 million in 2003 from
$53.3 million in 2002, or 6.61%, due primarily to the
repricing opportunities on core deposits and certificates of
deposits which decreased interest expense by $4.0 million
in 2003. Interest expense on total borrowings increased slightly
due to a $56.2 million increase in average repurchase
agreements during 2003. In addition, the Company issued
$9.0 million in Company obligated mandatory redeemable
trust preferred securities with an initial rate of 4.17% and
$10.0 million in Company obligated mandatory redeemable
trust preferred securities with an initial rate of 4.02% in
December 2003 with a maturity of 30 years. The added
interest expense from these issuances will be fully reflected
during 2004.

The net interest margin on a fully tax-equivalent
basis decreased from 3.46% in 2002 to 3.17% for 2003. The
primary reason for the decrease in net interest margin was
attributable to the 128 basis points decrease in yields on
investment portfolio as a result of the $3.8 million
increase in premium amortization expense associated with the
mortgage-back securities. Total loan yields decreased
35 basis points due to a prime rate reduction in early 2003
and highly competitive pricing conditions in local markets. The
decrease in investment and loan yields were partially offset by
a 69 basis point reduction in average deposit rates and a
62 basis point reduction in average borrowing rates.

Provision for Loan
Losses.The provision for loan losses
decreased $8.3 million, or 44.9%, to $10.2 million in
2003 from $18.5 million in 2002 primarily due to reduced
provisions relating to decreased nonperforming loans, which
decreased from $31.5 million at December 31, 2002 to
$15.7 million at December 31, 2003 (see Non-Performing
Loans). As of December 31, 2003, the allowance for loan
losses totaled $15.7 million, or 1.45% of total loans, and
was equal to 100.2% of nonperforming loans.

Other Income.The
Companys total other income increased $9.1 million,
or 64.8%, to $23.1 million in 2003 from $14.0 million
in 2002. Other income as a percentage of average assets was
1.03% for the year ended 2003 compared to 0.74% for the year
ended 2002. Net gains on securities transactions were
$5.3 million for the year ended December 31, 2003
compared to $1.5 million for the year ended
December 31, 2002. Net trading account profits were
$348,000 for the year ended December 31, 2002 compared the
net trading account loss of $14,000 for the year ended
December 31, 2003. The increase in total other income in
2003 compared to 2002 was in part due to a $3.5 million
increase in option income to $5.3 million for the year
ended December 31, 2003, as a result of the purchase or
sale of various covered put or call options, with terms less
than 90 days, on securities held in the Companys
investment portfolio and cash available to counterparties.
Option fees are part of managements ongoing strategy to
manage risk in the securities portfolio and take advantage of
favorable market conditions. Management has effectively used the
proceeds from selling covered call and put options to offset net
interest margin compression and has administered such sales in a
coordinated process with the Companys overall
asset/liability management. Management is prepared to adjust its
option strategy when interest rates increase or decrease. There
is no assurance that the option fee income realized through
December 31, 2003 is sustainable in future periods.

Insurance and brokerage commissions, service
charges on deposits as a result of a larger deposit base,
mortgage banking fees, and derivative income, associated with
two terminated credit default swaps which is included in other
income, increased by $754,000, $164,000, $355,000, and $903,000,
respectively.

Other Expenses.The
Companys total other expenses increased $9.6 million,
or 28.3%, to $43.5 million in 2003 from $33.9 million
in 2002. Other expenses as a percentage of average assets were
1.95% for the year ended 2003 compared to 1.79% for the year
ended 2002. Net overhead expenses were 1.15% as a percentage of

25



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##### Table of Contents



average assets in 2003 and 2002. The increase in
total other expenses in 2003 was primarily due to the following
factors:




| |   |                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Salaries and employee benefits increased
    $3.5 million due to an increase in full-time staff
    positions, including brokerage staff and employees added through
    the acquisition of BFFC, growth in existing banking centers, and
    annual merit increases;
|
| |  | Occupancy and equipment increased
    $1.7 million in 2003 compared to the prior year primarily
    due to the increase premises and equipment as a result of the
    BFFC acquisition;                                                                              
|
| |  | Professional services increased $1.7 million
    for 2003 compared to 2002 due to higher legal and consulting
    fees.                                                                                                                                              
|
| |  | Other real estate expense increased by $888,000
    for 2003 compared to 2002.                                                                                                                                                                                       
|
| |  | Other increases in incremental expenses of
    $700,000 are attributed to the three banking centers acquired
    through the BFFC acquisition.                                                                                                                       
|
| |  | Amortization expense on intangible assets
    increased by $517,000 in 2003 compared to 2002 due to the BFFC
    acquisition.                                                                                                                                        

These increases contributed to an increase in the
efficiency ratio from 50.74% for the year ended
December 31, 2003 compared to 47.40% 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 $8.9 million in 2003
compared to $4.7 million in 2002, an increase of 90.7%. The
effective tax rate in 2003 was 28.1% compared to 22.2% in 2002.
The 22.2% tax rate in 2002 was a result of a new favorable
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.



| |                      
| | ---------------------
| | 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. While interest income on total
earning assets decreased slightly by $145,000 for the year ended
December 31, 2002 compared to December 31, 2001, total
interest expense decreased dramatically as the Company was able
to reprice its deposit in a lower interest rate environment in
2001.

Other factors that contributed to net interest
income in 2002 include the following:



| |   |                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Interest income on loans (on a fully
    tax-equivalent basis) 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, despite the increase in
    average loans outstanding of $172.7 million.
|
| |  | Interest expense on interest-bearing liabilities
    decreased $12.3 million primarily due to the repricing
    opportunities on core deposits and certificates of deposits.                                                                                                                                                         
|
| |  | Interest expense on other borrowings increased
    slightly 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.                                                                                
|
| |  | The Company issued $15.0 million in Company
    obligated mandatory redeemable trust preferred securities in
    October 2002 at an initial rate of 5.27% with a maturity of
    30 years. The increased interest expense will be fully
    recognized is 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

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##### Table of Contents



nonperforming loans. 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.


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 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 This increase in
option income was offset by a $1.8 million decrease in net
securities gains and trading profits. The following other income
items increased in 2002: 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. These modest increases
coupled with the increases in other income contributed to the
lowering of the efficiency ratio was 47.40% for the year ended
December 31, 2002 compared to 52.2% in 2001.

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 $4.7 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.

27



---



##### Table of Contents



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 35.0% tax rate for 2003, 2002,
and 2001.

|                                                           |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |         |         |        |  |  |      |      |  |   |           |         |  |   |         |        |  |  |      |      | 
|---------------------------------------------------------- | ----------------------------------- | ------------------------------- | --------- | -------- |  | ------- | ------- | ------- |  | -------- | ---- | ------- |  | ------- | --------- | -------- |  | ------- | ------- | ------ |  |  | ---- | ---- |  | - | --------- | ------- |  | - | ------- | ------ |  |  | ---- | ---- | 
|                                                           |                                     |                                
|                                                           |                                     | For the Year Ended December 31,
|                                                           |                                     |                                
|                                                           |                                     |                                 |           |          |  |        
|                                                           |                                     | 2003                            |           | 2002     |  | 2001   
|                                                           |                                     |                                 |           |          |  |        
|                                                           |                                     | Average                         |           |          |  | Average |         | Average |  |          |      | Average |  | Average |           |          |  | Average
|                                                           |                                     | Balance                         |           | Interest |  | Rate    |         | Balance |  | Interest |      | Rate    |  | Balance |           | Interest |  | Rate   
|                                                           |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |        
|                                                           |                                     |                                
|                                                           |                                     | (Dollars in thousands)         
|Interest-Earning Assets:                                   |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |         |         |        |  |  |      |      |  |   |           |         |  |   |         |        |  |  |      |     
|Federal funds sold and interest-bearing due from
    banks |                                     | $                               | 24,956    |          |  | $       | 247     |         |  |          | 0.99 | %       |  | $       | 8,796     |          |  | $       | 138     |        |  |  | 1.57 | %    |  | $ | 6,132     |         |  | $ | 250     |        |  |  | 4.08 | %   
|Securities:                                                |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |         |         |        |  |  |      |      |  |   |           |         |  |   |         |        |  |  |      |     
|                                                           | Taxable(1)                          |                                 |           | 888,577  |  |         |         | 38,647  |  |          |      | 4.35    |  |         |           | 639,226  |  |         |         | 36,542 |  |  |      | 5.72 |  |   |           | 555,053 |  |   |         | 36,362 |  |  |      | 6.55 | 
|                                                           | Exempt from federal income taxes(1) |                                 |           | 71,191   |  |         |         | 4,786   |  |          |      | 6.72    |  |         |           | 59,662   |  |         |         | 4,033  |  |  |      | 6.76 |  |   |           | 33,255  |  |   |         | 2,320  |  |  |      | 6.98 | 
|                                                           |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |         |         |        |  |  |      |      |  |   |           |         |  |   |         |        |  |  |      |     
|Total securities                                           |                                     |                                 | 959,768   |          |  |         | 43,433  |         |  |          | 4.53 |         |  |         | 698,888   |          |  |         | 40,575  |        |  |  | 5.81 |      |  |   | 588,308   |         |  |   | 38,682  |        |  |  | 6.58 |     
|Loans(2)(3)(4):                                            |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |         |         |        |  |  |      |      |  |   |           |         |  |   |         |        |  |  |      |     
|                                                           | Commercial loans(1)                 |                                 |           | 219,277  |  |         |         | 12,764  |  |          |      | 5.82    |  |         |           | 229,525  |  |         |         | 13,175 |  |  |      | 5.74 |  |   |           | 215,722 |  |   |         | 17,067 |  |  |      | 7.91 | 
|                                                           | Commercial real estate loans(1)     |                                 |           | 704,514  |  |         |         | 47,031  |  |          |      | 6.68    |  |         |           | 684,414  |  |         |         | 49,044 |  |  |      | 7.17 |  |   |           | 526,309 |  |   |         | 45,145 |  |  |      | 8.58 | 
|                                                           | Agricultural loans(1)               |                                 |           | 57,112   |  |         |         | 3,657   |  |          |      | 6.40    |  |         |           | 53,853   |  |         |         | 3,702  |  |  |      | 6.87 |  |   |           | 49,332  |  |   |         | 3,994  |  |  |      | 8.10 | 
|                                                           | Consumer real estate loans          |                                 |           | 122,390  |  |         |         | 8,249   |  |          |      | 6.74    |  |         |           | 108,339  |  |         |         | 7,805  |  |  |      | 7.20 |  |   |           | 112,053 |  |   |         | 9,291  |  |  |      | 8.29 | 
|                                                           | Consumer installment loans          |                                 |           | 12,992   |  |         |         | 1,031   |  |          |      | 7.94    |  |         |           | 14,183   |  |         |         | 1,172  |  |  |      | 8.26 |  |   |           | 14,194  |  |   |         | 1,327  |  |  |      | 9.35 | 
|                                                           |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |         |         |        |  |  |      |      |  |   |           |         |  |   |         |        |  |  |      |     
|Total loans                                                |                                     |                                 | 1,116,285 |          |  |         | 72,732  |         |  |          | 6.52 |         |  |         | 1,090,314 |          |  |         | 74,898  |        |  |  | 6.87 |      |  |   | 917,610   |         |  |   | 76,824  |        |  |  | 8.37 |     
|                                                           |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |         |         |        |  |  |      |      |  |   |           |         |  |   |         |        |  |  |      |     
|Total interest-earning assets                              |                                     | $                               | 2,101,009 |          |  | $       | 116,412 |         |  |          | 5.54 | %       |  | $       | 1,797,998 |          |  | $       | 115,611 |        |  |  | 6.43 | %    |  | $ | 1,512,050 |         |  | $ | 115,756 |        |  |  | 7.66 | %   
|                                                           |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |         |         |        |  |  |      |      |  |   |           |         |  |   |         |        |  |  |      |     
|Interest-Bearing Liabilities:                              |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |         |         |        |  |  |      |      |  |   |           |         |  |   |         |        |  |  |      |     
|Deposits:                                                  |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |         |         |        |  |  |      |      |  |   |           |         |  |   |         |        |  |  |      |     
|Interest-bearing demand deposits                           |                                     | $                               | 181,474   |          |  | $       | 2,143   |         |  |          | 1.18 | %       |  |         | 135,943   |          |  | $       | 2,035   |        |  |  | 1.50 | %    |  | $ | 129,116   |         |  | $ | 3,409   |        |  |  | 2.64 | %   
|Money-market demand accounts and savings accounts          |                                     |                                 | 326,491   |          |  |         | 3,853   |         |  |          | 1.18 |         |  |         | 260,151   |          |  |         | 4,271   |        |  |  | 1.64 |      |  |   | 264,603   |         |  |   | 8,369   |        |  |  | 3.16 |     
|Time deposits less than $100,000                           |                                     |                                 | 718,495   |          |  |         | 20,130  |         |  |          | 2.80 |         |  |         | 590,978   |          |  |         | 21,298  |        |  |  | 3.60 |      |  |   | 480,036   |         |  |   | 27,372  |        |  |  | 5.70 |     
|Time deposits of $100,000 or more                          |                                     |                                 | 111,372   |          |  |         | 2,670   |         |  |          | 2.40 |         |  |         | 133,991   |          |  |         | 4,132   |        |  |  | 3.08 |      |  |   | 95,389    |         |  |   | 4,991   |        |  |  | 5.23 |     
|Public funds                                               |                                     |                                 | 56,453    |          |  |         | 1,269   |         |  |          | 2.25 |         |  |         | 72,495    |          |  |         | 2,300   |        |  |  | 3.17 |      |  |   | 69,137    |         |  |   | 3,378   |        |  |  | 4.89 |     
|                                                           |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |         |         |        |  |  |      |      |  |   |           |         |  |   |         |        |  |  |      |     
|Total interest-bearing deposits                            |                                     |                                 | 1,394,285 |          |  |         | 30,065  |         |  |          | 2.16 |         |  |         | 1,193,558 |          |  |         | 34,036  |        |  |  | 2.85 |      |  |   | 1,038,281 |         |  |   | 47,519  |        |  |  | 4.58 |     
|Borrowings:                                                |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |         |         |        |  |  |      |      |  |   |           |         |  |   |         |        |  |  |      |     
|Federal funds purchased and repurchase agreements          |                                     |                                 | 223,608   |          |  |         | 6,111   |         |  |          | 2.73 |         |  |         | 172,011   |          |  |         | 4,518   |        |  |  | 2.63 |      |  |   | 60,674    |         |  |   | 2,221   |        |  |  | 3.66 |     
|FHLB advances                                              |                                     |                                 | 256,583   |          |  |         | 10,862  |         |  |          | 4.23 |         |  |         | 235,923   |          |  |         | 13,004  |        |  |  | 5.51 |      |  |   | 243,706   |         |  |   | 13,528  |        |  |  | 5.55 |     
|Notes payable and other borrowings                         |                                     |                                 | 41,848    |          |  |         | 2,759   |         |  |          | 6.59 |         |  |         | 30,472    |          |  |         | 1,761   |        |  |  | 5.78 |      |  |   | 26,146    |         |  |   | 2,397   |        |  |  | 9.17 |     
|                                                           |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |         |         |        |  |  |      |      |  |   |           |         |  |   |         |        |  |  |      |     
|Total borrowings                                           |                                     |                                 | 522,039   |          |  |         | 19,732  |         |  |          | 3.78 |         |  |         | 438,406   |          |  |         | 19,283  |        |  |  | 4.40 |      |  |   | 330,526   |         |  |   | 18,146  |        |  |  | 5.49 |     
|                                                           |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |         |         |        |  |  |      |      |  |   |           |         |  |   |         |        |  |  |      |     
|Total interest-bearing liabilities                         |                                     | $                               | 1,916,324 |          |  | $       | 49,797  |         |  |          | 2.60 |         |  | $       | 1,631,964 |          |  | $       | 53,319  |        |  |  | 3.27 | %    |  | $ | 1,368,807 |         |  | $ | 65,665  |        |  |  | 4.80 | %   
|                                                           |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |         |         |        |  |  |      |      |  |   |           |         |  |   |         |        |  |  |      |     
|Net interest income (tax equivalent)(1)                    |                                     |                                 |           |          |  | $       | 66,615  |         |  |          | 2.94 | %       |  |         |           |          |  | $       | 62,292  |        |  |  | 3.16 | %    |  |   |           |         |  | $ | 50,091  |        |  |  | 2.86 | %   
|                                                           |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |         |         |        |  |  |      |      |  |   |           |         |  |   |         |        |  |  |      |     
|Net interest margin (tax equivalent)(1)                    |                                     |                                 |           |          |  |         |         |         |  |          | 3.17 | %       |  |         |           |          |  |         |         |        |  |  | 3.46 | %    |  |   |           |         |  |   |         |        |  |  | 3.31 | %   
|Net interest income(2)                                     |                                     |                                 |           |          |  | $       | 62,282  |         |  |          |      |         |  |         |           |          |  | $       | 59,402  |        |  |  |      |      |  |   |           |         |  | $ | 47,467  |        |  |  |      |     
|                                                           |                                     |                                 |           |          |  |         |         |         |  |          |      |         |  |         |           |          |  |         |         |        |  |  |      |      |  |   |           |         |  |   |         |        |  |  |      |     
|Net interest margin(2)                                     |                                     |                                 |           |          |  |         |         |         |  |          | 2.96 | %       |  |         |           |          |  |         |         |        |  |  | 3.30 | %    |  |   |           |         |  |   |         |        |  |  | 3.14 | %   

28



---



##### Table of Contents





---



|    |                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------
|(1) | Adjusted for 35% tax rate in 2003, 2002, and 2001
    and adjusted for the dividends-received deduction where
    applicable.
|   
|(2) | Not adjusted for 35% tax rate in 2003, 2002, and
    2001 or for the dividends-received deduction.                           
|   
|(3) | Nonaccrual loans are included in the average
    balance; however, these loans are not earning any interest.                 
|   
|(4) | Includes loan fees; these fees are immaterial.                                                                               

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.

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 35.0% tax rate in 2003,
2002, and 2001. 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,
|                              |                                                            |                                
|                              |                                                            |                                 |       |                      
|                              |                                                            | 2003 Compared to 2002           |       | 2002 Compared to 2001
|                              |                                                            | Change Due to                   |       | Change Due to        
|                              |                                                            |                                 |       |                      
|                              |                                                            | Net                             |       | Volume                |   | Rate |       | Net    |   | Volume |        | Rate   
|                              |                                                            |                                 |       |                       |   |      |       |        |   |        |        |        
|Interest-Earning Assets:      |                                                            |                                 |       |                       |   |      |       |        |   |        |        |         |   |   |        |         |   |   |       |        |   |   |       |        
|                              | Federal funds sold and interest-bearing due from
    banks |                                 | $     | 109                   |   |      | $     | 176    |   |        | $      | (67     | ) |   | $      | (112    | ) |   | $     | 81     |   |   | $     | (193    | )
|                              | Securities taxable                                         |                                 |       | 2,105                 |   |      |       | 12,141 |   |        |        | (10,036 | ) |   |        | 180     |   |   |       | 5,132  |   |   |       | (4,952  | )
|                              | Securities exempt from federal income taxes                |                                 |       | 753                   |   |      |       | 775    |   |        |        | (22     | ) |   |        | 1,713   |   |   |       | 1,787  |   |   |       | (74     | )
|                              | Commercial loans                                           |                                 |       | (411                  | ) |      |       | (595   | ) |        |        | 184     |   |   |        | (3,892  | ) |   |       | 1,035  |   |   |       | (4,927  | )
|                              | Commercial real estate loans                               |                                 |       | (2,013                | ) |      |       | 1,411  |   |        |        | (3,424  | ) |   |        | 3,899   |   |   |       | 12,120 |   |   |       | (8,221  | )
|                              | Agricultural loans                                         |                                 |       | (45                   | ) |      |       | 217    |   |        |        | (262    | ) |   |        | (292    | ) |   |       | 345    |   |   |       | (637    | )
|                              | Consumer real estate loans                                 |                                 |       | 444                   |   |      |       | 969    |   |        |        | (525    | ) |   |        | (1,486  | ) |   |       | (300   | ) |   |       | (1,186  | )
|                              | Consumer installment loans                                 |                                 |       | (141                  | ) |      |       | (96    | ) |        |        | (45     | ) |   |        | (155    | ) |   |       | (1     | ) |   |       | (154    | )
|                              |                                                            |                                 |       |                       |   |      |       |        |   |        |        |         |   |   |        |         |   |   |       |        |   |   |       |        
|                              | Total interest-earning assets                              |                                 | $     | 801                   |   |      | $     | 14,998 |   |        | $      | (14,197 | ) |   | $      | (145    | ) |   | $     | 20,199 |   |   | $     | (20,344 | )
|                              |                                                            |                                 |       |                       |   |      |       |        |   |        |        |         |   |   |        |         |   |   |       |        |   |   |       |        
|Interest-Bearing Liabilities: |                                                            |                                 |       |                       |   |      |       |        |   |        |        |         |   |   |        |         |   |   |       |        |   |   |       |        
|                              | Interest-bearing demand deposits                           |                                 | $     | 108                   |   |      | $     | 593    |   |        | $      | (485    | ) |   | $      | (1,374  | ) |   | $     | 172    |   |   | $     | (1,546  | )
|                              | Money market demand accounts and savings accounts          |                                 |       | (418                  | ) |      |       | 943    |   |        |        | (1,361  | ) |   |        | (4,098  | ) |   |       | (139   | ) |   |       | (3,959  | )
|                              | Time deposits of less than $100,000                        |                                 |       | (1,168                | ) |      |       | 4,092  |   |        |        | (5,260  | ) |   |        | (6,074  | ) |   |       | 5,428  |   |   |       | (11,502 | )
|                              | Time deposits of $100,000 or more                          |                                 |       | (1,462                | ) |      |       | (631   | ) |        |        | (831    | ) |   |        | (859    | ) |   |       | 1,608  |   |   |       | (2,467  | )
|                              | Public funds                                               |                                 |       | (1,031                | ) |      |       | (445   | ) |        |        | (586    | ) |   |        | (1,078  | ) |   |       | 157    |   |   |       | (1,235  | )
|                              | Federal funds purchased and repurchase agreements          |                                 |       | 1,593                 |   |      |       | 1,404  |   |        |        | 189     |   |   |        | 2,297   |   |   |       | 3,078  |   |   |       | (781    | )
|                              | FHLB advances                                              |                                 |       | (2,142                | ) |      |       | 1,066  |   |        |        | (3,208  | ) |   |        | (524    | ) |   |       | (430   | ) |   |       | (94     | )
|                              | Notes payable and other borrowings                         |                                 |       | 998                   |   |      |       | 725    |   |        |        | 273     |   |   |        | (636    | ) |   |       | 351    |   |   |       | (987    | )
|                              |                                                            |                                 |       |                       |   |      |       |        |   |        |        |         |   |   |        |         |   |   |       |        |   |   |       |        
|                              | Total interest-bearing liabilities                         |                                 | $     | (3,522                | ) |      | $     | 7,747  |   |        | $      | (11,269 | ) |   | $      | (12,346 | ) |   | $     | 10,225 |   |   | $     | (22,571 | )
|                              |                                                            |                                 |       |                       |   |      |       |        |   |        |        |         |   |   |        |         |   |   |       |        |   |   |       |        
|Net interest                  |                                                            | $                               | 4,323 |                       |   | $    | 7,251 |        |   | $      | (2,928 | )       |   | $ | 12,201 |         |   | $ | 9,974 |        |   | $ | 2,227 |        
|                              |                                                            |                                 |       |                       |   |      |       |        |   |        |        |         |   |   |        |         |   |   |       |        |   |   |       |        

29



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Financial Condition



| |      
| | -----
| | Loans

The following table sets forth the composition of
the Companys loan portfolio as of the indicated dates.

|                          |                      |                |         |           |  |      |         |           |  |      |         |           |  |   |         |         |  |   |         |         | 
|------------------------- | -------------------- | -------------- | ------- | --------- |  | ---- | ------- | --------- |  | ---- | ------- | --------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                          |                      |               
|                          |                      | December 31,  
|                          |                      |               
|                          |                      | 2003           |         | 2002      |  | 2001 |         | 2000      |  | 1999
|                          |                      |                |         |           |  |      |         |           |  |     
|                          |                      |               
|                          |                      | (In thousands)
|Commercial                |                      | $              | 203,920 |           |  | $    | 229,764 |           |  | $    | 220,801 |           |  | $ | 205,698 |         |  | $ | 187,822 |        
|Commercial real estate    |                      |                | 711,891 |           |  |      | 730,836 |           |  |      | 612,687 |           |  |   | 448,988 |         |  |   | 300,071 |        
|Agricultural              |                      |                | 58,144  |           |  |      | 57,426  |           |  |      | 48,772  |           |  |   | 47,773  |         |  |   | 41,745  |        
|Consumer real estate(1)   |                      |                | 96,107  |           |  |      | 105,391 |           |  |      | 109,329 |           |  |   | 108,780 |         |  |   | 103,681 |        
|Consumer installment      |                      |                | 12,124  |           |  |      | 14,573  |           |  |      | 13,375  |           |  |   | 14,529  |         |  |   | 13,889  |        
|                          |                      |                |         |           |  |      |         |           |  |      |         |           |  |   |         |         |  |   |         |        
|                          | Total loans, gross   |                |         | 1,082,186 |  |      |         | 1,137,990 |  |      |         | 1,004,964 |  |   |         | 825,768 |  |   |         | 647,208 | 
|Net deferred fees         |                      |                | (890    | )         |  |      | (1,286  | )         |  |      | (1,578  | )         |  |   | (1,136  | )       |  |   | (753    | )      
|                          |                      |                |         |           |  |      |         |           |  |      |         |           |  |   |         |         |  |   |         |        
|                          | Total loans          |                |         | 1,081,296 |  |      |         | 1,136,704 |  |      |         | 1,003,386 |  |   |         | 824,632 |  |   |         | 646,455 | 
|Allowance for loan losses |                      |                | (15,714 | )         |  |      | (20,754 | )         |  |      | (10,135 | )         |  |   | (8,593  | )       |  |   | (7,567  | )      
|                          |                      |                |         |           |  |      |         |           |  |      |         |           |  |   |         |         |  |   |         |        
|                          | Net loans            |                | $       | 1,065,582 |  |      | $       | 1,115,950 |  |      | $       | 993,251   |  |   | $       | 816,039 |  |   | $       | 638,888 | 
|                          |                      |                |         |           |  |      |         |           |  |      |         |           |  |   |         |         |  |   |         |        
|Loans held for sale:      |                      |                |         |           |  |      |         |           |  |      |         |           |  |   |         |         |  |   |         |        
|                          | Consumer real estate |                | $       | 1,571     |  |      | $       | 4,924     |  |      | $       | 3,414     |  |   | $       | 616     |  |   | $       | 449     | 
|                          |                      |                |         |           |  |      |         |           |  |      |         |           |  |   |         |         |  |   |         |        



---



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

Total loans decreased $55.4 million to
$1.1 billion as of December 31, 2003 from
December 31, 2002, a decrease of 4.9%. The Company sold
$141.9 million of mortgage loans during the first quarter
of 2003 that were acquired from BFFC in an effort to reduce the
interest rate risk of the portfolio.

During 2003, overall loan demand was down as a
result of current economic conditions, the successful completion
of several large construction projects by existing borrowers and
other competitive factors. In addition, the decrease in loans
was due to a corporate commitment to tighter credit standards
and pricing disciplines applied to commercial and commercial
real estate loans to protect long-term profitability. Set forth
below are other highlights of the loan portfolio.



| |   |                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Commercial loans decreased $25.8 million to
    $203.9 million as of December 31, 2003 from
    $229.8 million as of December 31, 2002, a decrease of
    11.3% for the reasons indicated above.                                                                                                                                                                    
|
| |  | Commercial real estate loans decreased 2.6% from
    December 31, 2003 compared to December 31, 2002. The
    Company has added lending personnel to assist in the growth in
    this category on which the Company maintains a primary focus.                                                                                                                      
|
| |  | Agricultural loans increased slightly as of
    December 31, 2003.                                                                                                                                                                                                                                                                                                  
|
| |  | Consumer real estate loans decreased
    $9.3 million as of December 31, 2003, in part due to
    refinancing activity.                                                                                                                                                                                                                                             
|
| |  | Most consumer residential 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. The carrying value of these loans
    approximated their market value at that time.

The Company attempts to balance the types of
loans in its portfolio with the objective of reducing risk. Some
of the risks the Company attempts to reduce include:



| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

30



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| |   |                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.



| |                
| | ---------------
| | Loan Maturities

The following table sets forth the remaining
maturities, based upon contractual dates, for selected loan
categories as of December 31, 2003.

|                       |             |                |         |           |  |              |         |         |  |          |         |         |  |   |        |        |  |   |        |        |  |   |           |           | 
|---------------------- | ----------- | -------------- | ------- | --------- |  | ------------ | ------- | ------- |  | -------- | ------- | ------- |  | - | ------ | ------ |  | - | ------ | ------ |  | - | --------- | --------- | 
|                       |             |                |         |           |  |              |         |        
|                       |             |                |         | 1-5 Years |  | Over 5 Years |         |        
|                       |             | One Year       |         |           |  |              |         |        
|                       |             | Or Less        |         | Fixed     |  | Variable     |         | Fixed   |  | Variable |         | Total  
|                       |             |                |         |           |  |              |         |         |  |          |         |        
|                       |             |               
|                       |             | (In thousands)
|Commercial             |             | $              | 167,220 |           |  | $            | 17,606  |         |  | $        | 14,658  |         |  | $ | 2,936  |        |  | $ | 1,500  |        |  | $ | 203,920   |          
|Commercial real estate |             |                | 412,665 |           |  |              | 206,502 |         |  |          | 67,320  |         |  |   | 13,966 |        |  |   | 11,438 |        |  |   | 711,891   |          
|Agricultural           |             |                | 19,359  |           |  |              | 4,782   |         |  |          | 10,734  |         |  |   | 1,326  |        |  |   | 21,943 |        |  |   | 58,144    |          
|Consumer real estate   |             |                | 21,839  |           |  |              | 13,906  |         |  |          | 18,467  |         |  |   | 10,257 |        |  |   | 31,638 |        |  |   | 96,107    |          
|Consumer installment   |             |                | 5,807   |           |  |              | 5,505   |         |  |          |        |         |  |   | 812    |        |  |   |       |        |  |   | 12,124    |          
|                       |             |                |         |           |  |              |         |         |  |          |         |         |  |   |        |        |  |   |        |        |  |   |           |          
|Total loans, gross     |             |                | 626,890 |           |  |              | 248,301 |         |  |          | 111,179 |         |  |   | 29,297 |        |  |   | 66,519 |        |  |   | 1,082,186 |          
|Net deferred fees      |             |                | (890    | )         |  |              |        |         |  |          |        |         |  |   |       |        |  |   |       |        |  |   | (890      | )        
|                       |             |                |         |           |  |              |         |         |  |          |         |         |  |   |        |        |  |   |        |        |  |   |           |          
|                       | Total loans |                | $       | 626,006   |  |              | $       | 248,301 |  |          | $       | 111,179 |  |   | $      | 29,297 |  |   | $      | 66,519 |  |   | $         | 1,081,296 | 
|                       |             |                |         |           |  |              |         |         |  |          |         |         |  |   |        |        |  |   |        |        |  |   |           |          



| |                    
| | -------------------
| | 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 managements analysis of all
information available to it, including 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 transferred to
nonaccrual status if 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
based upon the specific facts of each situation. 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. 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.

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

|                                                                    |                            |                        |        |        |  |      |        |        |  |      |       |       |  |   |       |       |  |   |       |       | 
|------------------------------------------------------------------- | -------------------------- | ---------------------- | ------ | ------ |  | ---- | ------ | ------ |  | ---- | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                                                    |                            |                       
|                                                                    |                            | December 31,          
|                                                                    |                            |                       
|                                                                    |                            | 2003                   |        | 2002   |  | 2001 |        | 2000   |  | 1999
|                                                                    |                            |                        |        |        |  |      |        |        |  |     
|                                                                    |                            |                       
|                                                                    |                            | (Dollars in thousands)
|Nonaccrual and impaired loans not accruing                          |                            | $                      | 15,665 |        |  | $    | 29,035 |        |  | $    | 1,774 |       |  | $ | 1,168 |       |  | $ | 1,567 |      
|Impaired and other loans 90 days past due
    and accruing          |                            |                        | 18     |        |  |      | 2,514  |        |  |      | 595   |       |  |   | 1,082 |       |  |   | 806   |      
|                                                                    |                            |                        |        |        |  |      |        |        |  |      |       |       |  |   |       |       |  |   |       |      
|                                                                    | Total nonperforming loans  |                        |        | 15,683 |  |      |        | 31,549 |  |      |       | 2,369 |  |   |       | 2,250 |  |   |       | 2,373 | 
|Other real estate                                                   |                            |                        | 6,942  |        |  |      | 533    |        |  |      | 355   |       |  |   | 1,153 |       |  |   | 2,651 |      
|                                                                    |                            |                        |        |        |  |      |        |        |  |      |       |       |  |   |       |       |  |   |       |      
|                                                                    | Total nonperforming assets |                        | $      | 22,625 |  |      | $      | 32,082 |  |      | $     | 2,724 |  |   | $     | 3,403 |  |   | $     | 5,024 | 
|                                                                    |                            |                        |        |        |  |      |        |        |  |      |       |       |  |   |       |       |  |   |       |      
|Total nonperforming loans to total loans                            |                            |                        | 1.45   | %      |  |      | 2.78   | %      |  |      | 0.24  | %     |  |   | 0.26  | %     |  |   | 0.37  | %    
|Total nonperforming assets to total loans and
    other real estate |                            |                        | 2.08   |        |  |      | 2.82   |        |  |      | 0.27  |       |  |   | 0.41  |       |  |   | 0.77  |      
|Total nonperforming assets to total assets                          |                            |                        | 1.00   |        |  |      | 1.60   |        |  |      | 0.15  |       |  |   | 0.23  |       |  |   | 0.40  |      

During 2003, 2002, and 2001, the Company
recognized interest income on impaired loans of
$1.9 million, $207,000 and $69,000, respectively.

Nonperforming loans decreased $15.9 million
or 50.3% to $15.7 million at December 31, 2003 from
$31.5 million at December 31, 2002. A number of
problem loans were successfully collected during the year. Other
real estate increased $6.4 million in 2003 from $533,000 in
2002 to $6.9 million. This increase was due to the
reclassification from nonaccrual loans to other real estate
owned for a townhouse project which the Company will develop.
Total nonperforming assets decreased by $9.5 million from
$32.1 million in 2002 to $22.6 million in 2003.

Included in other real estate owned is one
property totaling $6.5 million. The fair market value of
this property was determined by a recent appraisal of the real
property. This property is a townhouse development for which the
borrower ceased construction activities on the project and a
construction manager has been appointed. The Company will
continue the development and has engaged a well established
construction contractor to complete the development in the next
two years. There are 101 townhouse units to be built, and the
Company expects full retirement of its outstanding other real
estate owned amount.



| |                                          
| | -----------------------------------------
| | 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 amount needed
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 personnel, 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
with the Companys independent loan review personnel
reviews the officers grades. In the event that the loan
downgraded during this review, the loan 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 allowance for loan losses represents
managements estimate of probable credit losses inherent in
the loan portfolio. Estimating the amount of the allowance for
loan losses requires significant judgment and the

32



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##### Table of Contents



use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated
losses on pools of homogeneous loans based on historical loss
experience, and consideration of current economic trends and
conditions, all of which may be susceptible to significant
change. The loan portfolio also represents the largest asset
type on the consolidated balance sheet. Loan losses are charged
off against the allowance, while recoveries of amounts
previously charged off are credited to the allowance. A
provision for loan losses is charged to operations based on
managements periodic evaluation of the factors previously
mentioned, as well as other pertinent factors.


The allowance for loan losses consists of an
allocated component and an unallocated component. The components
of the allowance represent an estimation done pursuant to either
Statement of Financial Accounting Standards No.
(SFAS) 5, Accounting for Contingencies, or
SFAS 114, Accounting by Creditors for Impairment of a Loan.
The allocated component of the allowance for loan losses
reflects expected losses resulting from analyses developed
through specific credit allocations for individual loans and
historical loss experience for each loan category. The specific
credit allocations are based on regular analyses of all loans
over a fixed-dollar amount where the internal credit rating is
at or below a predetermined classification. These analyses
involve a high degree of judgment in estimating the amount of
loss associated with specific loans, including estimating the
amount and timing of future cash flows and collateral values.
The Companys historical loss experience is updated
quarterly. The allocated component of the allowance for loan
losses also includes consideration of concentrations and changes
in portfolio mix and volume, and other qualitative factors.

There are many factors affecting the allowance
for loan losses; some are quantitative while others require
qualitative judgment. The process for determining the allowance
(which management believes adequately considers all of the
potential factors which potentially result in credit losses)
includes subjective elements and, therefore, may be susceptible
to significant change. To the extent actual outcomes differ from
management estimates, additional provision for credit losses
could be required that could adversely affect earnings or
financial position in future periods.

33



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##### 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,
|                                                             |                              |                        
|                                                             |                              | 2003                    |           | 2002  |        | 2001 |           | 2000  |       | 1999
|                                                             |                              |                         |           |       |        |      |           |       |       |     
|                                                             |                              |                        
|                                                             |                              | (Dollars in thousands) 
|Average total loans                                          |                              | $                       | 1,116,285 |       |        | $    | 1,090,314 |       |       | $    | 917,610   |     |     | $ | 745,085 |     |       | $ | 583,683 |      
|                                                             |                              |                         |           |       |        |      |           |       |       |      |           |     |     |   |         |     |       |   |         |      
|Total loans at end of year                                   |                              | $                       | 1,081,296 |       |        | $    | 1,136,704 |       |       | $    | 1,003,386 |     |     | $ | 824,632 |     |       | $ | 646,455 |      
|                                                             |                              |                         |           |       |        |      |           |       |       |      |           |     |     |   |         |     |       |   |         |      
|Total nonperforming and impaired loans                       |                              | $                       | 15,683    |       |        | $    | 31,549    |       |       | $    | 2,369     |     |     | $ | 2,250   |     |       | $ | 2,373   |      
|                                                             |                              |                         |           |       |        |      |           |       |       |      |           |     |     |   |         |     |       |   |         |      
|Allowance at beginning of year                               |                              | $                       | 20,754    |       |        | $    | 10,135    |       |       | $    | 8,593     |     |     | $ | 7,567   |     |       | $ | 6,576   |      
|Allowance from acquired bank                                 |                              |                         | 300       |       |        |      |          |       |       |      |          |     |     |   |        |     |       |   |        |      
|Allowance adjustment for loan sale by related
    parties(1) |                              |                         | (6,685    | )     |        |      |          |       |       |      |          |     |     |   |        |     |       |   |        |      
|Charge-offs:                                                 |                              |                         |           |       |        |      |           |       |       |      |           |     |     |   |         |     |       |   |         |      
|                                                             | Commercial loans             |                         |           | 8,111 |        |      |           | 6,957 |       |      |           | 541 |     |   |         | 874 |       |   |         | 1,124 |      
|                                                             | Consumer real estate loans   |                         |           | 72    |        |      |           | 14    |       |      |           | 49  |     |   |         | 56  |       |   |         | 49    |      
|                                                             | Commercial real estate loans |                         |           | 1,526 |        |      |           | 651   |       |      |           | 231 |     |   |         | 89  |       |   |         | 120   |      
|                                                             | Agricultural loans           |                         |           | 168   |        |      |           | 284   |       |      |           |    |     |   |         | 11  |       |   |         |      |      
|                                                             | Consumer installment loans   |                         |           | 128   |        |      |           | 300   |       |      |           | 56  |     |   |         | 77  |       |   |         | 124   |      
|                                                             |                              |                         |           |       |        |      |           |       |       |      |           |     |     |   |         |     |       |   |         |      
|                                                             |                              | Total charge-offs       |           |       | 10,005 |      |           |       | 8,206 |      |           |     | 877 |   |         |     | 1,107 |   |         |       | 1,417 | 
|Recoveries:                                                  |                              |                         |           |       |        |      |           |       |       |      |           |     |     |   |         |     |       |   |         |      
|                                                             | Commercial loans             |                         |           | 1,081 |        |      |           | 206   |       |      |           | 168 |     |   |         | 256 |       |   |         | 108   |      
|                                                             | Consumer real estate loans   |                         |           | 2     |        |      |           | 47    |       |      |           | 2   |     |   |         | 6   |       |   |         | 1     |      
|                                                             | Commercial real estate loans |                         |           | 10    |        |      |           | 5     |       |      |           |    |     |   |         | 1   |       |   |         | 71    |      
|                                                             | Agricultural loans           |                         |           |      |        |      |           |      |       |      |           |    |     |   |         |    |       |   |         | 8     |      
|                                                             | Consumer installment loans   |                         |           | 52    |        |      |           | 35    |       |      |           | 29  |     |   |         | 20  |       |   |         | 17    |      
|                                                             |                              |                         |           |       |        |      |           |       |       |      |           |     |     |   |         |     |       |   |         |      
|                                                             |                              | Total recoveries        |           |       | 1,145  |      |           |       | 293   |      |           |     | 199 |   |         |     | 283   |   |         |       | 205   | 
|                                                             |                              |                         |           |       |        |      |           |       |       |      |           |     |     |   |         |     |       |   |         |      
|Net charge-offs                                              |                              |                         | 8,860     |       |        |      | 7,913     |       |       |      | 678       |     |     |   | 824     |     |       |   | 1,212   |      
|Provision for loan losses                                    |                              |                         | 10,205    |       |        |      | 18,532    |       |       |      | 2,220     |     |     |   | 1,850   |     |       |   | 2,203   |      
|                                                             |                              |                         |           |       |        |      |           |       |       |      |           |     |     |   |         |     |       |   |         |      
|Allowance at end of the year                                 |                              | $                       | 15,714    |       |        | $    | 20,754    |       |       | $    | 10,135    |     |     | $ | 8,593   |     |       | $ | 7,567   |      
|                                                             |                              |                         |           |       |        |      |           |       |       |      |           |     |     |   |         |     |       |   |         |      
|Net charge-off to average total loans                        |                              |                         | 0.79      | %     |        |      | 0.73      | %     |       |      | 0.07      | %   |     |   | 0.11    | %   |       |   | 0.21    | %    
|Allowance to total loans at end of year                      |                              |                         | 1.45      |       |        |      | 1.83      |       |       |      | 1.01      |     |     |   | 1.04    |     |       |   | 1.17    |      
|Allowance to nonperforming loans                             |                              |                         | 1.00      | x     |        |      | 0.66      | x     |       |      | 4.28      | x   |     |   | 3.82    | x   |       |   | 3.19    | x    



---



|    |                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Adjustment made following the March 26, 2003
    receipt of $13.3 million of proceeds relating to the sale
    of certain loans, of which $12.5 million was applied to
    outstanding principal, $750,000 to the letter of credit, and
    $67,000 applied to interest income and late charges. See
    Note 27 to the consolidated financial statements.

The provision for loan losses decreased
$8.3 million, or 44.9%, to $10.2 million for the year
ended December 31, 2003 from $18.5 million for the
year ended December 31, 2002. The allowance for loan losses
was $15.7 million at December 31, 2003 and
$20.8 million at December 31, 2002. Total recoveries
on loans previously charged off were $1.1 million for the
year ended December 31, 2003 and $293,000 for the year
ended December 31, 2002. These recoveries were due
primarily to payments from customers bankruptcy
proceedings or payment plans on charged-off loans.

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Net charge-offs increased $947,000 to
$8.9 million, or 0.79% of average loans in 2003 compared to
$7.9 million, or 0.73%, of average loans in 2002. Allowance
for loan losses to nonperforming loans ratio was 1.00x and 0.66x
at December 31, 2003 and December 31, 2002,
respectively.

Further decreases in nonperforming loans are
anticipated in 2004, and prospects exist for a partial recovery
of loans previously charged off in 2003. The Company anticipates
net charge-offs and the provision for loan losses to be reduced
from 2002 and 2003 levels.

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,          
|                       |                                 |                       
|                       |                                 |                        |       |          |  |        |       |          |   |       
|                       |                                 | 2003                   |       | 2002     |  | 2001   |       | 2000     |   | 1999  
|                       |                                 |                        |       |          |  |        |       |          |   |       
|                       |                                 |                        |       | Loan     |  |        |       | Loan     |   |        |        | Loan     |  |        |       | Loan     |   |        |       | Loan    
|                       |                                 |                        |       | Category |  |        |       | Category |   |        |        | Category |  |        |       | Category |   |        |       | Category
|                       |                                 |                        |       | To       |  |        |       | To       |   |        |        | To       |  |        |       | To       |   |        |       | To      
|                       |                                 |                        |       | Gross    |  |        |       | Gross    |   |        |        | Gross    |  |        |       | Gross    |   |        |       | Gross   
|                       |                                 | Amount                 |       | Loans    |  | Amount |       | Loans    |   | Amount |        | Loans    |  | Amount |       | Loans    |   | Amount |       | Loans   
|                       |                                 |                        |       |          |  |        |       |          |   |        |        |          |  |        |       |          |   |        |       |         
|                       |                                 |                       
|                       |                                 | (Dollars in thousands)
|Commercial             |                                 | $                      | 7,242 |          |  |        | 18.84 | %        |   | $      | 15,392 |          |  |        | 20.19 | %        |   | $      | 5,339 |          |  |  | 22.00 | %      |   | $ | 4,579 |       |  |  | 24.91 | %      |   | $ | 3,771 |       |  |  | 29.02 | %     
|Commercial real estate |                                 |                        | 7,286 |          |  |        | 65.78 |          |   |        | 3,141  |          |  |        | 64.22 |          |   |        | 2,386 |          |  |  | 60.95 |        |   |   | 1,865 |       |  |  | 54.37 |        |   |   | 1,635 |       |  |  | 46.36 |       
|Agricultural           |                                 |                        | 190   |          |  |        | 5.37  |          |   |        | 426    |          |  |        | 5.05  |          |   |        | 737   |          |  |  | 4.86  |        |   |   | 659   |       |  |  | 5.79  |        |   |   | 637   |       |  |  | 6.45  |       
|Consumer real estate   |                                 |                        | 289   |          |  |        | 8.88  |          |   |        | 145    |          |  |        | 9.26  |          |   |        | 310   |          |  |  | 10.89 |        |   |   | 206   |       |  |  | 13.17 |        |   |   | 194   |       |  |  | 16.02 |       
|Consumer installment   |                                 |                        | 410   |          |  |        | 1.12  |          |   |        | 421    |          |  |        | 1.28  |          |   |        | 173   |          |  |  | 1.30  |        |   |   | 138   |       |  |  | 1.76  |        |   |   | 146   |       |  |  | 2.15  |       
|Unallocated            |                                 |                        | 297   |          |  |        |      |          |   |        | 1,229  |          |  |        |      |          |   |        | 1,190 |          |  |  |      |        |   |   | 1,146 |       |  |  |      |        |   |   | 1,184 |       |  |  |      |       
|                       |                                 |                        |       |          |  |        |       |          |   |        |        |          |  |        |       |          |   |        |       |          |  |  |       |        |   |   |       |       |  |  |       |        |   |   |       |       |  |  |       |       
|                       | Total allowance for loan losses |                        | $     | 15,714   |  |        |       | 100.00   | % |        | $      | 20,754   |  |        |       | 100.00   | % |        | $     | 10,135   |  |  |       | 100.00 | % |   | $     | 8,593 |  |  |       | 100.00 | % |   | $     | 7,567 |  |  |       | 100.00 | %
|                       |                                 |                        |       |          |  |        |       |          |   |        |        |          |  |        |       |          |   |        |       |          |  |  |       |        |   |   |       |       |  |  |       |        |   |   |       |       |  |  |       |       

During 2003, the Company had an increase in
problem credits specifically in commercial real estate. A few
loans accounted for the $4.1 million increase in the
allocation. The $8.2 million decrease in the allocation for
commercial loans reflects in part the purchase of certain loans
by related parties. The remainder of the decrease in commercial
loans is attributed to the successful workout of other
commercial loans which previously had specific allocations. The
Company also further evaluated other factors including: using
more recent loss history, quantitative factors, changes in risk
ratings, and increases in classified loans. The unallocated
portion of the allowance decreased by $932,000 as a result of
the above mentioned factors.

As of December 31, 2003, approximately 46.1%
of the allowance was allocated to commercial loans, while 74.2%
was allocated in the prior year, as a result of the
reclassification of certain commercial loans in the third and
fourth quarters of 2002. During March 2003, $13.3 million
of classified nonperforming loans were sold to an insider group.
For more information please see Note 27 to the consolidated
financial statements. During 2002 and 2003, the Company
experienced asset quality deterioration in commercial and
commercial real estate loans. Net commercial loan charge-offs
for 2002 and 2003 were $6.8 million and $7.0 million,
respectively. Commercial real estate net charge-offs were
$646,000 and $1.5 million for 2002 and 2003, respectively.
The trend of loans subject to adverse classification has
increased to $48.5 million at December 31, 2003 from
$43.2 million at December 31, 2002.

The Company utilizes an internal asset
classification system as a means of reporting problem and
potential problem assets. At each scheduled Bank Board of
Directors meeting, a watch list is presented, showing
significant loan relationships listed as Special Mention,
Substandard, and Doubtful. Set forth below is a discussion of
each of these classifications.

Special Mention:A
special mention extension of credit is defined as having
potential weaknesses that deserve managements close
attention. If left uncorrected, these potential weaknesses may,
at some future date, result in the deterioration of the
repayment prospects for the credit or the institutions
credit position. Special mention credits are not considered as
part of the classified extensions of credit category and do not
expose an institution to sufficient risk to warrant
classification. They are currently protected but are potentially
weak. They constitute an undue and unwarranted credit risk.

35



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##### Table of Contents



Loans in this category have some identifiable
problem, most notably slowness in payments, but, in
managements opinion, offer no immediate risk of loss. An
extension of credit that is not delinquent also may be
identified as special mention. These loans are classified due to
Bank managements actions or the servicing of the loan. The
lending officer may be unable to properly supervise the credit
because of an inadequate loan or credit agreement. There may be
questions regarding the condition of and/or control over
collateral. Economic or market conditions may unfavorably affect
the obligor in the future. A declining trend in the
obligors operations or an imbalanced position in the
balance sheet may exist, although it is not to the point that
repayment is jeopardized. Another example of a special mention
credit is one that has other deviations from prudent lending
practices.

If the Bank may have to consider relying on a
secondary or alternative source of repayment, then collection
may not yet be in jeopardy, but the loan may be considered
special mention. Other trends that indicate that the loan may
deteriorate further include such red flags as
continuous overdrafts, negative trends on a financial statement,
such as a deficit net worth, a delay in the receipt of financial
statements, accounts receivable ageings, etc. These loans on a
regular basis can be 30 days or more past due. Judgments,
tax liens, delinquent real estate taxes, cancellation of
insurance policies and exceptions to Bank policies are other
red flags.

Substandard:A
substandard extension of credit is inadequately protected by the
current sound worth and paying capacity of the obligor or of the
collateral pledged, if any. Extensions of credit so classified
must have a well-defined weakness or weaknesses that jeopardize
the liquidation of the debt. They are characterized by the
distinct possibility that the Bank will sustain some loss if the
deficiencies are not corrected. In other words, there is more
than normal risk of loss. Loss potential, while existing in the
aggregate amount of substandard credits, does not have to exist
in individual extensions of credit classified substandard.

The likelihood that a substandard loan will be
paid from the primary source of repayment is uncertain.
Financial deterioration is underway and very close attention is
warranted to insure that the loan is collected without a loss.
The Bank may be relying on a secondary source of repayment, such
as liquidating collateral, or collecting on guarantees. The
borrower cannot keep up with either the interest or principal
payments. If the Bank is forced into a subordinated or unsecured
position due to flaws in documentation, the loan may be
substandard. If the loan must be restructured, or interest rate
concessions made, it should be classified as such. If the bank
is contemplating foreclosure or legal action, the credit is
likely substandard.

Doubtful:An
extension of credit classified doubtful has all the weaknesses
inherent in one classified substandard with the added
characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing facts,
conditions and values, highly questionable and improbable. The
possibility of loss is extremely high, but because of certain
important and reasonably specific pending factors that may work
to the advantage of and strengthen the credit, its
classification as an estimated loss is deferred until its more
exact status may be determined. Pending factors may include a
proposed merger or acquisition, liquidation proceedings, capital
injection, perfecting liens on additional collateral, or
refinancing plans.

If the primary source of repayment is gone, and
there is doubt as to the quality of the secondary source, then
the loan will be considered doubtful. If a court suit is
pending, and is the only means of collection, a loan is
generally doubtful. As stated above, the loss amount in this
category is often undeterminable, and the loan is classified
doubtful until said loss can be determined.

Potential problem loans are loans included on the
watch list presented to the Board of Directors but where known
information about possible credit problems of borrowers causes
management to have serious doubts as to the ability of such
borrowers to comply with present loan repayment terms. At
December 31, 2003, special mention, substandard, and
doubtful classifications were $12.7 million,
$48.6 million, and $2.7 million, respectively,
compared to $6.7 million, $35.1 million, and
$1.4 million, respectively, at December 31, 2002.
Total classifications include those loans that have been
adversely classified by bank regulators and the Companys
internal loan review department. These amounts include
nonaccrual and impaired loans. Specific allocations attributed
to impaired loans were $5.5 million and $6.6 million,
respectively, at December 31, 2003 and 2002. The Company
continues to monitor its loan portfolio for adverse changes in
specific types of loans and overall.

36



---



##### Table of Contents



During early 2004, a $7.7 million commercial
asset based loan was downgraded to substandard. This borrower
continues to make its scheduled interest payments and is
exploring options to retire this loan with the Company. The
Company is monitoring this loan, and at present there is
adequate cash flow and collateral to continue to service the
debt as agreed. The Companys allowance for loan losses is
considered by management to be adequate at December 31,
2003.

The Companys determination as to the
classification of its assets and the amount of its valuation
allowances is subject to review by the Banks primary
regulators in the course of its regulatory examinations, which
can order the establishment of additional general or specific
loss allowances. There can be no assurance that regulators, in
reviewing the Companys loan portfolio, will not request
the Company to materially increase its allowance for loan
losses. Although management believes that adequate specific and
general loan loss allowances have been established, actual
losses are dependent upon future events and, as such, further
additions to the level of specific and general loan loss
allowances may become necessary.



| |           
| | ----------
| | Securities

The Company manages, via a centralized portfolio
management department, its securities portfolio to provide a
source of both liquidity and earnings. Each Bank has its own
asset/liability committee, which develops current investment
policies based upon its operating needs and market
circumstances. The investment policy of each Bank 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 Banks
investment policy is formally reviewed and approved annually by
its board of directors. The asset/liability committee of each
Bank is responsible for reporting and monitoring compliance with
the investment policy. Reports are provided to each Banks
board of directors and the Board of Directors of the Company on
a regular basis.

The total fair value of the securities portfolio
was $853.4 million as of December 31, 2003, or 97.1%
of amortized cost. The fair value of the securities portfolio
was $772.3 million and $705.3 million as of
December 31, 2002 and 2001, respectively.

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, 2003, 2002, and 2001 has been categorized as
either available-for-sale or held-to-maturity in accordance with
SFAS No. 115.

|                                                              |  |                        |        |                    |  |           |        |            |  |           |         |            |  |           |         |  |  |   |         |  |  |   |         |  |  |  |        |  
|------------------------------------------------------------- |  | ---------------------- | ------ | ------------------ |  | --------- | ------ | ---------- |  | --------- | ------- | ---------- |  | --------- | ------- |  |  | - | ------- |  |  | - | ------- |  |  |  | ------ | -
|                                                              |  |                       
|                                                              |  | December 31, 2003     
|                                                              |  |                       
|                                                              |  |                        |        |                    |  |          
|                                                              |  | Held-to-Maturity       |        | Available-for-Sale |  | Total    
|                                                              |  |                        |        |                    |  |          
|                                                              |  | Amortized              |        | Fair               |  | Amortized |        |            |  | Amortized |         |            |  | % of     
|                                                              |  | Cost                   |        | Value              |  | Cost      |        | Fair Value |  | Cost      |         | Fair Value |  | Portfolio
|                                                              |  |                        |        |                    |  |           |        |            |  |           |         |            |  |          
|                                                              |  |                       
|                                                              |  | (Dollars in thousands)
|U.S. Treasury and obligations of
    U.S. government agencies |  | $                      |       |                    |  | $         |       |            |  | $         | 360,280 |            |  | $         | 336,604 |  |  | $ | 360,280 |  |  | $ | 336,604 |  |  |  | 40.99  |  
|Obligations of states and political subdivisions              |  |                        | 12,840 |                    |  |           | 13,468 |            |  |           | 35,124  |            |  |           | 37,202  |  |  |   | 47,964  |  |  |   | 50,670  |  |  |  | 5.46   |  
|Mortgage-backed securities                                    |  |                        | 43,234 |                    |  |           | 43,771 |            |  |           | 172,420 |            |  |           | 173,510 |  |  |   | 215,654 |  |  |   | 217,281 |  |  |  | 24.54  |  
|Equity securities                                             |  |                        |       |                    |  |           |       |            |  |           | 159,391 |            |  |           | 154,760 |  |  |   | 159,391 |  |  |   | 154,760 |  |  |  | 18.13  |  
|Other bonds                                                   |  |                        |       |                    |  |           |       |            |  |           | 95,625  |            |  |           | 94,064  |  |  |   | 95,625  |  |  |   | 94,064  |  |  |  | 10.88  |  
|                                                              |  |                        |        |                    |  |           |        |            |  |           |         |            |  |           |         |  |  |   |         |  |  |   |         |  |  |  |        |  
|Total                                                         |  | $                      | 56,074 |                    |  | $         | 57,239 |            |  | $         | 822,840 |            |  | $         | 796,140 |  |  | $ | 878,914 |  |  | $ | 853,379 |  |  |  | 100.00 | %
|                                                              |  |                        |        |                    |  |           |        |            |  |           |         |            |  |           |         |  |  |   |         |  |  |   |         |  |  |  |        |  

37



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##### Table of Contents



|                                                              |  |                        |         |                    |  |           |         |            |  |           |         |            |  |           |         |  |  |   |         |  |  |   |         |  |  |  |        |  
|------------------------------------------------------------- |  | ---------------------- | ------- | ------------------ |  | --------- | ------- | ---------- |  | --------- | ------- | ---------- |  | --------- | ------- |  |  | - | ------- |  |  | - | ------- |  |  |  | ------ | -
|                                                              |  |                       
|                                                              |  | 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              |        | Fair               |  | Amortized |        |            |  | Amortized |         |            |  | % of     
|                                                              |  | Cost                   |        | 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 | %
|                                                              |  |                        |        |                    |  |           |        |            |  |           |         |            |  |           |         |  |  |   |         |  |  |   |         |  |  |  |        |  

The Company has a number of available for sale
securities that have unrealized losses at December 31, 2003
and 2002, see Note 3 to the consolidated financials
statements for further information. During the past two years,
the Company has purchased securities in the lowest interest rate
environment in over 40 years. In a rising interest rate
environment, the fair value of securities will likely decrease.

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.

The Company has various interest rate swap
transactions as of December 31, 2003, which resulted in the
Company converting $137.5 million of its FHLB advance fixed
rate debt to floating rate debt. The swap transactions require
payment of interest by the Company at the one-month LIBOR rate
plus a spread and, in turn, the Company receives an interest
payment based on a fixed rate.

In 2003, the Company entered into 3,000
U.S. Treasury 10-year note futures contracts with a
notional value of $300.0 million and a delivery date of
March 2004. The Company sold these contracts in order to hedge
certain U.S. Agency notes held in its available-for-sale
portfolio. The Companys objective was to offset changes in
the fair market value of the U.S. Agency notes with changes in
the fair market value of the futures contracts, thereby reducing
interest rate risk. These futures contracts are fair value
hedges with the changes in market value of the futures contracts
as well as the changes in the market value of the hedged items
charged or credited to earnings on a quarterly basis to net
gains on securities transactions. For the period ending
December 31, 2003, the ineffective portion of the hedge
transactions resulted in a net loss of $553,000.

38



---



##### Table of Contents



The Company has bought and sold various put and
call options, with terms less than 90 days, on
mortgage-backed securities during 2003 and 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 consolidated financial
statements. Option fees are part of managements ongoing
strategy to manage risk in the securities portfolio and take
advantage of favorable market conditions. Management has
effectively used the proceeds from selling covered call and put
options to offset net interest margin compression and has
administered such sales in a coordinated process with the
Companys overall asset/liability management. Management is
poised to adjust its option strategy when interest rates
increase or decrease. Option income was $5.3 million and
$1.8 million for the years ended December 31, 2003 and
2002, respectively. There is no assurance that the option fee
income realized through December 31, 2003 is sustainable in
future periods.

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 second credit derivative transaction
with a notional amount of $30.0 million for a term of five
years, maturing November 27, 2002. The second 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. In both
transactions, the underlying asset-backed security is
$1.0 billion and is diversified amongst 100 companies. Both
credit derivative transactions were terminated in October of
2003.

As of December 31, 2003, 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 available-for-sale
portfolio on an amortized cost basis increased
$181.7 million, or 28.3%, in 2003 compared to 2002. This
increase is primarily due to the reinvestment of the
$141.9 million in proceeds from the sale of mortgage loans
acquired through the BFFC acquisition and to reduced loan volume.

Due to the low interest rate environment,
prepayment rates have increased and the Company has experienced
an increase in amortization expense associated with its
mortgage-backed securities. Amortization expense was
$9.1 million for the twelve months ended December 31,
2003 compared to $5.3 million for the similar period in
2002. The Company has reallocated its securities holdings in
order to mitigate the increase in amortization expense. The
Company reduced its portion of the investment portfolio invested
in mortgage-backed securities in order to decrease the earnings
volatility related to accelerated premium amortization due to
mortgage refinancing. Accordingly, as of December 31, 2003,
mortgage-backed securities comprised 24.5% of the portfolio
compared to 78.5% at December 31, 2002.

U.S. Treasury and government agency
obligations increased $336.4 million to
$360.3 million, representing 41.0% of the portfolio as of
December 31, 2003 compared to $23.9 million as of
December 31, 2002, or 3.1% of the portfolio. Equity
securities increased $100.0 million from $59.4 million
at December 31, 2002 to $159.4 million as of
December 31, 2003. Equity securities at December 31,
2003 included capital securities of U.S. agencies and
Federal Home Loan Bank and Federal Reserve Bank stock.
Other bonds increased $88.4 million to $95.6 million
at December 31, 2003 compared to $7.2 million at
December 31, 2002. Other bonds include high grade corporate
bonds primarily issued by financial institutions. Obligations of
state and political subdivisions decreased $20.0 million to
$35.1 million at December 31, 2003 from
$55.1 million at December 31, 2002.

Securities held-to-maturity decreased
$62.5 million to $56.1 million as of December 31,
2003 from $118.6 million as of December 31, 2002
primarily due to the principal payments from the mortgage-backed
securities.

There were no trading account securities held at
December 31, 2003 or December 31, 2002. The Company
holds trading account securities on a short-term basis based on
market and liquidity conditions.

39



---



##### Table of Contents



Trading account profits were $348,000 compared to
a loss of $14,000 for the years ended December 31, 2002 and
2003, respectively.


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 the Company will recognize gains on
the sale of securities. The Company has a long history of
managing its securities in this manner. Gains on securities
transactions for the years ended December 31, 2003 and 2002
were $5.3 million and $1.5 million, respectively.
Included in the net gains on available-for-sale securities
transactions was a net loss of $553,000 as a result of the hedge
ineffectiveness on derivative instruments. See Note 20 to
the consolidated financial statements.



| |                                     
| | ------------------------------------
| | 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, 2003 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                 |       | Within        |  | Within         |      | After     |   |       
|                                                              |       | One Year               |       | Five Years    |  | Ten Years      |      | 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 of U.S.
    government agencies |       | $                      |      |               |  |                | 0.00 | %         |   | $      | 223     |         |  |        | 3.10 | %     |   | $      | 336,381 |         |  |  | 4.22 | %    |   | $ |        |         |  |  | 0.00 | %    |   | $ | 336,604 |         |  |  | 4.22 | %   
|Obligations of states and political subdivisions              |       |                        | 1,227 |               |  |                | 5.38 |           |   |        | 6,093   |         |  |        | 5.21 |       |   |        | 29,774  |         |  |  | 4.74 |      |   |   | 108     |         |  |  | 5.30 |      |   |   | 37,202  |         |  |  | 4.84 |     
|Mortgage-backed securities                                    |       |                        | 208   |               |  |                | 5.54 |           |   |        | 172,386 |         |  |        | 6.15 |       |   |        | 56      |         |  |  | 6.71 |      |   |   | 860     |         |  |  | 6.46 |      |   |   | 173,510 |         |  |  | 6.15 |     
|Equity securities                                             |       |                        |      |               |  |                | 0.00 |           |   |        |        |         |  |        | 0.00 |       |   |        |        |         |  |  | 0.00 |      |   |   | 154,760 |         |  |  | 4.26 |      |   |   | 154,760 |         |  |  | 4.26 |     
|Other bonds                                                   |       |                        |      |               |  |                | 0.00 |           |   |        | 27,225  |         |  |        | 5.89 |       |   |        | 59,084  |         |  |  | 5.77 |      |   |   | 7,755   |         |  |  | 4.80 |      |   |   | 94,064  |         |  |  | 5.72 |     
|                                                              |       |                        |       |               |  |                |      |           |   |        |         |         |  |        |      |       |   |        |         |         |  |  |      |      |   |   |         |         |  |  |      |      |   |   |         |         |  |  |      |     
|                                                              | Total |                        | $     | 1,435         |  |                |      | 5.41      | % |        | $       | 205,927 |  |        |      | 6.09  | % |        | $       | 425,295 |  |  |      | 4.47 | % |   | $       | 163,483 |  |  |      | 4.29 | % |   | $       | 796,140 |  |  |      | 4.85 | %
|                                                              |       |                        |       |               |  |                |      |           |   |        |         |         |  |        |      |       |   |        |         |         |  |  |      |      |   |   |         |         |  |  |      |      |   |   |         |         |  |  |      |     
|Held-to-Maturity Securities:                                  |       |                        |       |               |  |                |      |           |   |        |         |         |  |        |      |       |   |        |         |         |  |  |      |      |   |   |         |         |  |  |      |      |   |   |         |         |  |  |      |     
|Obligations of states and political subdivisions              |       | $                      | 3,092 |               |  |                | 4.87 | %         |   | $      | 9,498   |         |  |        | 4.91 | %     |   | $      | 250     |         |  |  | 4.90 | %    |   | $ |        |         |  |  | 0.00 | %    |   | $ | 12,840  |         |  |  | 4.90 | %   
|Mortgage-backed securities                                    |       |                        | 33    |               |  |                | 7.50 |           |   |        | 43,201  |         |  |        | 6.47 |       |   |        |        |         |  |  | 0.00 |      |   |   |        |         |  |  | 0.00 |      |   |   | 43,234  |         |  |  | 6.47 |     
|                                                              |       |                        |       |               |  |                |      |           |   |        |         |         |  |        |      |       |   |        |         |         |  |  |      |      |   |   |         |         |  |  |      |      |   |   |         |         |  |  |      |     
|                                                              | Total |                        | $     | 3,125         |  |                |      | 4.89      | % |        | $       | 52,699  |  |        |      | 6.19  | % |        | $       | 250     |  |  |      | 4.90 | % |   | $       |        |  |  |      | 0.00 | % |   | $       | 56,074  |  |  |      | 6.11 | %
|                                                              |       |                        |       |               |  |                |      |           |   |        |         |         |  |        |      |       |   |        |         |         |  |  |      |      |   |   |         |         |  |  |      |      |   |   |         |         |  |  |      |     



---



|    |                                          
|--- | -----------------------------------------
|(1) | Yield based on coupon rate of securities.



| |         
| | --------
| | Deposits

The Company has experienced significant growth in
total deposits in recent years. Total deposits were
$1.6 billion at December 31, 2003, $1.4 billion
at December 31, 2002, and $1.2 billion at
December 31, 2001, representing an increase of 14.1% and
14.8%, respectively, between the three years. Average total
deposits were $1.5 billion for the year ended
December 31, 2003, $1.3 billion for the year ended
December 31, 2002, and $1.2 billion for the year ended
December 31, 2001. 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.
Non-interest-bearing deposits were $160.7 million as of
December 31, 2003, approximately $25.8 million higher
than the $134.9 million level as of December 31, 2002.

The Company acquired $73.4 million in core
deposits and $64.6 million in time deposits through the
acquisition of BFFC. Deposits at the three BFFC branches
increased 31.8% to $181.8 million at December 31, 2003
compared to January 3, 2003, the BFFC acquisition date.

40



---



##### Table of Contents



Over the same period, interest-bearing deposits
increased 13.5% or $170.0 million to $1.4 billion.
Certificates of deposits less than $100,000 increased 20.3% or
$124.9 million to $739.4 million at December 31,
2003 compared to $614.5 million in 2002.

The Companys strategy during 2003 was to
reduce the levels of certificates of deposit over $100,000 and
public funds. The Companys marketing efforts have focused
on core and time deposit account growth in its retail markets,
reducing the need to rely on public funds and brokered
certificates of deposit. As a result, these types of deposits
decreased $96.5 million from $235.5 million at
December 31, 2002 to $139.0 at December 31, 2003. Most
of the decrease was due to brokered certificates of deposit and
public fund maturities. Total brokered certificates of deposit
and public funds were $85.4 million and $153.7 million
at December 31, 2003 and 2002, respectively.

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,
|                                     |                                            |                                
|                                     |                                            |                                 |         |            |           |     
|                                     |                                            | 2003                            |         | 2002       |           | 2001
|                                     |                                            |                                 |         |            |           |     
|                                     |                                            | Average                         |         | Percent of |           |      |       | Average |        | Percent of |      |      |      | Average |         | Percent of |           |     
|                                     |                                            | Balance                         |         | Deposits   |           | Rate |       | Balance |        | Deposits   |      | Rate |      | Balance |         | Deposits   |           | Rate
|                                     |                                            |                                 |         |            |           |      |       |         |        |            |      |      |      |         |         |            |           |     
|                                     |                                            |                                
|                                     |                                            | (Dollars in thousands)         
|Non-interest-bearing demand deposits |                                            | $                               | 146,699 |            |           |      | 9.52  | %       |        |            | 0.00 | %    |      | $       | 129,864 |            |           |      | 9.81  | %     |        |   | 0.00 | %    |      | $ | 121,394 |         |           |  | 10.47 | %     |        |   | 0.00 | %   
|Interest-bearing demand deposits     |                                            |                                 | 181,474 |            |           |      | 11.78 |         |        |            | 1.18 |      |      |         | 135,943 |            |           |      | 10.27 |       |        |   | 1.50 |      |      |   | 129,116 |         |           |  | 11.13 |       |        |   | 2.64 |     
|Savings and money market accounts    |                                            |                                 | 326,491 |            |           |      | 21.19 |         |        |            | 1.18 |      |      |         | 260,151 |            |           |      | 19.66 |       |        |   | 1.64 |      |      |   | 264,603 |         |           |  | 22.82 |       |        |   | 3.16 |     
|Time Deposits:                       |                                            |                                 |         |            |           |      |       |         |        |            |      |      |      |         |         |            |           |      |       |       |        |   |      |      |      |   |         |         |           |  |       |       |        |   |      |     
|                                     | Certificates of deposit, under $100,000(1) |                                 |         | 718,495    |           |      |       | 46.62   |        |            |      | 2.80 |      |         |         | 590,978    |           |      |       | 44.66 |        |   |      | 3.60 |      |   |         | 480,036 |           |  |       | 41.39 |        |   |      | 5.70 |     
|                                     | Certificates of deposit, over $100,000(1)  |                                 |         | 111,372    |           |      |       | 7.23    |        |            |      | 2.40 |      |         |         | 133,991    |           |      |       | 10.12 |        |   |      | 3.08 |      |   |         | 95,389  |           |  |       | 8.23  |        |   |      | 5.23 |     
|                                     | Public funds                               |                                 |         | 56,453     |           |      |       | 3.66    |        |            |      | 2.25 |      |         |         | 72,495     |           |      |       | 5.48  |        |   |      | 3.17 |      |   |         | 69,137  |           |  |       | 5.96  |        |   |      | 4.89 |     
|                                     |                                            |                                 |         |            |           |      |       |         |        |            |      |      |      |         |         |            |           |      |       |       |        |   |      |      |      |   |         |         |           |  |       |       |        |   |      |     
|                                     |                                            | Total time deposits             |         |            | 886,320   |      |       |         | 57.52  |            |      |      | 2.72 |         |         |            | 797,464   |      |       |       | 60.26  |   |      |      | 3.48 |   |         |         | 644,562   |  |       |       | 55.58  |   |      |      | 5.55 |  
|                                     |                                            |                                 |         |            |           |      |       |         |        |            |      |      |      |         |         |            |           |      |       |       |        |   |      |      |      |   |         |         |           |  |       |       |        |   |      |     
|                                     |                                            | Total deposits                  |         | $          | 1,540,984 |      |       |         | 100.00 | %          |      |      | 1.95 | %       |         | $          | 1,323,422 |      |       |       | 100.00 | % |      |      | 2.57 | % |         | $       | 1,159,675 |  |       |       | 100.00 | % |      |      | 4.10 | %
|                                     |                                            |                                 |         |            |           |      |       |         |        |            |      |      |      |         |         |            |           |      |       |       |        |   |      |      |      |   |         |         |           |  |       |       |        |   |      |     



---



|    |                                                   
|--- | --------------------------------------------------
|(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, 2003. 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                  |       | $              | 71,490 |        
|Over three months through six months  |       |                | 24,304 |        
|Over six months through twelve months |       |                | 43,542 |        
|Over twelve months                    |       |                | 77,002 |        
|                                      |       |                |        |        
|                                      | Total |                | $      | 216,338 | 
|                                      |       |                |        |        

41



---



##### Table of Contents



Borrowings

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

|                                                                      |       |                        |         |         |  |      |         |         |  |   |         |         | 
|--------------------------------------------------------------------- | ----- | ---------------------- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                                                                      |       |                       
|                                                                      |       | December 31,          
|                                                                      |       |                       
|                                                                      |       | 2003                   |         | 2002    |  | 2001
|                                                                      |       |                        |         |         |  |     
|                                                                      |       |                       
|                                                                      |       | (Dollars in thousands)
|Federal funds purchased                                               |       | $                      |        |         |  | $    | 20,825  |         |  | $ | 24,350  |        
|Securities sold under agreements to repurchase                        |       |                        | 202,699 |         |  |      | 185,057 |         |  |   | 146,800 |        
|Notes payable                                                         |       |                        | 2,000   |         |  |      | 2,000   |         |  |   | 6,500   |        
|Company obligated mandatory redeemable trust
    preferred securities |       |                        | 54,000  |         |  |      | 35,000  |         |  |   | 20,000  |        
|FHLB advances                                                         |       |                        | 253,461 |         |  |      | 219,500 |         |  |   | 244,500 |        
|                                                                      |       |                        |         |         |  |      |         |         |  |   |         |        
|                                                                      | Total |                        | $       | 512,160 |  |      | $       | 462,382 |  |   | $       | 442,150 | 
|                                                                      |       |                        |         |         |  |      |         |         |  |   |         |        

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, intermediate-term and long-term
borrowings for the periods indicated.

|                         |                                               |                         |   |        |   |      |   |        |   |  |   |        |  
|------------------------ | --------------------------------------------- | ----------------------- | - | ------ | - | ---- | - | ------ | - |  | - | ------ | -
|                         |                                               |                        
|                         |                                               | Year Ended December 31,
|                         |                                               |                        
|                         |                                               | 2003                    |   | 2002   |   | 2001
|                         |                                               |                         |   |        |   |     
|                         |                                               |                        
|                         |                                               | (Dollars in thousands) 
|Federal funds purchased: |                                               |                         |   |        |   |      |   |        |   |  |   |       
|                         | Balance at end of year                        |                         | $ |       |   |      | $ | 20,825 |   |  | $ | 24,350 |  
|                         | Weighted average interest rate at end of year |                         |   | 0.00   | % |      |   | 1.43   | % |  |   | 1.89   | %
|                         | Maximum amount outstanding(1)                 |                         | $ | 29,125 |   |      | $ | 29,850 |   |  | $ | 51,500 |  
|                         | Average amount outstanding                    |                         |   | 11,783 |   |      |   | 16,376 |   |  |   | 23,604 |  
|                         | Weighted average interest rate during year    |                         |   | 1.38   | % |      |   | 1.91   | % |  |   | 3.36   | %



---



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

|                                             |                                               |                         |   |         |   |      |   |         |   |  |   |         |  
|-------------------------------------------- | --------------------------------------------- | ----------------------- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                             |                                               |                        
|                                             |                                               | Year Ended December 31,
|                                             |                                               |                        
|                                             |                                               | 2003                    |   | 2002    |   | 2001
|                                             |                                               |                         |   |         |   |     
|                                             |                                               |                        
|                                             |                                               | (Dollars in thousands) 
|Securities sold under repurchase agreements: |                                               |                         |   |         |   |      |   |         |   |  |   |        
|                                             | Balance at end of year                        |                         | $ | 202,699 |   |      | $ | 185,057 |   |  | $ | 146,800 |  
|                                             | Weighted average interest rate at end of year |                         |   | 2.89    | % |      |   | 2.95    | % |  |   | 2.04    | %
|                                             | Maximum amount outstanding(1)                 |                         | $ | 243,909 |   |      | $ | 204,830 |   |  | $ | 146,800 |  
|                                             | Average amount outstanding                    |                         |   | 211,825 |   |      |   | 155,635 |   |  |   | 37,070  |  
|                                             | Weighted average interest rate during year    |                         |   | 2.81    | % |      |   | 2.70    | % |  |   | 3.85    | %



---



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

The Banks are members of the Federal Home
Loan Bank of Chicago (FHLB). 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, 2003, $223.5 million of these advances
had call provisions and $2.0 million had adjustable rates.
The Company acquired $33.0 million in FHLB advances due to
the BFFC acquisition. The Company has converted
$67.5 million of its FHLB advances from fixed rate debt to
floating rate through interest rate swap transactions in
December 2002 and an additional $70.0 million in July 2003.
These swap transactions resulted in a $2.2 million decrease
in interest expense for the year ended December 31, 2003.
The following table sets forth

42



---



##### Table of Contents



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.


|               |                                               |                         |   |         |   |      |   |         |   |  |   |         |  
|-------------- | --------------------------------------------- | ----------------------- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|               |                                               |                        
|               |                                               | Year Ended December 31,
|               |                                               |                        
|               |                                               | 2003                    |   | 2002    |   | 2001
|               |                                               |                         |   |         |   |     
|               |                                               |                        
|               |                                               | (Dollars in thousands) 
|FHLB advances: |                                               |                         |   |         |   |      |   |         |   |  |   |        
|               | Balance at end of year                        |                         | $ | 253,461 |   |      | $ | 219,500 |   |  | $ | 244,500 |  
|               | Weighted average interest rate at end of year |                         |   | 4.26    | % |      |   | 4.75    | % |  |   | 5.47    | %
|               | Maximum amount outstanding(1)                 |                         | $ | 258,594 |   |      | $ | 244,500 |   |  | $ | 244,500 |  
|               | Average amount outstanding                    |                         |   | 256,583 |   |      |   | 235,923 |   |  |   | 243,706 |  
|               | Weighted average interest rate during year    |                         |   | 4.23    | % |      |   | 5.51    | % |  |   | 5.55    | %



---



|    |                                                               
|--- | --------------------------------------------------------------
|(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,                      
|                 |                                            |                                              
|                 |                                            | 2003                                          |   | 2002  |      | 2001
|                 |                                            |                                               |   |       |      |     
|                 |                                            |                                              
|                 |                                            | (Dollars in thousands)                       
|Lines of Credit: |                                            |                                               |   |       |      |      |   |        |      |   |   |      
|                 | Balance at end of year                     |                                               | $ | 2,000 |      |      | $ | 2,000  |      |   | $ | 6,500 |     
|                 |                                            | Weighted average interest rate at end of year |   |       | 2.11 | %    |   |        | 2.37 | % |   |       | 2.59 | %
|                 | Maximum amount outstanding(1)              |                                               | $ | 7,500 |      |      | $ | 12,300 |      |   | $ | 6,500 |     
|                 | Average amount outstanding                 |                                               |   | 6,171 |      |      |   | 7,842  |      |   |   | 6,147 |     
|                 | Weighted average interest rate during year |                                               |   | 2.76  | %    |      |   | 2.61   | %    |   |   | 6.46  | %   



---



|    |                                                               
|--- | --------------------------------------------------------------
|(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
$10.0 million. The original maturity of the revolving line
of credit was January 30, 2000. The revolving line of
credit was extended until May 1, 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 120 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,
2003.

The revolving line of credit includes the
following covenants at December 31, 2003: (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 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 at December 31, 2003. The Company has
complied with these covenants at December 31, 2002, except
or the covenants regarding nonperforming assets. On
April 14, 2003, the Company obtained a waiver for the
nonperforming covenant.

In May 2000, the Company formed the MBHI Capital
Trust I (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% Company obligated mandatory redeemable trust
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

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##### Table of Contents



$20,000,000 to the Trust. The junior subordinated
debentures are the sole assets of the Trust. The Company
obligated mandatory redeemable trust preferred securities and
the junior subordinated debentures pay distributions and
dividends, respectively, on a quarterly basis, which are
included in interest expense. The Company obligated mandatory
redeemable trust preferred securities will mature on
June 7, 2030, at which time the preferred securities must
be redeemed. The Company obligated mandatory redeemable trust
preferred securities and junior subordinated debentures 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. See Note 13 to the consolidated
financial statements for additional information on trust
preferred securities. The following table details the four
trusts formed by the Company:


|                       |  |            |                   |        |  |      |            |                 |  |                 |            |   |  |  |                   |  |  |  |                   | 
|---------------------- |  | ---------- | ----------------- | ------ |  | ---- | ---------- | --------------- |  | --------------- | ---------- | - |  |  | ----------------- |  |  |  | ----------------- | 
|                       |  |            |                   |        |  |      |            | Mandatory       |  | Optional       
|Issuer                 |  | Issue Date |                   | Amount |  | Rate |            | Redemption Date |  | Redemption Date
|                       |  |            |                   |        |  |      |            |                 |  |                
|MBHI Capital Trust I   |  |            | June 7, 2000      |        |  | $    | 20,000,000 |                 |  |                 | 10.0%      |   |  |  | June 7, 2030      |  |  |  | June 7, 2005      | 
|MBHI Capital Trust II  |  |            | October 29, 2002  |        |  | $    | 15,000,000 |                 |  |                 | LIBOR+3.45 | % |  |  | November 7, 2032  |  |  |  | November 7, 2007  | 
|MBHI Capital Trust III |  |            | December 19, 2003 |        |  | $    | 9,000,000  |                 |  |                 | LIBOR+3.00 | % |  |  | December 30, 2033 |  |  |  | December 30, 2008 | 
|MBHI Capital Trust IV  |  |            | December 19, 2003 |        |  | $    | 10,000,000 |                 |  |                 | LIBOR+2.85 | % |  |  | January 23, 2034  |  |  |  | January 23, 2008  | 

FIN No. 46, Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research
Bulletin No. 51 (Revised December 2003). FIN 46
establishes accounting guidance for consolidation of variable
interest entities (VIE) that function to support the
activities of the primary beneficiary. The primary beneficiary
of a VIE entity is the entity that absorbs a majority of the
VIEs expected losses, receives a majority of the
VIEs expected residual returns, or both, as a result of
ownership, controlling interest, contractual relationship or
other business relationship with the VIE. Prior to the
implementation of FIN 46, VIEs were generally
consolidated by an enterprise when the enterprise had a
controlling financial interest through ownership of a majority
of voting interest in the entity. The provisions of FIN 46
were effective immediately for all arrangements entered into
after January 31, 2003. If a VIE existed prior to
February 1, 2003, FIN 46 was effective at the
beginning of the first interim period beginning after
June 15, 2003. However, subsequent revisions to the
interpretation deferred the implementation date of FIN 46
until the first period ending after December 15, 2003.

The trust preferred securities issued by MBHI
Capital Trust I, II, III and IV are currently
included in the Tier 1 capital of the Company for
regulatory capital purposes. The Federal Reserve Board may in
the future disallow inclusion of the trust preferred securities
in Tier 1 capital for regulatory capital purposes. In July
2003, the Federal Reserve Board issued a supervisory letter
instructing bank holding companies to continue to include the
trust preferred securities in their Tier 1 capital for
regulatory capital purposes until notice is given to the
contrary. The Federal Reserve Board intends to review the
regulatory implications of the change in accounting treatment of
subsidiary trusts that issue trust preferred securities and, if
necessary or warranted, provide further appropriate guidance.
There can be no assurance that the Federal Reserve Board will
continue to permit institutions to include trust preferred
securities in Tier I capital for regulatory capital
purposes.

As of December 31, 2003, assuming the
Company was not permitted to include the $54.0 million in
trust preferred securities issued by MBHI Capital
Trust I, II, III and IV in its Tier 1
capital, the Company would still exceed the regulatory required
minimums for capital adequacy purposes. If the trust preferred
securities were no longer permitted to be included in
Tier 1 capital, the Company would also be permitted to
redeem the capital securities without penalty.

The interpretations of FIN 46 and its
application to various transaction types and structures are
continually evolving. Management continuously monitors emerging
issues related to FIN 46, some of which could potentially
impact the Companys financial statements.

44



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##### Table of Contents



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.

|                                       |  |                                        |           |       |  |        |       |       |  |        |           |       |  |  |       |   |  |   |           |  |  |  |       |  
|-------------------------------------- |  | -------------------------------------- | --------- | ----- |  | ------ | ----- | ----- |  | ------ | --------- | ----- |  |  | ----- | - |  | - | --------- |  |  |  | ----- | -
|                                       |  |                                       
|                                       |  | Risk-Based Capital Ratios December 31,
|                                       |  |                                       
|                                       |  |                                        |           |       |  |       
|                                       |  | 2003                                   |           | 2002  |  | 2001  
|                                       |  |                                        |           |       |  |       
|                                       |  | Amount                                 |           | Ratio |  | Amount |       | Ratio |  | Amount |           | Ratio
|                                       |  |                                        |           |       |  |        |       |       |  |        |           |      
|                                       |  |                                       
|                                       |  | (Dollars in Thousands)                
|Tier 1 capital to risk-weighted assets |  | $                                      | 201,105   |       |  |        | 13.68 | %     |  | $      | 138,197   |       |  |  | 10.44 | % |  | $ | 113,747   |  |  |  | 9.93  | %
|Tier 1 capital minimum requirement     |  |                                        | 58,823    |       |  |        | 4.00  |       |  |        | 52,938    |       |  |  | 4.00  |   |  |   | 45,814    |  |  |  | 4.00  |  
|Total capital to risk-weighted assets  |  |                                        | 216,819   |       |  |        | 14.74 |       |  |        | 154,740   |       |  |  | 11.69 |   |  |   | 123,984   |  |  |  | 10.82 |  
|Total capital minimum requirements     |  |                                        | 117,647   |       |  |        | 8.00  |       |  |        | 105,876   |       |  |  | 8.00  |   |  |   | 91,628    |  |  |  | 8.00  |  
|Total risk-weighted assets             |  |                                        | 1,470,587 |       |  |        |       |       |  |        | 1,323,454 |       |  |  |       |   |  |   | 1,145,354 |  |  |  |       |  

The Company includes $54 million for 2003,
$35 million for 2002 and $20 million for 2001, of
trust preferred securities in Tier I capital. Please see
the above explanation in Borrowings of
FIN No. 46, Consolidation of Variable Interest
Entities for potential change in GAAP and/or regulatory
treatment of trust preferred securities.

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. At December 31, 2003,
the Company had cash and cash equivalents of
$196.2 million. 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, intermediate-term and long-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 2003, FHLB advances increased (excluding purchase accounting
adjustments and the market value of interest rate swaps) by
$33.0 million due to the $33.0 million in FHLB
advances acquired as a result of the acquisition of BFFC.
Assuming that collateral is available to secure loans, each Bank
can borrow up to 35% of its assets from the FHLB that provided
the Banks with a total additional $533.9 million in unused
capacity at December 31, 2003. 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
$2.3 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 $1.8 billion at December 31, 2003. 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 levels, which vary depending upon the time
period. As the time period is expanded, other data is factored
in, including estimated loan funding

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##### Table of Contents



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
representation of 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 $38.4 million,
$25.2 million, and $19.3 million for the years ended
December 31, 2003, 2002, and 2001, respectively. Net cash
provided by investing activities, consisting primarily of the
sale of mortgage loans acquired through BFFC net of investment
funding was $40.5 million for the year ended
December 31, 2003 and net used in investing activities,
consisting primarily of loan and investment funding, was
$217.9 million and $287.8 million for the years ended
December 31, 2002 and 2001, respectively. Net cash provided
by financing activities, consisting principally of deposit
growth and net borrowings, was $67.6 million,
$192.5 million, and $271.7 million for the years ended
December 31, 2003, 2002, and 2001, respectively.

Contractual Obligations, Commitments, and
Off-Balance Sheet Arrangements

|                                                                      |  |                        |           |           |  |           |         |         |  |       |         |  |  |   |         |  |  |   |           | 
|--------------------------------------------------------------------- |  | ---------------------- | --------- | --------- |  | --------- | ------- | ------- |  | ----- | ------- |  |  | - | ------- |  |  | - | --------- | 
|                                                                      |  |                       
|                                                                      |  | Payments Due By Period
|                                                                      |  |                       
|                                                                      |  | Within                 |           |           |  | After     |         |        
|                                                                      |  | 1 Year                 |           | 1-3 Years |  | 4-5 Years |         | 5 Years |  | Total
|                                                                      |  |                        |           |           |  |           |         |         |  |      
|                                                                      |  |                       
|                                                                      |  | (Dollars in Thousands)
|Deposits without a stated maturity                                    |  | $                      | 708,106   |           |  | $         |        |         |  | $     |        |  |  | $ |        |  |  | $ | 708,106   | 
|Consumer and brokered certificates of deposits                        |  |                        | 508,364   |           |  |           | 363,230 |         |  |       | 6,711   |  |  |   |        |  |  |   | 878,305   | 
|Securities sold under agreements to repurchase                        |  |                        | 14,202    |           |  |           | 188,497 |         |  |       |        |  |  |   |        |  |  |   | 202,699   | 
|FHLB advances(1)                                                      |  |                        | 4,500     |           |  |           | 42,500  |         |  |       | 67,000  |  |  |   | 138,500 |  |  |   | 252,000   | 
|Company obligated mandatory redeemable trust
    preferred securities |  |                        |          |           |  |           |        |         |  |       |        |  |  |   | 54,000  |  |  |   | 54,000    | 
|Note Payable                                                          |  |                        | 2,000     |           |  |           |        |         |  |       |        |  |  |   |        |  |  |   | 2,000     | 
|Leases                                                                |  |                        | 502       |           |  |           | 968     |         |  |       | 908     |  |  |   | 2,219   |  |  |   | 4,597     | 
|                                                                      |  |                        |           |           |  |           |         |         |  |       |         |  |  |   |         |  |  |   |           | 
|Total contractual cash obligations                                    |  | $                      | 1,237,174 |           |  | $         | 595,195 |         |  | $     | 212,119 |  |  | $ | 57,219  |  |  | $ | 2,101,707 | 
|                                                                      |  |                        |           |           |  |           |         |         |  |       |         |  |  |   |         |  |  |   |           | 



---



|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|(1) | Excludes purchase accounting adjustments and the
    market value of interest rate swaps.

46



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##### Table of Contents



The following table details the amounts and
expected maturities of significant commitments as of
December 31, 2003. Further discussion of these commitments
is included in Note 18 to the consolidated financial
statements.

|                             |                        |                                            |         |           |  |           |        |         |  |       |        |       |  |   |        |        |  |   |         |         | 
|---------------------------- | ---------------------- | ------------------------------------------ | ------- | --------- |  | --------- | ------ | ------- |  | ----- | ------ | ----- |  | - | ------ | ------ |  | - | ------- | ------- | 
|                             |                        |                                           
|                             |                        | Amount of Commitment Expiration Per Period
|                             |                        |                                           
|                             |                        | Within                                     |         |           |  | After     |        |        
|                             |                        | 1 Year                                     |         | 1-3 Years |  | 4-5 Years |        | 5 Years |  | Total
|                             |                        |                                            |         |           |  |           |        |         |  |      
|                             |                        |                                           
|                             |                        | (Dollars in Thousands)                    
|Lines of Credit:             |                        |                                            |         |           |  |           |        |         |  |       |        |       |  |   |        |        |  |   |         |        
|                             | Commercial real estate |                                            | $       | 107,700   |  |           | $      | 16,414  |  |       | $      | 113   |  |   | $      |       |  |   | $       | 124,227 | 
|                             | Consumer real estate   |                                            |         | 782       |  |           |        | 2,670   |  |       |        | 7,509 |  |   |        | 18,367 |  |   |         | 29,328  | 
|                             | Consumer               |                                            |         | 73        |  |           |        |        |  |       |        |      |  |   |        | 3,323  |  |   |         | 3,396   | 
|                             | Commercial             |                                            |         | 103,117   |  |           |        | 16,369  |  |       |        | 540   |  |   |        | 1,940  |  |   |         | 121,966 | 
|Letters of credit            |                        |                                            | 20,342  |           |  |           | 979    |         |  |       | 4,197  |       |  |   |       |        |  |   | 25,518  |        
|Commitments to extend credit |                        |                                            | 108,942 |           |  |           |       |         |  |       |       |       |  |   |       |        |  |   | 108,942 |        
|                             |                        |                                            |         |           |  |           |        |         |  |       |        |       |  |   |        |        |  |   |         |        
|Total commercial commitments |                        | $                                          | 340,956 |           |  | $         | 36,432 |         |  | $     | 12,359 |       |  | $ | 23,630 |        |  | $ | 413,377 |        
|                             |                        |                                            |         |           |  |           |        |         |  |       |        |       |  |   |        |        |  |   |         |        

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, 2003 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 to changes in interest rates. 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 Company obligated mandatory redeemable
trust preferred securities from a 10.00% fixed rate instrument
into floating rate debt. The average yield on the
$20 million trust preferred securities and related Company
obligated mandatory redeemable trust preferred securities 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 of 2002. The remaining amount is being
accreted into income, as a reduction of interest expense, over
the estimated life of the Company obligated mandatory redeemable
trust preferred securities.

The Company enters into hedging activities to
convert interest payments of some of its fixed rate liabilities
into floating rate liabilities. As of December 31, 2003,
the Company has various interest rate swap transactions, which
results in the Company converting $137.5 million of its
FHLB advance fixed rate debt to floating rate debt. The swap
transactions require payment of interest by the Company at the
one-month LIBOR rate plus a spread and, in turn, the Company
receives a fixed rate interest payment equal to the fixed rate
paid on the related FHLB advances. The Company has documented
these to be fair value hedges. See Note 20 to the
consolidated financial statements.

In 2003, the Company entered into 3,000
U.S. Treasury 10-year note futures contracts with a
notional value of $300.0 million and a delivery date of
March 2004. The Company sold these contracts in order to hedge
certain U.S. Agency notes held in its available-for-sale
portfolio. The Companys objective was to offset changes in
the fair market value of the U.S. Agency notes with changes
in the fair market value of the futures

47



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##### Table of Contents



contracts, thereby reducing interest rate risk.
These futures contracts are fair value hedges with the changes
in market value of the futures contracts as well as the changes
in the market value of the hedged items charged or credited to
earnings on a quarterly basis to net gains on securities
transactions. For the period ending December 31, 2003, the
ineffectiveness of the hedge generated a $533,000 loss.


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.

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 2004.

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 Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.

48



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##### 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, 2003 and
2002, respectively.

|        |  |                          |        |        |  |        |        |   |  |  |       |   
|------- |  | ------------------------ | ------ | ------ |  | ------ | ------ | - |  |  | ----- | --
|        |  |                         
|        |  | 2003 Net Interest Income
|        |  |                         
|        |  |                          |        | Dollar |  | Rate  
|        |  | Amount                   |        | Change |  | Change
|        |  |                          |        |        |  |       
|        |  |                         
|        |  | (Dollars in Thousands)  
|+200 bp |  | $                        | 65,389 |        |  | $      | (329   | ) |  |  | (0.50 | )%
|+100 bp |  |                          | 64,710 |        |  |        | (1,008 | ) |  |  | (1.53 | ) 
|Base    |  |                          | 65,718 |        |  |        |       |   |  |  |      |   
|-100 bp |  |                          | 65,727 |        |  |        | 9      |   |  |  | 0.01  |   

|        |  |                          |        |        |  |        |        |   |  |  |       |   
|------- |  | ------------------------ | ------ | ------ |  | ------ | ------ | - |  |  | ----- | --
|        |  |                         
|        |  | 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  |   

As shown above, at December 31, 2003, the
effect of an immediate 200 basis point increase in interest
rates would decrease the Companys net interest income by
0.50%, or approximately $329,000. Overall net interest income
sensitivity has decreased from 2002 to 2003, 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, 2003, the Company is not able to model an
additional 200 basis point decrease in rates.

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 income by 3.21%, or
approximately $2.1 million. 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.

Gap analysis is used to determine the
repricing characteristics of the Companys assets and
liabilities. The following table sets forth the interest rate
sensitivity of the Companys assets and liabilities as of
December 31, 2003, and provides the repricing dates of the
Companys interest-earning assets and interest-

49



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##### Table of Contents



bearing liabilities as of that date, as well as
the Companys interest rate sensitivity gap percentages for
the periods presented.


|                                                                                               |  |        |         |        |  |           |         |         |  |       |          |    |  |   |         |    |  |   |           |  
|---------------------------------------------------------------------------------------------- |  | ------ | ------- | ------ |  | --------- | ------- | ------- |  | ----- | -------- | -- |  | - | ------- | -- |  | - | --------- | -
|                                                                                               |  | 0-3    |         | 4-12   |  |           |         | Over    |  |      
|                                                                                               |  | Months |         | Months |  | 1-5 Years |         | 5 Years |  | Total
|                                                                                               |  |        |         |        |  |           |         |         |  |      
|INTEREST-EARNING ASSETS:                                                                       |  |        |         |        |  |           |         |         |  |       |          |    |  |   |         |    |  |   |           |  
|Funds sold                                                                                     |  | $      | 49,200  |        |  | $         |        |         |  | $     |         |    |  | $ |        |    |  | $ | 49,200    |  
|Interest-bearing due from banks                                                                |  |        | 79,037  |        |  |           |        |         |  |       |         |    |  |   |        |    |  |   | 79,037    |  
|Securities                                                                                     |  |        | 149,698 |        |  |           | 68,469  |         |  |       | 191,095  |    |  |   | 442,952 |    |  |   | 852,214   |  
|Loans                                                                                          |  |        | 380,802 |        |  |           | 241,927 |         |  |       | 358,516  |    |  |   | 100,051 |    |  |   | 1,081,296 |  
|                                                                                               |  |        |         |        |  |           |         |         |  |       |          |    |  |   |         |    |  |   |           |  
|Total interest-bearing assets                                                                  |  | $      | 658,737 |        |  | $         | 310,396 |         |  | $     | 549,611  |    |  | $ | 543,003 |    |  | $ | 2,061,747 |  
|                                                                                               |  |        |         |        |  |           |         |         |  |       |          |    |  |   |         |    |  |   |           |  
|INTEREST-BEARING LIABILITIES:                                                                  |  |        |         |        |  |           |         |         |  |       |          |    |  |   |         |    |  |   |           |  
|Interest-bearing demand deposits                                                               |  | $      | 18,236  |        |  | $         | 18,236  |         |  | $     | 145,891  |    |  | $ | 191,360 |    |  | $ | 373,723   |  
|Money markets                                                                                  |  |        | 13,029  |        |  |           | 13,029  |         |  |       | 104,228  |    |  |   | 49,467  |    |  |   | 179,753   |  
|Savings deposits                                                                               |  |        | 10,493  |        |  |           | 10,493  |         |  |       | 83,946   |    |  |   | 49,698  |    |  |   | 154,630   |  
|Time deposits                                                                                  |  |        | 238,484 |        |  |           | 269,476 |         |  |       | 370,345  |    |  |   |        |    |  |   | 878,305   |  
|                                                                                               |  |        |         |        |  |           |         |         |  |       |          |    |  |   |         |    |  |   |           |  
|Total interest-bearing deposits                                                                |  | $      | 280,242 |        |  | $         | 311,234 |         |  | $     | 704,410  |    |  | $ | 290,525 |    |  | $ | 1,586,411 |  
|                                                                                               |  |        |         |        |  |           |         |         |  |       |          |    |  |   |         |    |  |   |           |  
|Securities sold under agreements to repurchase,
    funds purchased, and treasury tax deposits |  | $      | 82,431  |        |  | $         | 2,476   |         |  | $     | 117,792  |    |  | $ |        |    |  | $ | 202,699   |  
|FHLB advances                                                                                  |  |        | 438     |        |  |           | 4,938   |         |  |       | 111,471  |    |  |   | 136,614 |    |  |   | 253,461   |  
|Junior subordinated debt                                                                       |  |        |        |        |  |           |        |         |  |       |         |    |  |   | 54,000  |    |  |   | 54,000    |  
|Note payable                                                                                   |  |        | 2,000   |        |  |           |        |         |  |       |         |    |  |   |        |    |  |   | 2,000     |  
|                                                                                               |  |        |         |        |  |           |         |         |  |       |          |    |  |   |         |    |  |   |           |  
|Total borrowings                                                                               |  |        | 84,869  |        |  |           | 7,414   |         |  |       | 229,263  |    |  |   | 190,614 |    |  |   | 512,160   |  
|                                                                                               |  |        |         |        |  |           |         |         |  |       |          |    |  |   |         |    |  |   |           |  
|Total interest-bearing liabilities                                                             |  | $      | 365,111 |        |  | $         | 318,648 |         |  | $     | 933,673  |    |  | $ | 481,139 |    |  | $ | 2,098,571 |  
|                                                                                               |  |        |         |        |  |           |         |         |  |       |          |    |  |   |         |    |  |   |           |  
|Interest sensitivity gap                                                                       |  | $      | 293,626 |        |  | $         | (8,252  | )       |  | $     | (384,062 | )  |  | $ | 61,864  |    |  | $ | (36,824   | )
|Cumulative gap                                                                                 |  | $      | 293,626 |        |  | $         | 285,374 |         |  | $     | (98,688  | )  |  | $ | (36,824 | )  |  |   |           |  
|Interest sensitivity gap to total assets                                                       |  |        | 12.97   | %      |  |           | (0.36   | )%      |  |       | (16.96   | )% |  |   | 2.73    | %  |  |   |           |  
|Cumulative sensitivity gap to total assets                                                     |  |        | 12.97   | %      |  |           | 12.60   | %       |  |       | (4.36    | )% |  |   | (1.63   | )% |  |   |           |  

Mortgage-backed securities, including adjustable
rate mortgage pools, are included in the above table based on
their estimated weighted average lives obtained from outside
analytical sources. Loans are included in the above table based
on contractual maturity or contractual repricing dates.

Computations of the prospective effects of
hypothetical interest rate changes are based on numerous
assumptions, including relative levels of market interest rates,
loan prepayments and deposit decay rates. These computations
should not be relied upon as indicative of actual results.
Actual values may differ from those projections set forth above,
should market conditions vary from assumptions used in preparing
the analyses. Further, the computations do not contemplate any
actions the Company may undertake in response to changes in
interest rates. The Gap analysis is based upon
assumptions as to when assets and liabilities will reprice in a
changing interest rate environment. Because such assumptions can
be no more than estimates, certain assets and liabilities
indicated as maturing or otherwise repricing within a stated
period may, in fact, mature or reprice at different times and at
different volumes than those estimated. Also, the renewal or
repricing of certain assets and liabilities can be discretionary
and subject to competitive and other pressures. Therefore, the
gap table included above does not and cannot necessarily
indicate the actual future impact of general interest rate
movements on the Companys net interest income. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Asset/ Liability
Management.

50



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|        |                                                             
|------- | ------------------------------------------------------------
|Item 8. | Consolidated Financial Statements and
    Supplementary Data

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






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|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. 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 completed the audit of the Companys consolidated
financial statements for the year ended December 31, 2002.

Crowe Chizeks reports on the Companys
consolidated financial statements for the fiscal years ended
December 31, 2001 and 2002 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, 2001 and 2002, 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.

On April 29, 2003, KPMG informed the Company
that it would not accept the appointment to serve as the
Companys independent accountant for the fiscal year ending
December 31, 2003 and resigned. On May 2, 2003, the
Audit Committee appointed McGladrey & Pullen, LLP to
serve as the Companys independent accountant for the
fiscal year ending December 31, 2003. This change in
accountants was previously reported in our Current Report on
Form 8-K filed with the SEC on April 29, 2003 and as
amended by Form 8-K/ A filed May 19, 2003.

During the fiscal years ended December 31,
2002 and 2001, and through May 1, 2003, the Company did not
consult McGladrey & Pullen, LLP 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.

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Item 9A.     Controls
and Procedures

As of the end of the period covered by this
report, an evaluation was performed under the supervision and
with the participation of the Companys Chief Executive
Officer and Chief Financial Officer of the effectiveness of the
Companys disclosure controls and procedures (as defined in
Exchange Act Rule 240.13a-15(e)). Based on that evaluation,
the Chief Executive Officer and the Chief Financial Officer have
concluded that the Companys current disclosure controls
and procedures are effective to ensure that information required
to be disclosed by the Company in the reports that it files or
submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commissions rules
and forms.

There were no changes in the Companys
internal control over financial reporting that occurred during
the period covered by this report that have materially affected,
or are reasonably likely to materially affect, the
Companys internal control over financial
reporting.          .




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 2004
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 of this annual
report.






|         |                       
|-------- | ----------------------
|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.






|         |                                                   
|-------- | --------------------------------------------------
|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.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Information regarding principal accountant fees
and services is included in the Companys Proxy Statement
under the heading Independent Public Accountants,
and the information included therein is incorporated herein by
reference.

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PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|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.

(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.

(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  |  | 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   | .3  |  | 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. 001-13755).                                                                                                                                                                                                                                                              
| | 3   | .4  |  | 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).                                                                                                                                                                                                                                                          
| | 3   | .11 |  | Certificate of Amendment of Restated Certificate
    of Incorporation (incorporated by reference to Registrants
    Form 10-Q for quarter ended June 30, 2002, File
    No. 001-13735).                                                                                                                                                                                                                                                  
| | 4   | .1  |  | Specimen Common Stock Certificate (incorporated
    by reference to Registrants Registration Statement on
    Form S-1, Registration No. 333-42827).                                                                                                                                                                                                                                                                                     
| | 4   | .2  |  | Certain instruments defining the rights of the
    holders of long-term debt of the Company and certain of its
    subsidiaries, none of which authorize a total amount of
    indebtedness in excess of 10% of the total assets of the Company
    and its subsidiaries on a consolidated basis, have not been
    filed as Exhibits. The Company hereby agrees to furnish a copy
    of any of these agreements to the SEC upon request.
| | *10 | .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 | .3a |  | 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 | .4  |  | Form of Transitional Employment Agreements
    (incorporated by reference to Registrants Registration
    Statement on Form S-1, Registration No. 333-42827).                                                                                                                                                                                                                                                                            
| | 10  | .5  |  | Lease dated as of December 24, 1958, between
    Western National Bank of Cicero and Midwest Bank and Trust
    Company, as amended (incorporated by reference to
    Registrants Registration Statement on Form S-1,
    Registration No. 333-42827).                                                                                                                                                                                   
| | 10  | .6  |  | Britannica Centre Lease, dated as of May 1,
    1994, between Chicago Title and Trust Company, as Trustee under
    Trust Agreement dated November 2, 1977 and known as Trust
    No. 1070932 and Midwest Bank & Trust Company
    (incorporated by reference to Registrants Registration
    Statement on Form S-1, Registration No. 333-42827).                                                                                        
| | 10  | .7  |  | Lease dated as of March 20, 1996 between
    Grove Lodge No. 824 Ancient Free and Accepted Masons and
    Midwest Bank of Hinsdale (incorporated by reference to
    Registrants Registration Statement on Form S-1,
    Registration No. 333-42827).                                                                                                                                                                                    

53



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| |     |     |  |                                                                                                                                                                                                                                                                                                      
| | --- | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10  | .8  |  | Office Lease, undated, between Grove Lodge
    No. 824 Ancient Free and Accepted Masons and Midwest Bank
    of Hinsdale (incorporated by reference to Registrants
    Registration Statement on Form S-1, Registration
    No. 333-42827).                                                         
| | 10  | .9  |  | 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).  
| | 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 |  | Form of Supplemental Executive Retirement
    Agreement (incorporated by reference to Registrants
    Form 10-Q for the quarter ended September 30, 2001,
    File No. 001-13735).                                                                                                                  
| | *10 | .16 |  | Form of Transitional Employment Agreement
    (Executive Officer Group) (incorporated by reference to
    Registrants Form 10-Q for the quarter ended
    September 30, 2001, File No. 001-13735).                                                                                                  
| | 10  | .17 |  | Fifth Amendment and Waiver to Credit Agreement
    dated as of August 16, 2002 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, 2002, File No. 001-13735)                                 
| | 10  | .18 |  | Sixth Amendment and Waiver to Credit Agreement
    dated as of April 14, 2003 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, 2002, File No. 001-13735)                                  
| | 10  | .19 |  | Agreement and Plan of Reorganization between the
    Company and Big Foot Financial Corp. dated as of July 19,
    2002 (incorporated by reference to Annex A of the
    Registrants Proxy Statement/ Prospectus dated
    October 23, 2002, Registration Statement No. 333-
    100090).           
| | 10  | .21 |  | Lease dated as of April 29, 1976, between
    Sanfilippo, Joseph C. and Grace Ann and Fairfield Savings and
    Loan Association, as amended.                                                                                                                                                        
| | 10  | .22 |  | Lease dated as of August 28, 2002 between
    Glen Oak Plaza and Midwest Bank and Trust Company.                                                                                                                                                                                                     
| | 10  | .23 |  | Seventh Amendment and Waiver to Credit Agreement
    dated as of January 5, 2004 between the Company and Harris
    Trust and Saving Bank.                                                                                                                                                           
| | 21  | .1  |  | Subsidiaries.                                                                                                                                                                                                                                                                                        
| | 23  | .1  |  | Consent of Crowe Chizek and Company LLC.                                                                                                                                                                                                                                                             
| | 23  | .2  |  | Consent of McGladrey and Pullen, LLP.                                                                                                                                                                                                                                                                
| | 24  | .1  |  | Power of Attorney (included on signature page).                                                                                                                                                                                                                                                      
| | 31  | .1  |  | Rule 13a-14(a) Certification of Principal
    Executive Officer.                                                                                                                                                                                                                                     
| | 31  | .2  |  | Rule 13a-14(a) Certification of Principal
    Financial Officer.                                                                                                                                                                                                                                     
| | 32  | .1  |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002, from the Companys Chief
    Executive Officer and Chief Financial Officer.                                                                                          



---



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

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(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
2003:



| |   |                                 
| | - | --------------------------------
| |  | Form 8-K dated November 4, 2003.

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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.



| |     |                   
| | --- | ------------------
| | By: | /s/ BRAD A. LUECKE

| |                                          
| | -----------------------------------------
| |                                          
| | Brad A. Luecke                           
| | President and Chief Executive
    Officer

Date: March 12, 2004

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

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.

|                                       |  |                                                  |  |                |  | 
|-------------------------------------- |  | ------------------------------------------------ |  | -------------- |  | 
|                                       |  |                                                  |  |               
|Signature                              |  | Title                                            |  | Date          
|                                       |  |                                                  |  |               
|                                      
|/s/ E.V. SILVERIE.V. Silveri           |  | Chairman of the Board, Director                  |  | March 12, 2004
|                                      
|/s/ BRAD A. LUECKEBrad A. Luecke       |  | President, Chief Executive Officer, and Director |  | March 12, 2004
|                                      
|/s/ ANGELO A. DIPAOLOAngelo A. DiPaolo |  | Director                                         |  | March 12, 2004
|                                      
|/s/ GERALD F. HARTLEYGerald F. Hartley |  | Director                                         |  | March 12, 2004
|                                      
|/s/ DANIEL NAGLEDaniel Nagle           |  | Director                                         |  | March 12, 2004
|                                      
|/s/ JOSEPH RIZZAJoseph Rizza           |  | Director                                         |  | March 12, 2004
|                                      
|/s/ LEROY ROSASCOLeRoy Rosasco         |  | Director                                         |  | March 12, 2004

56



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##### Table of Contents



|                                       |  |                                                                                |  |                |  | 
|-------------------------------------- |  | ------------------------------------------------------------------------------ |  | -------------- |  | 
|                                       |  |                                                                                |  |               
|Signature                              |  | Title                                                                          |  | Date          
|                                       |  |                                                                                |  |               
|                                      
|/s/ ROBERT D. SMALLRobert D. Small     |  | Director                                                                       |  | March 12, 2004
|                                      
|/s/ LEON WOLINLeon Wolin               |  | Director                                                                       |  | March 12, 2004
|                                      
|/s/ DANIEL R. KADOLPHDaniel R. Kadolph |  | Senior Vice President, Chief Financial Officer,
    Comptroller, and Treasurer |  | March 12, 2004

57



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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.

CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003, 2002, and
2001


CONTENTS

|                                |                                                     |  |     |     | 
|------------------------------- | --------------------------------------------------- |  | --- | --- | 
|REPORTS OF INDEPENDENT AUDITORS |                                                     |  | F-2 |    
|FINANCIAL STATEMENTS            |                                                     |  |     |    
|                                | CONSOLIDATED BALANCE SHEETS                         |  |     | F-4 | 
|                                | CONSOLIDATED STATEMENTS OF INCOME                   |  |     | F-5 | 
|                                | CONSOLIDATED STATEMENTS OF STOCKHOLDERS
    EQUITY |  |     | F-6 | 
|                                | CONSOLIDATED STATEMENTS OF CASH FLOWS               |  |     | F-7 | 
|                                | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS          |  |     | F-9 | 

F-1



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##### 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 sheet of Midwest Banc Holdings, Inc. as of
December 31, 2003, and the related consolidated statements
of income, stockholders equity, and cash flows for the
year ended December 31, 2003. 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 audit.

We conducted our audit 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 audit
provides 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, 2003 and the results of
its operations and its cash flows for the year ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.



| |                        
| | -----------------------
| | MCGLADREY & PULLEN, LLP

Chicago, Illinois

January 30, 2004, except for note 27,
as to which


the date is
March 12, 2004


F-2



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##### 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 sheet of Midwest Banc Holdings, Inc. as of
December 31, 2002, and the related consolidated statements
of income, stockholders equity, and cash flows for each of
the two 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 the results of
its operations and its cash flows for each of the two 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-3



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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

|                                                                              |                                                                                                                       |                            |                                            |           |           |           |           |           |           |           | 
|----------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | --------- | --------- | --------- | --------- | --------- | --------- | --------- | 
|                                                                              |                                                                                                                       |                           
|                                                                              |                                                                                                                       | December 31,              
|                                                                              |                                                                                                                       |                           
|                                                                              |                                                                                                                       | 2003                       |                                            | 2002     
|                                                                              |                                                                                                                       |                            |                                            |          
|                                                                              |                                                                                                                       |                           
|                                                                              |                                                                                                                       | (In thousands except share
|                                                                              |                                                                                                                       | and per share data)       
|ASSETS                                                                       
|Cash and cash equivalents                                                     |                                                                                                                       | $                          | 196,157                                    |           |           | $         | 49,687    |          
|Securities available-for-sale                                                 |                                                                                                                       |                            | 796,140                                    |           |           |           | 651,873   |          
|Securities held-to-maturity (fair value:
    2003 - $57,239; 2002 - $120,421) |                                                                                                                       |                            | 56,074                                     |           |           |           | 118,620   |          
|Loans                                                                         |                                                                                                                       |                            | 1,081,296                                  |           |           |           | 1,136,704 |          
|Allowance for loan losses                                                     |                                                                                                                       |                            | (15,714                                    | )         |           |           | (20,754   | )        
|                                                                              |                                                                                                                       |                            |                                            |           |           |           |           |          
|                                                                              | Net loans                                                                                                             |                            |                                            | 1,065,582 |           |           |           | 1,115,950 |          
|Cash value of life insurance                                                  |                                                                                                                       |                            | 24,906                                     |           |           |           | 20,634    |          
|Premises and equipment, net                                                   |                                                                                                                       |                            | 27,376                                     |           |           |           | 18,999    |          
|Other real estate                                                             |                                                                                                                       |                            | 6,942                                      |           |           |           | 533       |          
|Core deposit and other intangibles, net                                       |                                                                                                                       |                            | 2,790                                      |           |           |           | 244       |          
|Goodwill                                                                      |                                                                                                                       |                            | 4,360                                      |           |           |           | 4,360     |          
|Due from broker                                                               |                                                                                                                       |                            | 40,477                                     |           |           |           |          |          
|Other assets                                                                  |                                                                                                                       |                            | 43,345                                     |           |           |           | 28,147    |          
|                                                                              |                                                                                                                       |                            |                                            |           |           |           |           |          
|                                                                              | Total assets                                                                                                          |                            | $                                          | 2,264,149 |           |           | $         | 2,009,047 |          
|                                                                              |                                                                                                                       |                            |                                            |           |           |           |           |          
|                                                                             
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                     
|Liabilities                                                                   |                                                                                                                       |                            |                                            |           |           |           |           |          
|                                                                              | Deposits                                                                                                              |                            |                                            |           |           |           |           |           |          
|                                                                              |                                                                                                                       | Non-interest-bearing       |                                            | $         | 160,668   |           |           | $         | 134,858   |          
|                                                                              |                                                                                                                       | Interest-bearing           |                                            |           | 1,425,743 |           |           |           | 1,255,790 |          
|                                                                              |                                                                                                                       |                            |                                            |           |           |           |           |          
|                                                                              |                                                                                                                       |                            | Total deposits                             |           |           | 1,586,411 |           |           |           | 1,390,648 | 
|                                                                              | Federal funds purchased                                                                                               |                            |                                            |          |           |           |           | 20,825    |          
|                                                                              | Securities sold under agreements to repurchase                                                                        |                            |                                            | 202,699   |           |           |           | 185,057   |          
|                                                                              | Advances from the Federal Home Loan Bank                                                                              |                            |                                            | 253,461   |           |           |           | 219,500   |          
|                                                                              | Company obligated mandatory redeemable trust
    preferred securities                                                 |                            |                                            | 54,000    |           |           |           | 35,000    |          
|                                                                              | Note payable                                                                                                          |                            |                                            | 2,000     |           |           |           | 2,000     |          
|                                                                              | Due to broker                                                                                                         |                            |                                            |          |           |           |           | 20,582    |          
|                                                                              | Other liabilities                                                                                                     |                            |                                            | 22,497    |           |           |           | 20,484    |          
|                                                                              |                                                                                                                       |                            |                                            |           |           |           |           |          
|                                                                              |                                                                                                                       |                            | Total liabilities                          |           |           | 2,121,068 |           |           |           | 1,894,096 | 
|Stockholders equity                                                          |                                                                                                                       |                            |                                            |           |           |           |           |          
|                                                                              | Preferred stock, $.01 par value,
    1,000,000 shares authorized; none issued                                         |                            |                                            |          |           |           |           |          |          
|                                                                              | Common stock, $.01 par value,
    24,000,000 shares authorized; 18,668,140 and 17,069,052
    issued in 2003 and 2002 |                            |                                            | 187       |           |           |           | 171       |          
|                                                                              | Surplus                                                                                                               |                            |                                            | 64,330    |           |           |           | 29,366    |          
|                                                                              | Retained earnings                                                                                                     |                            |                                            | 102,041   |           |           |           | 87,105    |          
|                                                                              | Accumulated other comprehensive income (loss)                                                                         |                            |                                            | (15,824   | )         |           |           | 7,145     |          
|                                                                              | Treasury stock, at cost (2003 -
    806,934 shares, 2002 - 915,022 shares)                                            |                            |                                            | (7,653    | )         |           |           | (8,836    | )        
|                                                                              |                                                                                                                       |                            |                                            |           |           |           |           |          
|                                                                              |                                                                                                                       | Total stockholders equity |                                            |           | 143,081   |           |           |           | 114,951   |          
|                                                                              |                                                                                                                       |                            |                                            |           |           |           |           |          
|                                                                              |                                                                                                                       |                            | Total liabilities and stockholders equity |           | $         | 2,264,149 |           |           | $         | 2,009,047 | 
|                                                                              |                                                                                                                       |                            |                                            |           |           |           |           |          

See accompanying notes to consolidated financial
statements.

F-4



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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME

|                                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |        |         | 
|------------------------------------------------------- | --------------------------------------------------------------------- | ------------------------------------- | ------ | ------ | ------- | ---- | ------ | ------ | ------- | - | ------ | ------ | ------- | 
|                                                        |                                                                       |                                      
|                                                        |                                                                       | Year Ended December 31,              
|                                                        |                                                                       |                                      
|                                                        |                                                                       | 2003                                  |        | 2002   |         | 2001
|                                                        |                                                                       |                                       |        |        |         |     
|                                                        |                                                                       |                                      
|                                                        |                                                                       | (In thousands, except per share data)
|Interest income                                         |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|                                                        | Loans                                                                 |                                       | $      | 72,210 |         |      | $      | 74,433 |         |   | $      | 76,429 |        
|                                                        | Securities                                                            |                                       |        |        |         |      |        |        |         |   |        |        |        
|                                                        |                                                                       | Taxable                               |        |        | 36,492  |      |        |        | 35,529  |   |        |        | 34,920  | 
|                                                        |                                                                       | Exempt from federal income taxes      |        |        | 3,111   |      |        |        | 2,621   |   |        |        | 1,508   | 
|                                                        | Trading account securities                                            |                                       |        | 19     |         |      |        |       |         |   |        | 25     |        
|                                                        | Federal funds sold and other short-term
    investments               |                                       |        | 247    |         |      |        | 138    |         |   |        | 250    |        
|                                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|                                                        |                                                                       | Total interest income                 |        |        | 112,079 |      |        |        | 112,721 |   |        |        | 113,132 | 
|                                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|Interest expense                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|                                                        | Deposits                                                              |                                       |        | 30,065 |         |      |        | 34,036 |         |   |        | 47,519 |        
|                                                        | Federal funds purchased                                               |                                       |        | 163    |         |      |        | 313    |         |   |        | 793    |        
|                                                        | Securities sold under agreements to repurchase                        |                                       |        | 5,948  |         |      |        | 4,205  |         |   |        | 1,428  |        
|                                                        | Advances from the Federal Home Loan Bank                              |                                       |        | 10,862 |         |      |        | 13,004 |         |   |        | 13,528 |        
|                                                        | Company obligated mandatory redeemable trust
    preferred securities |                                       |        | 2,589  |         |      |        | 1,556  |         |   |        | 2,000  |        
|                                                        | Notes payable                                                         |                                       |        | 170    |         |      |        | 205    |         |   |        | 397    |        
|                                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|                                                        |                                                                       | Total interest expense                |        |        | 49,797  |      |        |        | 53,319  |   |        |        | 65,665  | 
|                                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|Net interest income                                     |                                                                       |                                       | 62,282 |        |         |      | 59,402 |        |         |   | 47,467 |       
|                                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|Provision for loan losses                               |                                                                       |                                       | 10,205 |        |         |      | 18,532 |        |         |   | 2,220  |       
|                                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|Net interest income after provision for loan
    losses |                                                                       |                                       | 52,077 |        |         |      | 40,870 |        |         |   | 45,247 |       
|                                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|Other income                                            |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|                                                        | Service charges on deposit accounts                                   |                                       |        | 5,855  |         |      |        | 5,691  |         |   |        | 5,013  |        
|                                                        | Net gains on securities transactions                                  |                                       |        | 5,340  |         |      |        | 1,522  |         |   |        | 2,761  |        
|                                                        | Net trading account profits (losses)                                  |                                       |        | (14    | )       |      |        | 348    |         |   |        | 899    |        
|                                                        | Option income                                                         |                                       |        | 5,326  |         |      |        | 1,822  |         |   |        | 508    |        
|                                                        | Mortgage banking fees                                                 |                                       |        | 1,048  |         |      |        | 693    |         |   |        | 605    |        
|                                                        | Insurance and brokerage commissions                                   |                                       |        | 2,244  |         |      |        | 1,490  |         |   |        | 795    |        
|                                                        | Trust income                                                          |                                       |        | 574    |         |      |        | 572    |         |   |        | 628    |        
|                                                        | Increase in cash surrender value of life insurance                    |                                       |        | 959    |         |      |        | 1,080  |         |   |        | 937    |        
|                                                        | Other income                                                          |                                       |        | 1,754  |         |      |        | 790    |         |   |        | 656    |        
|                                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|                                                        |                                                                       | Total other income                    |        |        | 23,086  |      |        |        | 14,008  |   |        |        | 12,802  | 
|                                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|Other expenses                                          |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|                                                        | Salaries and employee benefits                                        |                                       |        | 24,156 |         |      |        | 20,659 |         |   |        | 18,770 |        
|                                                        | Occupancy and equipment                                               |                                       |        | 6,495  |         |      |        | 4,818  |         |   |        | 5,067  |        
|                                                        | Professional services                                                 |                                       |        | 4,493  |         |      |        | 2,825  |         |   |        | 2,144  |        
|                                                        | Other expenses                                                        |                                       |        | 8,351  |         |      |        | 5,607  |         |   |        | 5,482  |        
|                                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|                                                        |                                                                       | Total other expenses                  |        |        | 43,495  |      |        |        | 33,909  |   |        |        | 31,463  | 
|                                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|Income before income taxes                              |                                                                       |                                       | 31,668 |        |         |      | 20,969 |        |         |   | 26,586 |       
|Provision for income taxes                              |                                                                       |                                       | 8,887  |        |         |      | 4,661  |        |         |   | 8,704  |       
|                                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|Net income                                              |                                                                       | $                                     | 22,781 |        |         | $    | 16,308 |        |         | $ | 17,882 |       
|                                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|Basic earnings per share                                |                                                                       | $                                     | 1.28   |        |         | $    | 1.01   |        |         | $ | 1.11   |       
|                                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|Diluted earnings per share                              |                                                                       | $                                     | 1.25   |        |         | $    | 0.99   |        |         | $ | 1.09   |       
|                                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       
|Cash dividends declared per common share                |                                                                       | $                                     | 0.44   |        |         | $    | 0.40   |        |         | $ | 0.40   |       
|                                                        |                                                                       |                                       |        |        |         |      |        |        |         |   |        |       

See accompanying notes to consolidated financial
statements.

F-5



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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                                                                                                                                                |                                                                                                                                         |                                                 |     |         |  |          |        |               |  |          |         |               |  |   |         |         |   |   |        |   |  |   |         |         |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------- | --- | ------- |  | -------- | ------ | ------------- |  | -------- | ------- | ------------- |  | - | ------- | ------- | - | - | ------ | - |  | - | ------- | ------- | ------ | -
|                                                                                                                                                                                                |                                                                                                                                         |                                                 |     |         |  |          |        | Accumulated   |  |          |         |              
|                                                                                                                                                                                                |                                                                                                                                         |                                                 |     |         |  |          |        | Other         |  |          |         | Total        
|                                                                                                                                                                                                |                                                                                                                                         | Common                                          |     |         |  | Retained |        | Comprehensive |  | Treasury |         | Stockholders
|                                                                                                                                                                                                |                                                                                                                                         | Stock                                           |     | Surplus |  | Earnings |        | Income (Loss) |  | Stock    |         | Equity       
|                                                                                                                                                                                                |                                                                                                                                         |                                                 |     |         |  |          |        |               |  |          |         |              
|                                                                                                                                                                                                |                                                                                                                                         |                                                
|                                                                                                                                                                                                |                                                                                                                                         | (In thousands, except share and per share data)
|Balance, January 1, 2001                                                                                                                                                                        |                                                                                                                                         | $                                               | 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  |        
|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 |        
|Cash dividends declared ($.44 per share)                                                                                                                                                        |                                                                                                                                         |                                                 |    |         |  |          |       |               |  |          | (7,845  | )             |  |   |        |         |   |   |       |   |  |   | (7,845  | )      
|Issuance of 1,599,088 shares of common stock
    upon acquisition of Big Foot Financial Corp.                                                                                                   |                                                                                                                                         |                                                 | 16  |         |  |          | 30,448 |               |  |          |        |               |  |   |        |         |   |   |       |   |  |   | 30,464  |        
|Issuance of common stock upon exercise of 108,088
    stock options, net of tax benefits                                                                                                        |                                                                                                                                         |                                                 |    |         |  |          | 483    |               |  |          |        |               |  |   |        |         |   |   | 1,183  |   |  |   | 1,666   |        
|Capital contribution from loan payoff by related
    parties                                                                                                                                    |                                                                                                                                         |                                                 |    |         |  |          | 4,033  |               |  |          |        |               |  |   |        |         |   |   |       |   |  |   | 4,033   |        
|Comprehensive income                                                                                                                                                                            |                                                                                                                                         |                                                 |     |         |  |          |        |               |  |          |         |               |  |   |         |         |   |   |        |   |  |   |         |        
|                                                                                                                                                                                                | Net income                                                                                                                              |                                                 |     |        |  |          |        |              |  |          |         | 22,781        |  |   |         |        |   |   |        |  |  |   |         | 22,781  |       
|                                                                                                                                                                                                | Net decrease in fair value of securities
    classified as available-for-sale, net of income taxes and
    reclassification adjustments |                                                 |     |        |  |          |        |              |  |          |         |              |  |   |         | (22,969 | ) |   |        |  |  |   |         | (22,969 | )     
|                                                                                                                                                                                                |                                                                                                                                         |                                                 |     |         |  |          |        |               |  |          |         |               |  |   |         |         |   |   |        |   |  |   |         |        
|                                                                                                                                                                                                |                                                                                                                                         | Total comprehensive loss                        |     |         |  |          |        |               |  |          |         |               |  |   |         |         |   |   |        |   |  |   |         |         | (188   | )
|                                                                                                                                                                                                |                                                                                                                                         |                                                 |     |         |  |          |        |               |  |          |         |               |  |   |         |         |   |   |        |   |  |   |         |        
|Balance, December 31, 2003                                                                                                                                                                      |                                                                                                                                         | $                                               | 187 |         |  | $        | 64,330 |               |  | $        | 102,041 |               |  | $ | (15,824 | )       |   | $ | (7,653 | ) |  | $ | 143,081 |        
|                                                                                                                                                                                                |                                                                                                                                         |                                                 |     |         |  |          |        |               |  |          |         |               |  |   |         |         |   |   |        |   |  |   |         |        

See accompanying notes to consolidated financial
statements.

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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                 |                                                                                                               |                                                               |                                                         |          |        |        |        |          |         |          |        |          |         |          |  
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------------------------- | -------- | ------ | ------ | ------ | -------- | ------- | -------- | ------ | -------- | ------- | -------- | -
|                                                 |                                                                                                               |                                                              
|                                                 |                                                                                                               | Year Ended December 31,                                      
|                                                 |                                                                                                               |                                                              
|                                                 |                                                                                                               | 2003                                                          |                                                         | 2002     |        | 2001  
|                                                 |                                                                                                               |                                                               |                                                         |          |        |       
|                                                 |                                                                                                               |                                                              
|                                                 |                                                                                                               | (In thousands)                                               
|Cash flows from operating activities             |                                                                                                               |                                                               |                                                         |          |        |        |        |          |         |          |        |         
|                                                 | Net income                                                                                                    |                                                               | $                                                       | 22,781   |        |        | $      | 16,308   |         |          | $      | 17,882   |        
|                                                 | Adjustments to reconcile net income to net cash
    provided by operating activities                          |                                                               |                                                         |          |        |        |        |          |         |          |        |          |        
|                                                 |                                                                                                               | Depreciation                                                  |                                                         |          | 2,433  |        |        |          | 2,308   |          |        |          | 2,474   |         
|                                                 |                                                                                                               | Provision for loan losses                                     |                                                         |          | 10,205 |        |        |          | 18,532  |          |        |          | 2,220   |         
|                                                 |                                                                                                               | Amortization of other intangibles                             |                                                         |          | 495    |        |        |          | 56      |          |        |          |        |         
|                                                 |                                                                                                               | Proceeds from sales of trading account
    securities, net    |                                                         |          | (14    | )      |        |          | 348     |          |        |          | 899     |         
|                                                 |                                                                                                               | Amortization of premiums and discounts on
    securities, net |                                                         |          | 10,302 |        |        |          | 5,172   |          |        |          | 2,832   |         
|                                                 |                                                                                                               | Net gain on sales of securities                               |                                                         |          | (5,340 | )      |        |          | (1,522  | )        |        |          | (2,761  | )       
|                                                 |                                                                                                               | Net loss (gain) on sales of trading account
    securities    |                                                         |          | 14     |        |        |          | (348    | )        |        |          | (899    | )       
|                                                 |                                                                                                               | Federal Home Loan Bank stock dividend                         |                                                         |          | (1,245 | )      |        |          | (671    | )        |        |          | (864    | )       
|                                                 |                                                                                                               | Net change in real estate loans held for sale                 |                                                         |          | 3,353  |        |        |          | (1,510  | )        |        |          | (2,798  | )       
|                                                 |                                                                                                               | Increase in cash surrender value of life insurance            |                                                         |          | (959   | )      |        |          | (1,080  | )        |        |          | (937    | )       
|                                                 |                                                                                                               | Deferred income taxes                                         |                                                         |          | 682    |        |        |          | (4,087  | )        |        |          | 486     |         
|                                                 |                                                                                                               | Loss (gain) on sale of other real estate                      |                                                         |          | 837    |        |        |          | 8       |          |        |          | (5      | )       
|                                                 |                                                                                                               | Change in other assets                                        |                                                         |          | (4,345 | )      |        |          | (16,642 | )        |        |          | (2,536  | )       
|                                                 |                                                                                                               | Change in other liabilities                                   |                                                         |          | (829   | )      |        |          | 8,353   |          |        |          | 3,307   |         
|                                                 |                                                                                                               |                                                               |                                                         |          |        |        |        |          |         |          |        |         
|                                                 |                                                                                                               |                                                               | Net cash provided by operating activities               |          |        | 38,370 |        |          |         | 25,225   |        |          |         | 19,300   |  
|Cash flows from investing activities             |                                                                                                               |                                                               |                                                         |          |        |        |        |          |         |          |        |         
|                                                 | Sales of securities available-for-sale                                                                        |                                                               |                                                         | 428,300  |        |        |        | 319,952  |         |          |        | 347,230  |        
|                                                 | Maturities of securities available-for-sale                                                                   |                                                               |                                                         | 355      |        |        |        | 4,190    |         |          |        | 2,291    |        
|                                                 | Principal payments on securities                                                                              |                                                               |                                                         | 338,203  |        |        |        | 209,620  |         |          |        | 132,915  |        
|                                                 | Purchases of securities available-for-sale                                                                    |                                                               |                                                         | (932,634 | )      |        |        | (611,101 | )       |          |        | (597,597 | )      
|                                                 | Purchases of securities held-to-maturity                                                                      |                                                               |                                                         |         |        |        |        | (24,588  | )       |          |        |         |        
|                                                 | Maturities of securities held-to-maturity                                                                     |                                                               |                                                         | 4,795    |        |        |        | 26,290   |         |          |        | 3,630    |        
|                                                 | Sale of derivatives or futures contracts                                                                      |                                                               |                                                         | (7,967   | )      |        |        |         |         |          |        |         |        
|                                                 | Net increase (decrease) in loans                                                                              |                                                               |                                                         | 48,545   |        |        |        | (139,722 | )       |          |        | (176,634 | )      
|                                                 | Proceeds from sale of mortgage loans                                                                          |                                                               |                                                         | 142,546  |        |        |        |         |         |          |        |         |        
|                                                 | Cash received (paid), net of cash and cash
    equivalents in acquisition and stock issuance                  |                                                               |                                                         | 17,783   |        |        |        | (1,008   | )       |          |        |         |        
|                                                 | Proceeds from sale of other real estate                                                                       |                                                               |                                                         | 2,635    |        |        |        | 347      |         |          |        | 1,144    |        
|                                                 | Property and equipment expenditures                                                                           |                                                               |                                                         | (2,091   | )      |        |        | (1,830   | )       |          |        | (766     | )      
|                                                 |                                                                                                               |                                                               |                                                         |          |        |        |        |          |         |          |        |         
|                                                 |                                                                                                               |                                                               | Net cash provided by (used in) investing
    activities |          |        | 40,470 |        |          |         | (217,850 | )      |          |         | (287,787 | )
|Cash flows from financing activities             |                                                                                                               |                                                               |                                                         |          |        |        |        |          |         |          |        |         
|                                                 | Net increase in deposits                                                                                      |                                                               |                                                         | 58,034   |        |        |        | 179,128  |         |          |        | 125,734  |        
|                                                 | Issuance of Company obligated mandatory
    redeemable trust preferred securities, net of debt issuance costs |                                                               |                                                         | 18,430   |        |        |        | 14,525   |         |          |        |         |        
|                                                 | Borrowings                                                                                                    |                                                               |                                                         | 5,500    |        |        |        | 9,300    |         |          |        | 9,500    |        
|                                                 | Payments on borrowings                                                                                        |                                                               |                                                         | (5,500   | )      |        |        | (38,800  | )       |          |        | (3,300   | )      
|                                                 | Dividends paid                                                                                                |                                                               |                                                         | (7,317   | )      |        |        | (6,450   | )       |          |        | (6,440   | )      
|                                                 | Change in short-term securities sold under
    agreements to repurchase and federal funds purchased           |                                                               |                                                         | (3,183   | )      |        |        | (116,789 | )       |          |        | 146,857  |        
|                                                 | Proceeds from long-term securities sold under
    agreement to repurchase                                     |                                                               |                                                         |         |        |        |        | 151,521  |         |          |        |         |        
|                                                 | Repurchase of common stock                                                                                    |                                                               |                                                         |         |        |        |        | (576     | )       |          |        | (541     | )      
|                                                 | Proceeds from exercise of stock options                                                                       |                                                               |                                                         | 1,666    |        |        |        | 641      |         |          |        | (67      | )      
|                                                 |                                                                                                               |                                                               |                                                         |          |        |        |        |          |         |          |        |         
|                                                 |                                                                                                               | Net cash provided by financing activities                     |                                                         |          | 67,630 |        |        |          | 192,500 |          |        |          | 271,743 |         
|                                                 |                                                                                                               |                                                               |                                                         |          |        |        |        |          |         |          |        |         
|Increase (decrease) in cash and cash equivalents |                                                                                                               |                                                               | 146,470                                                 |          |        |        | (125   | )        |         |          | 3,256  |         
|Cash and cash equivalents at beginning of year   |                                                                                                               |                                                               | 49,687                                                  |          |        |        | 49,812 |          |         |          | 46,556 |         
|                                                 |                                                                                                               |                                                               |                                                         |          |        |        |        |          |         |          |        |         
|Cash and cash equivalents at end of
    year     |                                                                                                               | $                                                             | 196,157                                                 |          |        | $      | 49,687 |          |         | $        | 49,812 |         
|                                                 |                                                                                                               |                                                               |                                                         |          |        |        |        |          |         |          |        |         

F-7



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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.


CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)

|                                                                        |                                                                     |                          |                                          |                               |                             |                                    |         |        |        |     |       |        |        |   |   |   |   | 
|----------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------ | ---------------------------------------- | ----------------------------- | --------------------------- | ---------------------------------- | ------- | ------ | ------ | --- | ----- | ------ | ------ | - | - | - | - | 
|                                                                        |                                                                     |                         
|                                                                        |                                                                     | Year Ended December 31, 
|                                                                        |                                                                     |                         
|                                                                        |                                                                     | 2003                     |                                          | 2002                          |                             | 2001                              
|                                                                        |                                                                     |                          |                                          |                               |                             |                                   
|                                                                        |                                                                     |                         
|                                                                        |                                                                     | (In thousands)          
|Supplemental disclosures                                                |                                                                     |                          |                                          |                               |                             |                                    |         |        |        |     |       |       
|                                                                        | Cash paid during the year for                                       |                          |                                          |                               |                             |                                    |         |        |        |     |       |        |       
|                                                                        |                                                                     | Interest                 |                                          | $                             | 49,953                      |                                    |         | $      | 53,511 |     |       | $      | 66,105 |  
|                                                                        |                                                                     | Income taxes             |                                          |                               | 6,334                       |                                    |         |        | 11,175 |     |       |        | 8,991  |  
|Supplemental schedule of noncash investing and
    financing activities |                                                                     |                          |                                          |                               |                             |                                    |         |        |        |     |       |       
|                                                                        | Amount due to broker for purchases of securities                    |                          |                                          |                              |                             |                                    |         | 20,582 |        |     |       | 46,432 |       
|                                                                        | Amount due from broker for purchases of securities                  |                          |                                          | 40,477                        |                             |                                    |         |       |        |     |       |       |       
|                                                                        | Transfer from securities available-for-sale to
    held-to-maturity |                          |                                          |                              |                             |                                    |         | 99,841 |        |     |       |       |       
|                                                                        | Acquisitions                                                        |                          |                                          |                               |                             |                                    |         |        |        |     |       |        |       
|                                                                        |                                                                     | Noncash assets acquired: |                                          |                               |                             |                                    |         |        |        |     |       |        |        |  
|                                                                        |                                                                     |                          | Investment securities available for sale |                               |                             | 17,128                             |         |        |        |    |       |        |        |  |  
|                                                                        |                                                                     |                          | Loans, net                               |                               |                             | 157,477                            |         |        |        |    |       |        |        |  |  
|                                                                        |                                                                     |                          | Premises and equipment, net              |                               |                             | 8,719                              |         |        |        | 139 |       |        |        |  |  
|                                                                        |                                                                     |                          | Goodwill, net                            |                               |                             |                                   |         |        |        | 761 |       |        |        |  |  
|                                                                        |                                                                     |                          | Other intangibles, net                   |                               |                             | 3,041                              |         |        |        | 300 |       |        |        |  |  
|                                                                        |                                                                     |                          | Other assets                             |                               |                             | 5,930                              |         |        |        |    |       |        |        |  |  
|                                                                        |                                                                     |                          |                                          |                               |                             |                                    |         |        |        |     |       |       
|                                                                        |                                                                     |                          |                                          | Total noncash assets acquired |                             | $                                  | 192,295 |        |        | $   | 1,200 |        |        | $ |  |  
|                                                                        |                                                                     |                          |                                          |                               |                             |                                    |         |        |        |     |       |       
|                                                                        |                                                                     | Liabilities assumed:     |                                          |                               |                             |                                    |         |        |        |     |       |        |        |  
|                                                                        |                                                                     |                          | Deposits                                 |                               | $                           | 137,729                            |         |        | $      |    |       |        | $      |  |  
|                                                                        |                                                                     |                          | FHLB advances                            |                               |                             | 36,727                             |         |        |        |    |       |        |        |  |  
|                                                                        |                                                                     |                          | Accrued expenses and other liabilities   |                               |                             | 5,887                              |         |        |        |    |       |        |        |  |  
|                                                                        |                                                                     |                          |                                          |                               |                             |                                    |         |        |        |     |       |       
|                                                                        |                                                                     |                          |                                          | Total liabilities assumed     |                             |                                    | 180,343 |        |        |     |      |        |        |   |  |  
|                                                                        |                                                                     |                          |                                          |                               |                             |                                    |         |        |        |     |       |       
|                                                                        |                                                                     |                          |                                          |                               | Net noncash assets acquired |                                    | $       | 11,952 |        |     | $     | 1,200  |        |   | $ |  |  
|                                                                        |                                                                     |                          |                                          |                               |                             |                                    |         |        |        |     |       |       
|                                                                        |                                                                     |                          |                                          |                               |                             | Cash and cash equivalents acquired |         | $      | 19,698 |     |       | $      |       |   |   | $ |  | 
|                                                                        |                                                                     |                          |                                          |                               |                             |                                    |         |        |        |     |       |       

See accompanying notes to consolidated financial
statements.

F-8



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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|         |                     
|-------- | --------------------
|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, MBHI Capital Trust III, MBHI Capital
Trust IV, and Midwest Financial and Investment
Services, Inc. (MFIS). Significant intercompany
balances and transactions have been eliminated.

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 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, 2003 or 2002. Declines in the fair value of
held-to-maturity and available-for-sale securities below their
cost that are deemed to be other than temporary are reflected in
earnings as realized losses. In estimating other than-temporary
losses, management considers (1) the length of time and the
extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the
issuer, and (3) the intent and ability of the Company to
retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.

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 deferred fees.
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

F-9



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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 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 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.

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.

Cash Surrender Value of Life
Insurance:The Company has purchased
life insurance policies on certain key executives. 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.

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.

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MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 price 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 Statement No. 123, Accounting for Stock-Based
Compensation.

|                                                                                      |  |                                 |        |      |  |      |        |  |  |   |        | 
|------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                                                      |  | 2003                            |        | 2002 |  | 2001
|                                                                                      |  |                                 |        |      |  |     
|                                                                                      |  |                                
|                                                                                      |  | (In thousands, except per share
|                                                                                      |  | data)                          
|Net income as reported                                                                |  | $                               | 22,781 |      |  | $    | 16,308 |  |  | $ | 17,882 | 
|Deduct: Stock-based compensation expense
    determined under fair value-based method |  |                                 | 457    |      |  |      | 321    |  |  |   | 242    | 
|                                                                                      |  |                                 |        |      |  |      |        |  |  |   |        | 
|Pro forma net income                                                                  |  | $                               | 22,324 |      |  | $    | 15,987 |  |  | $ | 17,640 | 
|                                                                                      |  |                                 |        |      |  |      |        |  |  |   |        | 
|Basic earnings per share as reported                                                  |  | $                               | 1.28   |      |  | $    | 1.01   |  |  | $ | 1.11   | 
|Pro forma basic earnings per share                                                    |  |                                 | 1.25   |      |  |      | 0.99   |  |  |   | 1.10   | 
|Diluted earnings per share as reported                                                |  |                                 | 1.25   |      |  |      | 0.99   |  |  |   | 1.09   | 
|Pro forma diluted earnings per share                                                  |  |                                 | 1.23   |      |  |      | 0.97   |  |  |   | 1.08   | 

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

|                                |  |      |         |      |  |      |         |   |  |   |         |  
|------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                |  | 2003 |         | 2002 |  | 2001
|                                |  |      |         |      |  |     
|Fair value                      |  | $    | 6.31    |      |  | $    | 4.83    |   |  | $ | 2.99    |  
|Risk-free interest rate         |  |      | 3.40    | %    |  |      | 4.84    | % |  |   | 4.64    | %
|Expected option life            |  |      | 5 years |      |  |      | 5 years |   |  |   | 5 years |  
|Expected stock price volatility |  |      | 53.00   | %    |  |      | 36.68   | % |  |   | 22.15   | %
|Dividend yield                  |  |      | 1.98    |      |  |      | 2.27    |   |  |   | 3.18    |  

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.

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.

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.

F-11



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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Guarantees:In
November 2002, the FASB issued Interpretation No. 45
(FIN 45), Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others. This interpretation expands the
disclosures to be made by a guarantor about its obligations
under certain guarantees and requires the guarantor to recognize
a liability for the obligation assumed under a guarantee. In
general, FIN 45 applies to contracts or indemnification
agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an
underlying that is related to an asset, liability, or equity
security of the guaranteed party.

Certain guarantee contracts are excluded from
both the disclosure and recognition requirements of this
interpretation, while other guarantees are subject to just the
disclosure requirements of FIN 45 but not to the
recognition provisions. The disclosure requirements of
FIN 45 were effective for the Company as of
December 31, 2002, and require disclosure of the nature of
the guarantee, the maximum potential amount of future payments
the guarantor could be required to make under the guarantee, and
the current amount of the liability, if any, for the
guarantors obligations under the guarantee. The
recognition requirements of FIN 45 were adopted during
2003. The implementation of the accounting requirements of
FIN 45 did not have a material impact on financial
condition, the results of operations, or liquidity.

Consolidation of Variable Interest
Entities:FASB Interpretation
No. 46 (FIN 46), Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research
Bulletin No. 51 (Revised December 2003) establishes
accounting guidance for consolidation of variable interest
entities (VIE) that function to support the
activities of the primary beneficiary. The primary beneficiary
of a VIE entity is the entity that absorbs a majority of the
VIEs expected losses, receives a majority of the
VIEs expected residual returns, or both, as a result of
ownership, controlling interest, contractual relationship or
other business relationship with a VIE. Prior to the
implementation of FIN 46, VIEs were generally consolidated
by an enterprise when the enterprise had a controlling financial
interest through ownership of a majority of the voting interest
in the entity. The provisions of FIN 46 were effective
immediately for all arrangements entered into after
January 31, 2003. If a VIE existed prior to
February 1, 2003, FIN 46 was effective at the
beginning of the first interim period beginning after
June 15, 2003. However, subsequent revisions to the
interpretation deferred the implementation date of FIN 46
until the first period ending after December 15, 2003.

The trust preferred securities issued by MBHI
Capital Trust I, II, III and IV are currently
included in the Tier 1 capital of the Company for
regulatory capital purposes. The Federal Reserve Board may in
the future disallow inclusion of the trust preferred securities
in Tier 1 capital for regulatory capital purposes. In July
2003, the Federal Reserve Board issued a supervisory letter
instructing bank holding companies to continue to include the
trust preferred securities in their Tier 1 capital for
regulatory capital purposes until notice is given to the
contrary.

The interpretations of FIN 46 and its
application to various transaction types and structures are
continually evolving. Management continuously monitors emerging
issues related to FIN 46, some of which could potentially
impact the Companys financial statements.

During the first quarter of 2004, the Company
will apply the provisions of FIN 46 to four wholly-owned
subsidiary trusts that issued capital securities to third-party
investors. The application of FIN 46 will result in the
deconsolidation of the four wholly-owned subsidiary trusts. The
assets and liabilities of the subsidiary trusts that will be
deconsolidated total $20 million, $15 million,
9 million and $10 million, respectively, at
December 31, 2003. See Note 13 for further discussion
of these trusts and the Companys related obligations. The
application of FIN 46 and related deconsolidation will
result in the reclassification of Company obligated mandatory
redeemable trust preferred securities into Investments In
Grantor Trusts and Junior Subordinated Debt due to
unconsolidated trust subsidiaries. The debentures issued
by the grantor trusts to Midwest Banc, less the capital
securities of the grantor trusts, continue to qualify as
Tier I capital under interim guidance issued by the Board
of Governors of the Federal Reserve System.

F-12



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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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



|         |           
|-------- | ----------
|Note 3  | Securities

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

|                              |                                                  |                                     |   |            |         |            |   |            |       |  |   |         |         |   |   |         |         | 
|----------------------------- | ------------------------------------------------ | ----------------------------------- | - | ---------- | ------- | ---------- | - | ---------- | ----- |  | - | ------- | ------- | - | - | ------- | ------- | 
|                              |                                                  |                                    
|                              |                                                  | December 31, 2003                  
|                              |                                                  |                                    
|                              |                                                  |                                     |   | Gross      |         | Gross      |   |           
|                              |                                                  | Amortized                           |   | Unrealized |         | Unrealized |   |           
|                              |                                                  | Cost                                |   | Gains      |         | Losses     |   | Fair Value
|                              |                                                  |                                     |   |            |         |            |   |           
|                              |                                                  |                                    
|                              |                                                  | (In thousands)                     
|Securities available-for-sale |                                                  |                                     |   |            |         |            |   |            |       |  |   |         |         |   |   |        
|                              | Obligations of U.S. government agencies          |                                     | $ | 360,280    |         |            | $ |           |       |  | $ | (23,676 | )       |   | $ | 336,604 |        
|                              | Obligations of states and political subdivisions |                                     |   | 35,124     |         |            |   | 2,078      |       |  |   |        |         |   |   | 37,202  |        
|                              | Mortgage-backed securities                       |                                     |   | 172,420    |         |            |   | 2,312      |       |  |   | (1,222  | )       |   |   | 173,510 |        
|                              | Equity securities                                |                                     |   | 159,391    |         |            |   | 353        |       |  |   | (4,984  | )       |   |   | 154,760 |        
|                              | Corporate and other debt securities              |                                     |   | 95,625     |         |            |   | 100        |       |  |   | (1,661  | )       |   |   | 94,064  |        
|                              |                                                  |                                     |   |            |         |            |   |            |       |  |   |         |         |   |   |        
|                              |                                                  | Total securities available-for-sale |   | $          | 822,840 |            |   | $          | 4,843 |  |   | $       | (31,543 | ) |   | $       | 796,140 | 
|                              |                                                  |                                     |   |            |         |            |   |            |       |  |   |         |         |   |   |        
|Securities held-to-maturity   |                                                  |                                     |   |            |         |            |   |            |       |  |   |         |         |   |   |        
|                              | Obligations of states and political subdivisions |                                     | $ | 12,840     |         |            | $ | 628        |       |  | $ |        |         |   | $ | 13,468  |        
|                              | Mortgage-backed securities                       |                                     |   | 43,234     |         |            |   | 537        |       |  |   |        |         |   |   | 43,771  |        
|                              |                                                  |                                     |   |            |         |            |   |            |       |  |   |         |         |   |   |        
|                              |                                                  | Total securities held-to-maturity   |   | $          | 56,074  |            |   | $          | 1,165 |  |   | $       |        |   |   | $       | 57,239  | 
|                              |                                                  |                                     |   |            |         |            |   |            |       |  |   |         |         |   |   |        

|                              |                                                  |                                     |   |            |         |            |   |            |        |  |   |      |        |   |   |         |         | 
|----------------------------- | ------------------------------------------------ | ----------------------------------- | - | ---------- | ------- | ---------- | - | ---------- | ------ |  | - | ---- | ------ | - | - | ------- | ------- | 
|                              |                                                  |                                    
|                              |                                                  | December 31, 2002                  
|                              |                                                  |                                    
|                              |                                                  |                                     |   | Gross      |         | Gross      |   |           
|                              |                                                  | Amortized                           |   | Unrealized |         | Unrealized |   |           
|                              |                                                  | Cost                                |   | Gains      |         | Losses     |   | Fair Value
|                              |                                                  |                                     |   |            |         |            |   |           
|                              |                                                  |                                    
|                              |                                                  | (In thousands)                     
|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 |        
|                              |                                                  |                                     |   |            |         |            |   |            |        |  |   |      |        |   |   |        
|                              |                                                  | Total securities held-to-maturity   |   | $          | 118,620 |            |   | $          | 1,810  |  |   | $    | (9     | ) |   | $       | 120,421 | 
|                              |                                                  |                                     |   |            |         |            |   |            |        |  |   |      |        |   |   |        

F-13



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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following is a summary of the fair value of
securities with unrealized losses and an aging of those
unrealized losses:

|                                        |  |                     |         |                   |  |       |         |            |  |       |        |            |  |   |      |   |  |   |         |  |  |   |         |  
|--------------------------------------- |  | ------------------- | ------- | ----------------- |  | ----- | ------- | ---------- |  | ----- | ------ | ---------- |  | - | ---- | - |  | - | ------- |  |  | - | ------- | -
|                                        |  |                    
|                                        |  | December 31, 2003  
|                                        |  |                    
|                                        |  |                     |         |                   |  |      
|                                        |  | Less Than 12 Months |         | 12 Months or More |  | Total
|                                        |  |                     |         |                   |  |      
|                                        |  | Fair                |         | Unrealized        |  | Fair  |         | Unrealized |  | Fair  |        | Unrealized
|                                        |  | Value               |         | Losses            |  | Value |         | Losses     |  | Value |        | Losses    
|                                        |  |                     |         |                   |  |       |         |            |  |       |        |           
|                                        |  |                    
|                                        |  | (In thousands)     
|Obligations of U.S. government agencies |  | $                   | 336,382 |                   |  | $     | (23,676 | )          |  | $     |       |            |  | $ |     |   |  | $ | 336,382 |  |  | $ | (23,676 | )
|Mortgage-backed securities              |  |                     | 79,792  |                   |  |       | (1,189  | )          |  |       | 2,220  |            |  |   | (33  | ) |  |   | 82,012  |  |  |   | (1,222  | )
|Equity securities                       |  |                     | 47,155  |                   |  |       | (4,850  | )          |  |       | 24,048 |            |  |   | (134 | ) |  |   | 71,203  |  |  |   | (4,984  | )
|Corporate and other debt securities     |  |                     | 78,403  |                   |  |       | (1,661  | )          |  |       |       |            |  |   |     |   |  |   | 78,403  |  |  |   | (1,661  | )
|                                        |  |                     |         |                   |  |       |         |            |  |       |        |            |  |   |      |   |  |   |         |  |  |   |         |  
|Total temporarily impaired securities   |  | $                   | 541,732 |                   |  | $     | (31,376 | )          |  | $     | 26,268 |            |  | $ | (167 | ) |  | $ | 568,000 |  |  | $ | (31,543 | )
|                                        |  |                     |         |                   |  |       |         |            |  |       |        |            |  |   |      |   |  |   |         |  |  |   |         |  

Management does not believe any individual
unrealized loss as of December 31, 2003 represents
other-than-temporary impairment. The unrealized loss for
U.S. government agencies and mortgage-backed securities
relate primarily to securities issued by FNMA and FHLMC. The
unrealized losses for equity securities relate primarily to
callable preferred stock issued by FNMA and FHLMC at
December 31, 2003 with a variable dividend. The unrealized
losses reported for Corporate and other debt securities relate
to securities which were rated single A minus or more by a
nationally recognized rating agency. These unrealized losses are
primarily attributable to changes in interest rates. The Company
has both the intent and ability to hold the securities contained
in the previous table for a time necessary to recover its
amortized cost, and due to the high quality of the securities,
the Company may also realize its amortized cost through the use
of options or interest rate derivatives in conjunction with
these securities.

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 resulted 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.

Securities with an approximate carrying value of
$555 million and $524 million at December 31,
2003 and 2002 were pledged to secure public deposits,
borrowings, and for other purposes as required or permitted by
law. Included in securities pledged at December 31, 2003
and 2002 is $203 million and $177 million,
respectively, which have been pledged for FHLB borrowings.

F-14



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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The amortized cost and fair value of securities
by contractual maturity at December 31, 2003 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                           |         |           
|                              |                                        | Cost                                |         | Fair Value
|                              |                                        |                                     |         |           
|                              |                                        |                                    
|                              |                                        | (In thousands)                     
|Securities available-for-sale |                                        |                                     |         |            |         |  |         |        
|                              | Due in one year or less                |                                     | $       | 1,197      |         |  | $       | 1,227   |        
|                              | Due after one year through five years  |                                     |         | 33,255     |         |  |         | 33,540  |        
|                              | Due after five years through ten years |                                     |         | 448,331    |         |  |         | 425,240 |        
|                              | Due after ten years                    |                                     |         | 8,246      |         |  |         | 7,863   |        
|                              |                                        |                                     |         |            |         |  |         |        
|                              |                                        |                                     | 491,029 |            |         |  | 467,870 |        
|                              | Mortgage-backed securities             |                                     |         | 172,420    |         |  |         | 173,510 |        
|                              |                                        |                                     |         |            |         |  |         |        
|                              |                                        | Total debt securities               |         |            | 663,449 |  |         |         | 641,380 | 
|                              | Equity securities                      |                                     |         | 159,391    |         |  |         | 154,760 |        
|                              |                                        |                                     |         |            |         |  |         |        
|                              |                                        | Total securities available-for-sale |         | $          | 822,840 |  |         | $       | 796,140 | 
|                              |                                        |                                     |         |            |         |  |         |        
|Securities held-to-maturity   |                                        |                                     |         |            |         |  |         |        
|                              | Due in one year or less                |                                     | $       | 3,092      |         |  | $       | 3,149   |        
|                              | Due after one year through five years  |                                     |         | 9,498      |         |  |         | 10,045  |        
|                              | Due after five years through ten years |                                     |         | 250        |         |  |         | 274     |        
|                              |                                        |                                     |         |            |         |  |         |        
|                              |                                        |                                     | 12,840  |            |         |  | 13,468  |        
|                              | Mortgage-backed securities             |                                     |         | 43,234     |         |  |         | 43,771  |        
|                              |                                        |                                     |         |            |         |  |         |        
|                              |                                        | Total securities held-to-maturity   |         | $          | 56,074  |  |         | $       | 57,239  | 
|                              |                                        |                                     |         |            |         |  |         |        

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

|                      |  |                         |         |      |  |      |         |   |  |   |         |  
|--------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                      |  |                        
|                      |  | Year Ended December 31,
|                      |  |                        
|                      |  | 2003                    |         | 2002 |  | 2001
|                      |  |                         |         |      |  |     
|                      |  |                        
|                      |  | (In thousands)         
|Proceeds from sales   |  | $                       | 428,300 |      |  | $    | 319,952 |   |  | $ | 347,230 |  
|Gross realized gains  |  |                         | 7,082   |      |  |      | 2,069   |   |  |   | 3,552   |  
|Gross realized losses |  |                         | (1,742  | )    |  |      | (547    | ) |  |   | (791    | )



|         |                                    
|-------- | -----------------------------------
|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, federal funds purchased, FHLB stock,
accrued interest receivable and payable, due from and to broker,
demand deposits, short-term debt, and variable rate loans or
deposits that reprice frequently and fully. The fair value of
securities and derivatives, including swaps, 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, securities sold under agreements to repurchase, fair
value is based on discounted cash flows using current market
rates applied to the estimated

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MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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.

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

|                      |                                                                                |                      |   |            |            |          |   |            |            |   |   |           |            |   |   |           |            |  
|--------------------- | ------------------------------------------------------------------------------ | -------------------- | - | ---------- | ---------- | -------- | - | ---------- | ---------- | - | - | --------- | ---------- | - | - | --------- | ---------- | -
|                      |                                                                                |                     
|                      |                                                                                | December 31,        
|                      |                                                                                |                     
|                      |                                                                                |                      |   |           
|                      |                                                                                | 2003                 |   | 2002      
|                      |                                                                                |                      |   |           
|                      |                                                                                | Carrying             |   | Estimated  |            | Carrying |   | Estimated 
|                      |                                                                                | Amount               |   | Fair Value |            | Amount   |   | Fair Value
|                      |                                                                                |                      |   |            |            |          |   |           
|                      |                                                                                |                     
|                      |                                                                                | (In thousands)      
|Financial assets      |                                                                                |                      |   |            |            |          |   |            |            |   |   |           |            |   |   |          
|                      | Cash and cash equivalents                                                      |                      | $ | 196,157    |            |          | $ | 196,157    |            |   | $ | 49,687    |            |   | $ | 49,687    |           
|                      | Securities available-for-sale                                                  |                      |   | 796,140    |            |          |   | 796,140    |            |   |   | 651,873   |            |   |   | 651,873   |           
|                      | Securities held-to-maturity                                                    |                      |   | 56,074     |            |          |   | 57,239     |            |   |   | 118,620   |            |   |   | 120,421   |           
|                      | Loans, net of allowance for loan losses                                        |                      |   | 1,065,582  |            |          |   | 1,070,032  |            |   |   | 1,115,950 |            |   |   | 1,117,992 |           
|                      | Accrued interest receivable                                                    |                      |   | 12,053     |            |          |   | 12,053     |            |   |   | 10,899    |            |   |   | 10,899    |           
|                      | Interest rate swaps                                                            |                      |   |           |            |          |   |           |            |   |   | 1,097     |            |   |   | 1,097     |           
|                      | Due from broker                                                                |                      |   | 40,477     |            |          |   | 40,477     |            |   |   |          |            |   |   |          |           
|Financial liabilities |                                                                                |                      |   |            |            |          |   |            |            |   |   |           |            |   |   |          
|                      | Deposits                                                                       |                      |   |            |            |          |   |            |            |   |   |           |            |   |   |           |           
|                      |                                                                                | Non-interest-bearing |   |            | (160,668   | )        |   |            | (160,668   | ) |   |           | (134,858   | ) |   |           | (134,858   | )
|                      |                                                                                | Interest-bearing     |   |            | (1,425,743 | )        |   |            | (1,403,049 | ) |   |           | (1,255,790 | ) |   |           | (1,258,779 | )
|                      | Securities sold under agreements to repurchase
    and federal funds purchased |                      |   | (202,699   | )          |          |   | (205,444   | )          |   |   | (205,882  | )          |   |   | (210,242  | )         
|                      | FHLB advances                                                                  |                      |   | (253,461   | )          |          |   | (275,630   | )          |   |   | (219,500  | )          |   |   | (221,826  | )         
|                      | Notes payable                                                                  |                      |   | (2,000     | )          |          |   | (2,000     | )          |   |   | (2,000    | )          |   |   | (1,999    | )         
|                      | Company obligated mandatory redeemable trust
    preferred securities          |                      |   | (54,000    | )          |          |   | (54,075    | )          |   |   | (35,000   | )          |   |   | (34,994   | )         
|                      | Accrued interest payable                                                       |                      |   | (3,463     | )          |          |   | (3,463     | )          |   |   | (3,618    | )          |   |   | (3,618    | )         
|                      | Interest rate swaps                                                            |                      |   | (1,886     | )          |          |   | (1,886     | )          |   |   |          |            |   |   |          |           
|                      | Due to broker                                                                  |                      |   |           |            |          |   |           |            |   |   | (20,582   | )          |   |   | (20,582   | )         
|                      | Put and call option and credit derivatives                                     |                      |   |           |            |          |   |           |            |   |   | (645      | )          |   |   | (645      | )         

The remaining other assets and liabilities of the
Company are not considered financial instruments and are not
included in the above disclosures.

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.

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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|         |      
|-------- | -----
|Note 5  | Loans

Major classifications of loans are summarized as
follows:

|                       |                    |                |         |           |  |   |         |           | 
|---------------------- | ------------------ | -------------- | ------- | --------- |  | - | ------- | --------- | 
|                       |                    |               
|                       |                    | December 31,  
|                       |                    |               
|                       |                    | 2003           |         | 2002     
|                       |                    |                |         |          
|                       |                    |               
|                       |                    | (In thousands)
|Commercial             |                    | $              | 203,920 |           |  | $ | 229,764 |          
|Commercial real estate |                    |                | 711,891 |           |  |   | 730,836 |          
|Agricultural           |                    |                | 58,144  |           |  |   | 57,426  |          
|Consumer real estate   |                    |                | 96,107  |           |  |   | 105,391 |          
|Consumer installment   |                    |                | 12,124  |           |  |   | 14,573  |          
|                       |                    |                |         |           |  |   |         |          
|                       | Total loans, gross |                |         | 1,082,186 |  |   |         | 1,137,990 | 
|Net deferred fees      |                    |                | (890    | )         |  |   | (1,286  | )        
|                       |                    |                |         |           |  |   |         |          
|                       | Total loans        |                | $       | 1,081,296 |  |   | $       | 1,136,704 | 
|                       |                    |                |         |           |  |   |         |          

Included in consumer real estate are $1,571,000
and $4,924,000 of loans held for sale at December 31, 2003
and 2002.



|         |                          
|-------- | -------------------------
|Note 6  | Allowance for Loan Losses

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

|                                               |                        |                         |         |        |  |      |        |        |  |   |       |        | 
|---------------------------------------------- | ---------------------- | ----------------------- | ------- | ------ |  | ---- | ------ | ------ |  | - | ----- | ------ | 
|                                               |                        |                        
|                                               |                        | Year Ended December 31,
|                                               |                        |                        
|                                               |                        | 2003                    |         | 2002   |  | 2001
|                                               |                        |                         |         |        |  |     
|                                               |                        |                        
|                                               |                        | (In thousands)         
|Balance at beginning of year                   |                        | $                       | 20,754  |        |  | $    | 10,135 |        |  | $ | 8,593 |       
|Balance from acquisition                       |                        |                         | 300     |        |  |      |       |        |  |   |      |       
|Adjustment for loan sale to related parties(1) |                        |                         | (6,685  | )      |  |      |        |        |  |   |       |       
|Provision for loan losses                      |                        |                         | 10,205  |        |  |      | 18,532 |        |  |   | 2,220 |       
|Loans charged off                              |                        |                         | (10,005 | )      |  |      | (8,206 | )      |  |   | (877  | )     
|Recoveries on loans previously charged off     |                        |                         | 1,145   |        |  |      | 293    |        |  |   | 199   |       
|                                               |                        |                         |         |        |  |      |        |        |  |   |       |       
|                                               | Balance at end of year |                         | $       | 15,714 |  |      | $      | 20,754 |  |   | $     | 10,135 | 
|                                               |                        |                         |         |        |  |      |        |        |  |   |       |       



---



|    |                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Adjustment made following the March 26, 2003
    receipt of $13.3 million of proceeds relating to the sale
    of certain loans to a related party, of which $12.5 million
    was applied to outstanding principal, $750,000 to the letter of
    credit, and $67,000 applied to accrued interest income and late
    charges. See Note 27.

F-17



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MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (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,  
|                                                                       |                      |               
|                                                                       |                      | 2003           |        | 2002  
|                                                                       |                      |                |        |       
|                                                                       |                      |               
|                                                                       |                      | (In thousands)
|Impaired loans for which no allowance for loan
    losses is allocated |                      | $              | 8,905  |        |  | $ | 146    |       
|Impaired loans with an allocation of the
    allowance for loan losses |                      |                | 21,774 |        |  |   | 29,998 |       
|                                                                       |                      |                |        |        |  |   |        |       
|                                                                       | Total impaired loans |                | $      | 30,679 |  |   | $      | 30,144 | 
|                                                                       |                      |                |        |        |  |   |        |       
|Allowance for loan losses allocated to impaired
    loans              |                      | $              | 5,507  |        |  | $ | 14,286 |       
|                                                                       |                      |                |        |        |  |   |        |       

|                                                                 |  |                         |        |      |  |      |        |  |  |   |       | 
|---------------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ----- | 
|                                                                 |  |                        
|                                                                 |  | Year Ended December 31,
|                                                                 |  |                        
|                                                                 |  | 2003                    |        | 2002 |  | 2001
|                                                                 |  |                         |        |      |  |     
|                                                                 |  |                        
|                                                                 |  | (In thousands)         
|Average impaired loans                                           |  | $                       | 26,728 |      |  | $    | 13,677 |  |  | $ | 1,327 | 
|Interest income recognized on impaired loans on a
    cash basis |  |                         | 2,141  |      |  |      | 207    |  |  |   | 69    | 

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:

|                                             |  |                |        |      |  |   |        | 
|-------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                                             |  | 2003           |        | 2002
|                                             |  |                |        |     
|                                             |  |               
|                                             |  | (In thousands)
|Loans past due over 90 days still on accrual |  | $              | 18     |      |  | $ | 2,514  | 
|Nonaccrual loans                             |  |                | 15,665 |      |  |   | 29,035 | 

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.



|         |                       
|-------- | ----------------------
|Note 7  | Premises and Equipment

Premises and equipment are summarized as follows:

|                          |                             |                |         |        |  |   |         |        | 
|------------------------- | --------------------------- | -------------- | ------- | ------ |  | - | ------- | ------ | 
|                          |                             |               
|                          |                             | December 31,  
|                          |                             |               
|                          |                             | 2003           |         | 2002  
|                          |                             |                |         |       
|                          |                             |               
|                          |                             | (In thousands)
|Land and improvements     |                             | $              | 10,519  |        |  | $ | 5,194   |       
|Building and improvements |                             |                | 27,236  |        |  |   | 20,138  |       
|Furniture and equipment   |                             |                | 17,549  |        |  |   | 17,001  |       
|                          |                             |                |         |        |  |   |         |       
|                          | Total cost                  |                |         | 55,304 |  |   |         | 42,333 | 
|Accumulated depreciation  |                             |                | (27,928 | )      |  |   | (23,334 | )     
|                          |                             |                |         |        |  |   |         |       
|                          | Premises and equipment, net |                | $       | 27,376 |  |   | $       | 18,999 | 
|                          |                             |                |         |        |  |   |         |       



|         |                         
|-------- | ------------------------
|Note 8  | Goodwill and Intangibles

On January 1, 2002, the Company implemented
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets. Under the
provisions of SFAS No. 142, goodwill is no longer
subject to amortization over its estimated useful life, but
instead is subject to at least annual assessments for impairment
by applying a fair-value based test. SFAS No. 142 also
requires that an acquired intangible asset

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MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal
rights, or if the asset can be sold, transferred, licensed,
rented or exchanged, regardless of the acquirers intent to
do so. The Company determined that no transitional impairment
loss was required at January 1, 2002.

Intangible asset disclosures are as follows (in
thousands):

|                                               |  |                   |       |                   |  |                |      |              |  |   |     |  |  |   |     |  
|---------------------------------------------- |  | ----------------- | ----- | ----------------- |  | -------------- | ---- | ------------ |  | - | --- |  |  | - | --- | -
|                                               |  |                   |       |                  
|                                               |  | December 31, 2003 |       | December 31, 2002
|                                               |  |                   |       |                  
|                                               |  | Gross Carrying    |       | Accumulated       |  | Gross Carrying |      | Accumulated 
|                                               |  | Amount            |       | Amortization      |  | Amount         |      | Amortization
|                                               |  |                   |       |                   |  |                |      |             
|Amortized intangible assets:                   |  |                   |       |                   |  |                |      |              |  |   |     |  |  |   |     |  
|Core deposit and other intangibles             |  | $                 | 3,341 |                   |  | $              | (551 | )            |  | $ | 300 |  |  | $ | (56 | )
|Estimated intangible amortization
    expense: |  |                   |       |                   |  |                |      |              |  |   |     |  |  |   |     |  
|For the year ending December 31, 2004          |  |                   | 495   |                   |  |                |      |              |  |   |     |  |  |   |     |  
|For the year ending December 31, 2005          |  |                   | 495   |                   |  |                |      |              |  |   |     |  |  |   |     |  
|For the year ending December 31, 2006          |  |                   | 439   |                   |  |                |      |              |  |   |     |  |  |   |     |  
|For the year ending December 31, 2007          |  |                   | 420   |                   |  |                |      |              |  |   |     |  |  |   |     |  
|For the year ending December 31, 2008          |  |                   | 420   |                   |  |                |      |              |  |   |     |  |  |   |     |  

The following tables present the changes in the
carrying amount of goodwill and other intangibles during the
years ended December 31, 2003 and December 31, 2002
(in thousands):

|                                  |  |                   |       |              |  |   |       |  
|--------------------------------- |  | ----------------- | ----- | ------------ |  | - | ----- | -
|                                  |  |                  
|                                  |  | December 31, 2003
|                                  |  |                  
|                                  |  |                   |       | Core Deposit
|                                  |  |                   |       | and Other   
|                                  |  | Goodwill          |       | Intangibles 
|                                  |  |                   |       |             
|Balance at beginning of period    |  | $                 | 4,360 |              |  | $ | 244   |  
|Amortization expense              |  |                   |      |              |  |   | (495  | )
|Goodwill and intangibles acquired |  |                   |      |              |  |   | 3,041 |  
|                                  |  |                   |       |              |  |   |       |  
|Balance at end of period          |  | $                 | 4,360 |              |  | $ | 2,790 |  
|                                  |  |                   |       |              |  |   |       |  

|                                  |  |                   |       |              |  |   |     |  
|--------------------------------- |  | ----------------- | ----- | ------------ |  | - | --- | -
|                                  |  |                  
|                                  |  | December 31, 2002
|                                  |  |                  
|                                  |  |                   |       | Core Deposit
|                                  |  |                   |       | and Other   
|                                  |  | Goodwill          |       | Intangibles 
|                                  |  |                   |       |             
|Balance at beginning of year      |  | $                 | 3,524 |              |  | $ |    |  
|Amortization expense              |  |                   |      |              |  |   | (56 | )
|Goodwill and intangibles acquired |  |                   | 836   |              |  |   | 300 |  
|                                  |  |                   |       |              |  |   |     |  
|Balance at end of year            |  | $                 | 4,360 |              |  | $ | 244 |  
|                                  |  |                   |       |              |  |   |     |  

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MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

|                                |                       |                        |        |      |  |      |        |      |  |   |        |      | 
|------------------------------- | --------------------- | ---------------------- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ | ---- | 
|                                |                       | 2003                   |        | 2002 |  | 2001
|                                |                       |                        |        |      |  |     
|                                |                       |                       
|                                |                       | (In thousands,        
|                                |                       | except per share data)
|Reported net income             |                       | $                      | 22,781 |      |  | $    | 16,308 |      |  | $ | 17,882 |     
|Add back: goodwill amortization |                       |                        |       |      |  |      |       |      |  |   | 200    |     
|                                |                       |                        |        |      |  |      |        |      |  |   |        |     
|Adjusted net income             |                       | $                      | 22,781 |      |  | $    | 16,308 |      |  | $ | 18,082 |     
|                                |                       |                        |        |      |  |      |        |      |  |   |        |     
|Basic earnings per share:       |                       |                        |        |      |  |      |        |      |  |   |        |     
|                                | Reported net income   |                        | $      | 1.28 |  |      | $      | 1.01 |  |   | $      | 1.11 | 
|                                | Goodwill amortization |                        |        |     |  |      |        |     |  |   |        | 0.01 | 
|                                |                       |                        |        |      |  |      |        |      |  |   |        |     
|                                | Adjusted net income   |                        | $      | 1.28 |  |      | $      | 1.01 |  |   | $      | 1.12 | 
|                                |                       |                        |        |      |  |      |        |      |  |   |        |     
|Diluted earnings per share:     |                       |                        |        |      |  |      |        |      |  |   |        |     
|                                | Reported net income   |                        | $      | 1.25 |  |      | $      | 0.99 |  |   | $      | 1.09 | 
|                                | Goodwill amortization |                        |        |     |  |      |        |     |  |   |        | 0.01 | 
|                                |                       |                        |        |      |  |      |        |      |  |   |        |     
|                                | Adjusted net income   |                        | $      | 1.25 |  |      | $      | 0.99 |  |   | $      | 1.10 | 
|                                |                       |                        |        |      |  |      |        |      |  |   |        |     



|         |             
|-------- | ------------
|Note 9  | Income Taxes

The provision for income taxes consists of the
following:

|         |                                  |                         |     |       |  |      |        |       |  |  |     |       | 
|-------- | -------------------------------- | ----------------------- | --- | ----- |  | ---- | ------ | ----- |  |  | --- | ----- | 
|         |                                  |                        
|         |                                  | Year Ended December 31,
|         |                                  |                        
|         |                                  | 2003                    |     | 2002  |  | 2001
|         |                                  |                         |     |       |  |     
|         |                                  |                        
|         |                                  | (In thousands)         
|Current  |                                  |                         |     |       |  |      |        |       |  |  |     |      
|         | Federal                          |                         | $   | 8,095 |  |      | $      | 7,761 |  |  | $   | 7,245 | 
|         | State                            |                         |     | 110   |  |      |        | 987   |  |  |     | 973   | 
|Deferred |                                  |                         | 682 |       |  |      | (4,087 | )     |  |  | 486 |      
|         |                                  |                         |     |       |  |      |        |       |  |  |     |      
|         | Total provision for income taxes |                         | $   | 8,887 |  |      | $      | 4,661 |  |  | $   | 8,704 | 
|         |                                  |                         |     |       |  |      |        |       |  |  |     |      

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,
|                                                                    |                                  |                        
|                                                                    |                                  | 2003                    |        | 2002  |  | 2001
|                                                                    |                                  |                         |        |       |  |     
|                                                                    |                                  |                        
|                                                                    |                                  | (In thousands)         
|Income taxes computed at the statutory rate                         |                                  | $                       | 11,084 |       |  | $    | 7,339  |       |  | $ | 9,305 |      
|Decrease in state income taxes due to Illinois
    audit settlement |                                  |                         |       |       |  |      | (821   | )     |  |   |      |      
|Tax-exempt interest income on securities and loans                  |                                  |                         | (1,184 | )     |  |      | (1,021 | )     |  |   | (652  | )    
|Amortization of goodwill                                            |                                  |                         |       |       |  |      |       |       |  |   | 87    |      
|State income taxes, net of federal tax benefit                      |                                  |                         | 506    |       |  |      | 378    |       |  |   | 620   |      
|Cash surrender value increase, net of premiums                      |                                  |                         | (336   | )     |  |      | (376   | )     |  |   | (324  | )    
|Dividends received deduction                                        |                                  |                         | (1,091 | )     |  |      | (818   | )     |  |   | (755  | )    
|Other                                                               |                                  |                         | (92    | )     |  |      | (20    | )     |  |   | 423   |      
|                                                                    |                                  |                         |        |       |  |      |        |       |  |   |       |      
|                                                                    | Total provision for income taxes |                         | $      | 8,887 |  |      | $      | 4,661 |  |   | $     | 8,704 | 
|                                                                    |                                  |                         |        |       |  |      |        |       |  |   |       |      

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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

|                                            |                                                                                                     |                                      |                        |        |        |        |   |        |        |       | 
|------------------------------------------- | --------------------------------------------------------------------------------------------------- | ------------------------------------ | ---------------------- | ------ | ------ | ------ | - | ------ | ------ | ----- | 
|                                            |                                                                                                     |                                     
|                                            |                                                                                                     | December 31,                        
|                                            |                                                                                                     |                                     
|                                            |                                                                                                     | 2003                                 |                        | 2002  
|                                            |                                                                                                     |                                      |                        |       
|                                            |                                                                                                     |                                     
|                                            |                                                                                                     | (In thousands)                      
|Gross deferred tax assets                   |                                                                                                     |                                      |                        |        |        |        |   |       
|                                            | Unrealized loss on securities available-for-sale                                                    |                                      | $                      | 10,608 |        |        | $ |       |       
|                                            | Allowance for loan losses                                                                           |                                      |                        | 6,234  |        |        |   | 8,233  |       
|                                            | Amortizable assets                                                                                  |                                      |                        | 117    |        |        |   | 64     |       
|                                            | Depreciation                                                                                        |                                      |                        |       |        |        |   | 214    |       
|                                            | Deferred compensation                                                                               |                                      |                        | 463    |        |        |   | 279    |       
|                                            | Net operating loss carryforward                                                                     |                                      |                        | 1,675  |        |        |   |       |       
|                                            | Income from partnerships                                                                            |                                      |                        | 261    |        |        |   |       |       
|                                            |                                                                                                     |                                      |                        |        |        |        |   |       
|                                            |                                                                                                     | Total gross deferred tax assets      |                        |        | 19,358 |        |   |        | 8,790  |      
|                                            |                                                                                                     |                                      |                        |        |        |        |   |       
|Gross deferred tax liabilities Depreciation |                                                                                                     |                                      | (2,151                 | )      |        |        |  |       
|                                            | Unrealized gain on securities available-for-sale
    and securities transferred to held-to-maturity |                                      |                        |       |        |        |   | (4,566 | )     
|                                            | FHLB stock dividends                                                                                |                                      |                        | (1,719 | )      |        |   | (918   | )     
|                                            | Other                                                                                               |                                      |                        | (2     | )      |        |   | (103   | )     
|                                            |                                                                                                     |                                      |                        |        |        |        |   |       
|                                            |                                                                                                     | Total gross deferred tax liabilities |                        |        | (3,872 | )      |   |        | (5,587 | )    
|                                            |                                                                                                     |                                      |                        |        |        |        |   |       
|                                            |                                                                                                     |                                      | Net deferred tax asset |        | $      | 15,486 |   |        | $      | 3,203 | 
|                                            |                                                                                                     |                                      |                        |        |        |        |   |       

As a result of the acquisition of Big Foot
Financial Corp. (BFFC) deferred tax assets were
increased by approximately $442,000 which is related to the
historical deferred taxes of BFFC and purchase accounting
adjustments.

The deferred inventory at December 31, 2002
includes an asset of approximately $2,650,000 which represents a
loan loss provision for certain loans to an individual borrower
and other affiliated companies. This provision was needed
because of regulatory review of the loan portfolio. In March
2003, the Bank received proceeds in connection within the sale
of these loans. As a result the Bank recognized a
$4,033,000 million after-tax capital contribution. The
deferred tax asset decreased by approximately $2,650,000 as a
result of this transaction.



|          |                                                   
|--------- | --------------------------------------------------
|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

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MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

agreements. At December 31, 2003, repurchase
agreements with brokerage firms approximated $176,571,000. The
following summarizes certain information relative to these
borrowings:

|                                                  |  |                |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                  |  | 2003           |         | 2002 |  | 2001
|                                                  |  |                |         |      |  |     
|                                                  |  |               
|                                                  |  | (In thousands)
|Outstanding at end of year                        |  | $              | 202,699 |      |  | $    | 185,057 |   |  | $ | 146,800 |  
|Weighted average interest at year end             |  |                | 2.89    | %    |  |      | 2.95    | % |  |   | 2.04    | %
|Maximum amount outstanding as of any month end    |  | $              | 243,909 |      |  | $    | 204,830 |   |  | $ | 146,800 |  
|Average amount outstanding                        |  |                | 211,825 |      |  |      | 155,635 |   |  |   | 37,070  |  
|Approximate weighted average rate during the year |  |                | 2.81    | %    |  |      | 2.70    | % |  |   | 3.85    | %

At December 31, 2003, securities sold under
agreements to repurchase are summarized below:

|               |  |                |         |                  |  |                      |      |            |  |   |         |  |  |   |         | 
|-------------- |  | -------------- | ------- | ---------------- |  | -------------------- | ---- | ---------- |  | - | ------- |  |  | - | ------- | 
|               |  |                |         |                  |  |                     
|               |  |                |         |                  |  | Collateral Mortgage-
|               |  |                |         |                  |  | Backed and Equity   
|               |  |                |         |                  |  | Securities          
|               |  |                |         |                  |  |                     
|Original       |  | Repurchase     |         | Weighted Average |  | Amortized            |      |           
|Term           |  | Liability      |         | Interest Rate    |  | Cost                 |      | Fair Value
|               |  |                |         |                  |  |                      |      |           
|               |  |               
|               |  | (In thousands)
|Up to 30 days  |  | $              | 13,187  |                  |  |                      | 1.37 | %          |  | $ | 18,700  |  |  | $ | 16,826  | 
|90 to 180 days |  |                | 1,015   |                  |  |                      | 1.40 |            |  |   | 1,036   |  |  |   | 1,059   | 
|1 to 2 years   |  |                | 50,548  |                  |  |                      | 3.62 |            |  |   | 55,404  |  |  |   | 52,761  | 
|2 to 3 years   |  |                | 58,327  |                  |  |                      | 2.77 |            |  |   | 68,023  |  |  |   | 65,520  | 
|Over 3 years   |  |                | 79,622  |                  |  |                      | 2.79 |            |  |   | 90,679  |  |  |   | 87,720  | 
|               |  |                |         |                  |  |                      |      |            |  |   |         |  |  |   |         | 
|               |  | $              | 202,699 |                  |  |                      | 2.89 | %          |  | $ | 233,842 |  |  | $ | 223,886 | 
|               |  |                |         |                  |  |                      |      |            |  |   |         |  |  |   |         | 



|          |                       
|--------- | ----------------------
|Note 11  | Advances From the FHLB

Advances from the FHLB are summarized as follows:

|                                             |      |                  |  |        |      |                  |   |         |         |  |  |      |      |   |   |         |         | 
|-------------------------------------------- | ---- | ---------------- |  | ------ | ---- | ---------------- | - | ------- | ------- |  |  | ---- | ---- | - | - | ------- | ------- | 
|                                             |      |                 
|                                             |      | December 31,    
|                                             |      |                 
|                                             |      |                  |  |       
|                                             |      | 2003             |  | 2002  
|                                             |      |                  |  |       
|                                             |      | Weighted Average |  |        |      | Weighted Average |   |        
|                                             |      | Rate             |  | Amount |      | Rate             |   | Amount 
|                                             |      |                  |  |        |      |                  |   |        
|                                             |      |                 
|                                             |      | (In thousands)  
|Advances from the Federal Home Loan Bank due |      |                  |  |        |      |                  |   |         |         |  |  |      |      |   |   |        
|                                             | 2004 |                  |  | 5.63   | %    |                  | $ | 4,500   |         |  |  | 5.63 | %    |   | $ | 4,500   |        
|                                             | 2005 |                  |  | 6.20   |      |                  |   | 41,010  |         |  |  | 6.07 |      |   |   | 32,500  |        
|                                             | 2006 |                  |  | 1.21   |      |                  |   | 2,000   |         |  |  | 1.46 |      |   |   | 2,000   |        
|                                             | 2008 |                  |  | 5.09   |      |                  |   | 69,338  |         |  |  | 5.00 |      |   |   | 42,000  |        
|                                             | 2010 |                  |  | 3.28   |      |                  |   | 135,613 |         |  |  | 4.38 |      |   |   | 137,500 |        
|                                             | 2011 |                  |  | 4.08   |      |                  |   | 1,000   |         |  |  | 4.08 |      |   |   | 1,000   |        
|                                             |      |                  |  |        |      |                  |   |         |         |  |  |      |      |   |   |        
|                                             |      | Total            |  |        | 4.26 | %                |   | $       | 253,461 |  |  |      | 4.75 | % |   | $       | 219,500 | 
|                                             |      |                  |  |        |      |                  |   |         |         |  |  |      |      |   |   |        

Total FHLB advances for 2003 includes
$33,000,000 million acquired as a result of the acquisition
of BFFC.

At December 31, 2003, $223,500,000 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 $21,544,000 million of mortgages on
agricultural property, free

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MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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 collateralized the advances by a
blanket lien arrangement at December 31, 2003 and 2002.



|          |             
|--------- | ------------
|Note 12  | Note Payable

Note payable consisted of the following:

|                                                                                                                                                                                                                                                                                                                               |  |                |       |      |  |   |       | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ----- | ---- |  | - | ----- | 
|                                                                                                                                                                                                                                                                                                                               |  |               
|                                                                                                                                                                                                                                                                                                                               |  | December 31,  
|                                                                                                                                                                                                                                                                                                                               |  |               
|                                                                                                                                                                                                                                                                                                                               |  | 2003           |       | 2002
|                                                                                                                                                                                                                                                                                                                               |  |                |       |     
|                                                                                                                                                                                                                                                                                                                               |  |               
|                                                                                                                                                                                                                                                                                                                               |  | (In thousands)
|Revolving line of credit ($10,000,000) maturing
    on May 1, 2004, interest payments due quarterly at the 30-,
    60-, 90-, or 180-day LIBOR plus 120 basis points or prime
    rate less 25 basis points (weighted average rate of 2.11%
    at December 31, 2003); secured by all common stock of the
    subsidiary banks |  | $              | 2,000 |      |  | $ | 2,000 | 

The revolving line of credit includes the
following covenants at December 31, 2003 and 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 at December 31,
2003. The Company has complied with these covenants at
December 31, 2002, except for the covenants regarding
nonperforming assets. On April 14, 2003, the Company
obtained a waiver for the nonperforming covenant.



|          |                                           
|--------- | ------------------------------------------
|Note 13  | Issuance of Trust Preferred
    Securities

In May 2000, the Company formed the MBHI Capital
Trust I (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% Company obligated mandatory redeemable trust
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 Company obligated mandatory redeemable
trust preferred securities and the junior subordinated
debentures pay distributions and dividends, respectively, on a
quarterly basis, which are included in interest expense. The
Company obligated mandatory redeemable trust preferred
securities will mature on June 7, 2030, at which time the
preferred securities must be redeemed. The Company obligated
mandatory redeemable trust preferred securities and junior
subordinated debentures 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. 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 Company obligated mandatory redeemable
trust preferred securities.

The Company has formed three statutory trusts
between October 2002 and December 2003 to issue
$34,000,000 million in floating rate trust preferred
securities. The three floating rate offerings were pooled
private placements exempt from registration under the Securities
Act pursuant to Section 4(2) thereunder. The Company has
provided a full, irrevocable, and unconditional subordinated
guarantee of the obligations of these trusts under the preferred
securities. The Company is obligated to fund dividends on these
securities before it can pay dividends on its shares of common
stock. See Note 13.

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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

These three trusts are detailed below as follows:

|                       |  |            |                   |        |  |      |            |                 |  |                 |            |   |  |  |                   |  |  |  |                   | 
|---------------------- |  | ---------- | ----------------- | ------ |  | ---- | ---------- | --------------- |  | --------------- | ---------- | - |  |  | ----------------- |  |  |  | ----------------- | 
|                       |  |            |                   |        |  |      |            | Mandatory       |  | Optional       
|Issuer                 |  | Issue Date |                   | Amount |  | Rate |            | Redemption Date |  | Redemption Date
|                       |  |            |                   |        |  |      |            |                 |  |                
|MBHI Capital Trust II  |  |            | October 29, 2002  |        |  | $    | 15,000,000 |                 |  |                 | LIBOR+3.45 | % |  |  | November 7, 2032  |  |  |  | November 7, 2007  | 
|MBHI Capital Trust III |  |            | December 19, 2003 |        |  | $    | 9,000,000  |                 |  |                 | LIBOR+3.00 | % |  |  | December 30, 2033 |  |  |  | December 30, 2008 | 
|MBHI Capital Trust IV  |  |            | December 19, 2003 |        |  | $    | 10,000,000 |                 |  |                 | LIBOR+2.85 | % |  |  | January 23, 2034  |  |  |  | January 23, 2008  | 

The trust preferred securities issued by MBHI
Capital Trust I, II, III and IV are currently
included in the Tier 1 capital of the Company for
regulatory capital purposes. The Federal Reserve Board may in
the future disallow inclusion of the trust preferred securities
in Tier 1 capital for regulatory capital purposes. In July
2003, the Federal Reserve Board issued a supervisory letter
instructing bank holding companies to continue to include the
trust preferred securities in their Tier 1 capital for
regulatory capital purposes until notice is given to the
contrary. The Federal Reserve Board intends to review the
regulatory implications of the change in accounting treatment of
subsidiary trusts that issue trust preferred securities and, if
necessary or warranted, provide further appropriate guidance.
There can be no assurance that the Federal Reserve Board will
continue to permit institutions to include trust preferred
securities in Tier I capital for regulatory capital
purposes.

As of December 31, 2003, assuming the
Company was not permitted to include the $54 million in
trust preferred securities issued by MBHI Capital
Trust I, II, III and IV in its Tier 1
capital, the Company would still exceed the regulatory required
minimums for capital adequacy purposes. If the trust preferred
securities were no longer permitted to be included in
Tier 1 capital, the Company would also be permitted to
redeem the capital securities without penalty.



|          |                       
|--------- | ----------------------
|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 $618,000, $519,000, and $459,000
for the years ended December 31, 2003, 2002, and 2001.

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
$464,000, $297,000, and $406,000 was recorded for the years
ended December 31, 2003, 2002, and 2001 and has been
included in compensation and benefits.

The Company has 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 $64.3 million at
December 31, 2003. In addition, the policies had aggregate
cash surrender values of approximately $24.9 million at
December 31, 2003 and $20.6 million at
December 31, 2002.



|          |              
|--------- | -------------
|Note 15  | Time Deposits

Interest-bearing deposits in denominations of
$100,000 and over were $216,338,000 as of December 31, 2003
and $291,929,000 as of December 31, 2002. Interest expense
related to deposits in denominations of $100,000 and over was
$3,939,000 for 2003 and $6,432,000 for 2002, and $8,334,000 for
2001.

F-24



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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Certificates of deposit have scheduled maturities
for the years 2004 through 2008 and thereafter as follows:

|           |  |                |         | 
|---------- |  | -------------- | ------- | 
|           |  | (In thousands)
|2004       |  | $              | 508,364 | 
|2005       |  |                | 248,328 | 
|2006       |  |                | 114,902 | 
|2007       |  |                | 5,426   | 
|2008       |  |                | 1,285   | 
|Thereafter |  |                |        | 
|           |  |                |         | 
|           |  | $              | 878,305 | 
|           |  |                |         | 



|          |                           
|--------- | --------------------------
|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, 2002 |                              | $              | 18,733 |       
|New loans                    |                              |                | 12,581 |       
|Repayments                   |                              |                | (4,586 | )     
|                             |                              |                |        |       
|                             | Balance at December 31, 2003 |                | $      | 26,728 | 
|                             |                              |                |        |       

As previously reported by the Company, on
March 26, 2003, Midwest Bank and Trust Company
(Bank) received proceeds from an entity indirectly
owned by certain directors and family members of directors of
the Bank of approximately $13.3 million in connection with
the sale of previously classified loans, which consisted of
$12.5 million of the loan principal balance, $750,000 for
the letter of credit and $67,000 of accrued interest and late
charges. As a result, the Bank recognized a $4.0 million
after-tax capital contribution as a result of the sale of these
loans to the related parties. As of December 31, 2002,
$6.3 million of the $12.5 million outstanding
principal amount of these loans was considered impaired.



|          |                     
|--------- | --------------------
|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.
Prompt corrective action provisions are not applicable to bank
holding companies.

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, 2003 and 2002, the Company and its
subsidiary banks met all capital adequacy requirements to which
they were subject.

As of December 31, 2003, 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

F-25



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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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:

|                                         |         |                |   |                   |  |                  |  |       |   |        |   |         |  |  |  |     |   |  |  |         |  |  |  |      | 
|---------------------------------------- | ------- | -------------- | - | ----------------- |  | ---------------- |  | ----- | - | ------ | - | ------- |  |  |  | --- | - |  |  | ------- |  |  |  | ---- | 
|                                         |         |                |   |                   |  |                 
|                                         |         |                |   |                   |  | Minimum Required
|                                         |         |                |   |                   |  |                 
|                                         |         |                |   |                   |  |                  |  |      
|                                         |         |                |   | For Capital       |  | To Be Well      
|                                         |         | Actual         |   | Adequacy Purposes |  | Capitalized     
|                                         |         |                |   |                   |  |                 
|                                         |         | Amount         |   | Ratio             |  | Amount           |  | Ratio |   | Amount |   | Ratio  
|                                         |         |                |   |                   |  |                  |  |       |   |        |   |        
|                                         |         |               
|                                         |         | (In thousands)
|As of December 31, 2003                  |         |                |   |                   |  |                  |  |       |   |        |   |         |  |  |  |     |   |  |  |         |  |  |  |     
|Total Capital (to risk-weighted assets)  |         |                |   |                   |  |                  |  |       |   |        |   |         |  |  |  |     |   |  |  |         |  |  |  |     
|                                         | Company |                | $ | 216,819           |  |                  |  | 14.7  | % |        | $ | 117,647 |  |  |  | 8.0 | % |  |  | n/a     |  |  |  | n/a  | 
|                                         | MBTC    |                |   | 180,973           |  |                  |  | 14.0  |   |        |   | 103,635 |  |  |  | 8.0 |   |  |  | 129,544 |  |  |  | 10.0 | 
|                                         | MBWI    |                |   | 23,129            |  |                  |  | 13.2  |   |        |   | 14,065  |  |  |  | 8.0 |   |  |  | 17,581  |  |  |  | 10.0 | 
|Tier 1 Capital (to risk-weighted assets) |         |                |   |                   |  |                  |  |       |   |        |   |         |  |  |  |     |   |  |  |         |  |  |  |     
|                                         | Company |                |   | 201,105           |  |                  |  | 13.7  |   |        |   | 58,823  |  |  |  | 4.0 |   |  |  | n/a     |  |  |  | n/a  | 
|                                         | MBTC    |                |   | 166,514           |  |                  |  | 12.9  |   |        |   | 51,818  |  |  |  | 4.0 |   |  |  | 77,726  |  |  |  | 6.0  | 
|                                         | MBWI    |                |   | 21,874            |  |                  |  | 12.4  |   |        |   | 7,033   |  |  |  | 4.0 |   |  |  | 10,549  |  |  |  | 6.0  | 
|Tier 1 Capital (to average assets)       |         |                |   |                   |  |                  |  |       |   |        |   |         |  |  |  |     |   |  |  |         |  |  |  |     
|                                         | Company |                |   | 201,105           |  |                  |  | 8.9   |   |        |   | 89,967  |  |  |  | 4.0 |   |  |  | n/a     |  |  |  | n/a  | 
|                                         | MBTC    |                |   | 166,514           |  |                  |  | 8.5   |   |        |   | 78,071  |  |  |  | 4.0 |   |  |  | 97,589  |  |  |  | 5.0  | 
|                                         | MBWI    |                |   | 21,874            |  |                  |  | 7.7   |   |        |   | 11,391  |  |  |  | 4.0 |   |  |  | 14,239  |  |  |  | 5.0  | 
|As of December 31, 2002                  |         |                |   |                   |  |                  |  |       |   |        |   |         |  |  |  |     |   |  |  |         |  |  |  |     
|Total Capital (to risk-weighted assets)  |         |                |   |                   |  |                  |  |       |   |        |   |         |  |  |  |     |   |  |  |         |  |  |  |     
|                                         | Company |                | $ | 154,740           |  |                  |  | 11.7  | % |        | $ | 105,876 |  |  |  | 8.0 | % |  |  | n/a     |  |  |  | n/a  | 
|                                         | 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 |   |  |  | n/a     |  |  |  | n/a  | 
|                                         | 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 |   |  |  | n/a     |  |  |  | n/a  | 
|                                         | 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  | 



|          |                                                             
|--------- | ------------------------------------------------------------
|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

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MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

instruments include lines of credit, letters of
credit, and commitments to extend credit. These are summarized
as follows:

|                             |                        |                                            |         |           |  |           |        |         |  |       |        |       |  |   |        |        |  |   |         |         | 
|---------------------------- | ---------------------- | ------------------------------------------ | ------- | --------- |  | --------- | ------ | ------- |  | ----- | ------ | ----- |  | - | ------ | ------ |  | - | ------- | ------- | 
|                             |                        |                                           
|                             |                        | Amount of Commitment Expiration Per Period
|                             |                        |                                           
|                             |                        | Within                                     |         |           |  | After     |        |        
|                             |                        | 1 Year                                     |         | 1-3 Years |  | 4-5 Years |        | 5 Years |  | Total
|                             |                        |                                            |         |           |  |           |        |         |  |      
|                             |                        |                                           
|                             |                        | (Dollars in Thousands)                    
|Lines of Credit:             |                        |                                            |         |           |  |           |        |         |  |       |        |       |  |   |        |        |  |   |         |        
|                             | Commercial real estate |                                            | $       | 107,700   |  |           | $      | 16,414  |  |       | $      | 113   |  |   | $      |       |  |   | $       | 124,227 | 
|                             | Consumer real estate   |                                            |         | 782       |  |           |        | 2,670   |  |       |        | 7,509 |  |   |        | 18,367 |  |   |         | 29,328  | 
|                             | Consumer               |                                            |         | 73        |  |           |        |        |  |       |        |      |  |   |        | 3,323  |  |   |         | 3,396   | 
|                             | Commercial             |                                            |         | 103,117   |  |           |        | 16,369  |  |       |        | 540   |  |   |        | 1,940  |  |   |         | 121,966 | 
|Letters of credit            |                        |                                            | 20,342  |           |  |           | 979    |         |  |       | 4,197  |       |  |   |       |        |  |   | 25,518  |        
|Commitments to extend credit |                        |                                            | 108,942 |           |  |           |       |         |  |       |       |       |  |   |       |        |  |   | 108,942 |        
|                             |                        |                                            |         |           |  |           |        |         |  |       |        |       |  |   |        |        |  |   |         |        
|Total commercial commitments |                        | $                                          | 340,956 |           |  | $         | 36,432 |         |  | $     | 12,359 |       |  | $ | 23,630 |        |  | $ | 413,377 |        
|                             |                        |                                            |         |           |  |           |        |         |  |       |        |       |  |   |        |        |  |   |         |        

At December 31, 2003 and 2002, commitments
to extend credit included $7,420,000 and $18,933,000 of fixed
rate loan commitments. These commitments are due to expire
within 30 to 90 days of issuance and have rates ranging
primarily from 5.00% to 7.70%. Substantially all of the unused
lines of credit are at adjustable rates of interest.

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 1,725,000 shares for issuance.

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MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Information about option grants follows:

|                                 |  |           |           |                  |  |   |       | 
|-------------------------------- |  | --------- | --------- | ---------------- |  | - | ----- | 
|                                 |  |           |           | Weighted Average
|                                 |  | Number of |           | Exercise Price  
|                                 |  | Options   |           | Per Share       
|                                 |  |           |           |                 
|Outstanding at January 1, 2001   |  |           | 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 | 
|Granted during 2003              |  |           | 103,000   |                  |  |   | 18.34 | 
|Exercised during 2003            |  |           | (120,251  | )                |  |   | 10.25 | 
|Forfeited during 2003            |  |           | (6,001    | )                |  |   | 13.42 | 
|                                 |  |           |           |                  |  |   |       | 
|Outstanding at December 31, 2003 |  |           | 1,076,545 |                  |  | $ | 11.67 | 
|                                 |  |           |           |                  |  |   |       | 

Options exercisable at year end are as follows:

|     |  |           |         |                  |  |   |       | 
|---- |  | --------- | ------- | ---------------- |  | - | ----- | 
|     |  |           |         | Weighted Average
|     |  | Number of |         | Exercise Price  
|     |  | Options   |         | Per Share       
|     |  |           |         |                 
|2001 |  |           | 649,346 |                  |  | $ | 9.75  | 
|2002 |  |           | 539,981 |                  |  |   | 9.89  | 
|2003 |  |           | 584,670 |                  |  |   | 10.30 | 

Options outstanding at December 31, 2003
were as follows:

|                        |  |             |           |                  |  |        |      |                  |  |  |         |  |  |   |       | 
|----------------------- |  | ----------- | --------- | ---------------- |  | ------ | ---- | ---------------- |  |  | ------- |  |  | - | ----- | 
|                        |  |             |           |                  |  |       
|                        |  | Outstanding |           |                 
|                        |  |             |           | Exercisable     
|                        |  |             |           | Weighted Average |  |       
|                        |  |             |           | Remaining        |  |        |      | Weighted Average
|Range of Exercise Price |  | Number      |           | Contractual Life |  | Number |      | Exercise Price  
|                        |  |             |           |                  |  |        |      |                 
|$5.42-8.50              |  |             | 71,000    |                  |  |        | 3.54 |                  |  |  | 71,000  |  |  | $ | 7.24  | 
|$8.83-10.59             |  |             | 520,857   |                  |  |        | 6.56 |                  |  |  | 308,607 |  |  |   | 9.69  | 
|$10.75-18.34            |  |             | 484,688   |                  |  |        | 7.36 |                  |  |  | 205,063 |  |  |   | 12.29 | 
|                        |  |             |           |                  |  |        |      |                  |  |  |         |  |  |   |       | 
|Outstanding at year end |  |             | 1,076,545 |                  |  |        | 6.72 |                  |  |  | 584,670 |  |  | $ | 10.30 | 
|                        |  |             |           |                  |  |        |      |                  |  |  |         |  |  |   |       | 

Note 20  Derivative
Instruments

The Company enters into interest rate swaps to
reduce exposure to declining interest rates. As of
December 31, 2003, the Company has various interest rate
swap transactions, which results in the Company converting
$137.5 million of its FHLB 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.

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MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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

|                                      |  |                |            |      |  |   |            |  
|------------------------------------- |  | -------------- | ---------- | ---- |  | - | ---------- | -
|                                      |  | 2003           |            | 2002
|                                      |  |                |            |     
|                                      |  |               
|                                      |  | (In thousands)
|Notional amounts                      |  | $              | 137,500    |      |  | $ | 67,500     |  
|Weighted average fixed rates received |  |                | 5.46       | %    |  |   | 5.91       | %
|Weighted average variable rates paid  |  |                | 3.34       | %    |  |   | 3.74       | %
|Weighted average maturity             |  |                | 6.61 years |      |  |   | 7.25 years |  
|Fair value                            |  | $              | (1,886     | )    |  | $ | 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:

|                          |  |                |   |      |  |   |          |  
|------------------------- |  | -------------- | - | ---- |  | - | -------- | -
|                          |  | 2003           |   | 2002
|                          |  |                |   |     
|                          |  |               
|                          |  | (In thousands)
|Notional amounts          |  | $              |  |      |  | $ | 75,000   |  
|Weighted average maturity |  |                |  |      |  |   | 60  days |  
|Fair value                |  | $              |  |      |  | $ | (145     | )

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. 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. These are stand-alone derivatives with
changes in the market value charged or credited 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. In both transactions, the underlying asset-backed
security is $1 billion and is diversified amongst 100
companies. Both credit derivative transactions were terminated
in October of 2003.

In 2003, the Company entered into 3,000
U.S. Treasury 10-year note futures contracts with a
notional value of $300.0 million and a delivery date of
March 2004. The Company sold these contracts in order to hedge
certain U.S. Agency notes held in its available-for-sale
portfolio. The Companys objective was to offset changes in
the fair market value of the U.S. Agency notes with changes
in the fair market value of the futures contracts, thereby
reducing interest rate risk. These futures contracts are fair
value hedges with the changes in market value of the futures
contracts as well as the changes in the market value of the
hedged items charged or credited to earnings on a quarterly
basis to net gains on securities transactions. For the period
ending December 31, 2003, the ineffective portion of the
hedge was a net loss of $553,000.

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MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|          |                                    
|--------- | -----------------------------------
|Note 21  | Parent Company Financial Statements

The following are condensed balance sheets and
statements of income and cash flows for the Company, without
subsidiaries:

CONDENSED BALANCE SHEETS

|                                         |                                            |                |         |         |  |   |         |         | 
|---------------------------------------- | ------------------------------------------ | -------------- | ------- | ------- |  | - | ------- | ------- | 
|                                         |                                            |               
|                                         |                                            | December 31,  
|                                         |                                            |               
|                                         |                                            | 2003           |         | 2002   
|                                         |                                            |                |         |        
|                                         |                                            |               
|                                         |                                            | (In thousands)
|ASSETS                                  
|Cash                                     |                                            | $              | 11,716  |         |  | $ | 2,355   |        
|Securities available-for-sale            |                                            |                |        |         |  |   | 5,318   |        
|Investment in subsidiaries               |                                            |                | 186,097 |         |  |   | 146,340 |        
|Other assets                             |                                            |                | 6,351   |         |  |   | 2,997   |        
|                                         |                                            |                |         |         |  |   |         |        
|                                         | Total assets                               |                | $       | 204,164 |  |   | $       | 157,010 | 
|                                         |                                            |                |         |         |  |   |         |        
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|                                        
|Note payable                             |                                            | $              | 2,000   |         |  | $ | 2,000   |        
|Junior subordinated debt                 |                                            |                | 54,000  |         |  |   | 35,000  |        
|Other liabilities                        |                                            |                | 5,083   |         |  |   | 5,059   |        
|Stockholders equity                     |                                            |                | 143,081 |         |  |   | 114,951 |        
|                                         |                                            |                |         |         |  |   |         |        
|                                         | Total liabilities and stockholders equity |                | $       | 204,164 |  |   | $       | 157,010 | 
|                                         |                                            |                |         |         |  |   |         |        

CONDENSED STATEMENTS OF INCOME

|                                                                                  |                                 |                |        |        |   |      |        |        |   |   |        |        |  
|--------------------------------------------------------------------------------- | ------------------------------- | -------------- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|                                                                                  |                                 |               
|                                                                                  |                                 | December 31,  
|                                                                                  |                                 |               
|                                                                                  |                                 | 2003           |        | 2002   |   | 2001
|                                                                                  |                                 |                |        |        |   |     
|                                                                                  |                                 |               
|                                                                                  |                                 | (In thousands)
|Operating income                                                                  |                                 |                |        |        |   |      |        |        |   |   |        |       
|                                                                                  | Dividends from subsidiary banks |                | $      | 7,445  |   |      | $      | 7,303  |   |   | $      | 8,658  |  
|                                                                                  | Fees from subsidiaries          |                |        | 1,831  |   |      |        | 1,705  |   |   |        | 1,524  |  
|                                                                                  | Other income                    |                |        | 1,104  |   |      |        | 350    |   |   |        | 167    |  
|                                                                                  | Interest expense                |                |        | (2,844 | ) |      |        | (1,827 | ) |   |        | (2,459 | )
|                                                                                  | Other expense                   |                |        | (5,566 | ) |      |        | (4,862 | ) |   |        | (4,899 | )
|                                                                                  |                                 |                |        |        |   |      |        |        |   |   |        |       
|Income before income taxes and equity in
    undistributed income of subsidiaries |                                 |                | 1,970  |        |   |      | 2,669  |        |   |   | 2,991  |       
|Income tax benefit                                                                |                                 |                | 2,110  |        |   |      | 2,054  |        |   |   | 2,347  |       
|Equity in undistributed income of subsidiaries                                    |                                 |                | 18,701 |        |   |      | 11,585 |        |   |   | 12,544 |       
|                                                                                  |                                 |                |        |        |   |      |        |        |   |   |        |       
|Net income                                                                        |                                 | $              | 22,781 |        |   | $    | 16,308 |        |   | $ | 17,882 |       
|                                                                                  |                                 |                |        |        |   |      |        |        |   |   |        |       

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MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

CONDENSED STATEMENTS OF CASH FLOWS

|                                                 |                                                                                      |                                                         |                                           |         |         |       |       |        |         |     |       |        |         |       | 
|------------------------------------------------ | ------------------------------------------------------------------------------------ | ------------------------------------------------------- | ----------------------------------------- | ------- | ------- | ----- | ----- | ------ | ------- | --- | ----- | ------ | ------- | ----- | 
|                                                 |                                                                                      |                                                        
|                                                 |                                                                                      | December 31,                                           
|                                                 |                                                                                      |                                                        
|                                                 |                                                                                      | 2003                                                    |                                           | 2002    |         | 2001 
|                                                 |                                                                                      |                                                         |                                           |         |         |      
|                                                 |                                                                                      |                                                        
|                                                 |                                                                                      | (In thousands)                                         
|Cash flows from operating activities             |                                                                                      |                                                         |                                           |         |         |       |       |        |         |     |       |       
|                                                 | Net income                                                                           |                                                         | $                                         | 22,781  |         |       | $     | 16,308 |         |     | $     | 17,882 |        
|                                                 | Adjustments to reconcile net income to net cash
    provided by operating activities |                                                         |                                           |         |         |       |       |        |         |     |       |        |        
|                                                 |                                                                                      | Equity in undistributed income of subsidiaries          |                                           |         | (18,701 | )     |       |        | (11,585 | )   |       |        | (12,544 | )    
|                                                 |                                                                                      | Depreciation                                            |                                           |         | 66      |       |       |        | 71      |     |       |        | 84      |      
|                                                 |                                                                                      | Decrease (increase) in other assets                     |                                           |         | 7,059   |       |       |        | (4,458  | )   |       |        | 1,167   |      
|                                                 |                                                                                      | Increase in other liabilities                           |                                           |         | (3,178  | )     |       |        | 341     |     |       |        | 279     |      
|                                                 |                                                                                      |                                                         |                                           |         |         |       |       |        |         |     |       |       
|                                                 |                                                                                      |                                                         | Net cash provided by operating activities |         |         | 8,027 |       |        |         | 677 |       |        |         | 6,868 | 
|                                                 |                                                                                      |                                                         |                                           |         |         |       |       |        |         |     |       |       
|Cash flows from investing activities             |                                                                                      |                                                         |                                           |         |         |       |       |        |         |     |       |       
|                                                 | Cash paid, net of cash and cash equivalents in
    acquisition and stock issuance    |                                                         |                                           | (1,377  | )       |       |       |       |         |     |       |       |        
|                                                 | Investment in subsidiaries                                                           |                                                         |                                           | (10,000 | )       |       |       | (4,700 | )       |     |       |       |        
|                                                 | Property and equipment expenditures                                                  |                                                         |                                           | (68     | )       |       |       | (50    | )       |     |       | (58    | )      
|                                                 |                                                                                      |                                                         |                                           |         |         |       |       |        |         |     |       |       
|                                                 |                                                                                      | Net cash used in investing activities                   |                                           |         | (11,445 | )     |       |        | (4,750  | )   |       |        | (58     | )    
|                                                 |                                                                                      |                                                         |                                           |         |         |       |       |        |         |     |       |       
|Cash flows from financing activities             |                                                                                      |                                                         |                                           |         |         |       |       |        |         |     |       |       
|                                                 | Issuance of junior subordinated debt, net of debt
    issuance costs                 |                                                         |                                           | 18,430  |         |       |       | 14,525 |         |     |       |       |        
|                                                 | Notes payable                                                                        |                                                         |                                           | 5,500   |         |       |       |       |         |     |       | 1,500  |        
|                                                 | Payments on notes payable                                                            |                                                         |                                           | (5,500  | )       |       |       | (4,500 | )       |     |       | (300   | )      
|                                                 | Dividends paid                                                                       |                                                         |                                           | (7,317  | )       |       |       | (6,450 | )       |     |       | (6,440 | )      
|                                                 | Repurchase of common stock                                                           |                                                         |                                           |        |         |       |       | (576   | )       |     |       | (541   | )      
|                                                 | Proceeds from exercise of stock options                                              |                                                         |                                           | 1,666   |         |       |       | 641    |         |     |       | (67    | )      
|                                                 |                                                                                      |                                                         |                                           |         |         |       |       |        |         |     |       |       
|                                                 |                                                                                      | Net cash provided by (used in) financing
    activities |                                           |         | 12,779  |       |       |        | 3,640   |     |       |        | (5,848  | )    
|                                                 |                                                                                      |                                                         |                                           |         |         |       |       |        |         |     |       |       
|Increase (decrease) in cash and cash equivalents |                                                                                      |                                                         | 9,361                                     |         |         |       | (433  | )      |         |     | 962   |       
|Cash and cash equivalents at beginning of year   |                                                                                      |                                                         | 2,355                                     |         |         |       | 2,788 |        |         |     | 1,826 |       
|                                                 |                                                                                      |                                                         |                                           |         |         |       |       |        |         |     |       |       
|Cash and cash equivalents at end of
    year     |                                                                                      | $                                                       | 11,716                                    |         |         | $     | 2,355 |        |         | $   | 2,788 |       
|                                                 |                                                                                      |                                                         |                                           |         |         |       |       |        |         |     |       |       

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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 22  Earnings Per
Share

|                                  |                                            |                                       |      |        |  |      |      |        |  |   |      |        | 
|--------------------------------- | ------------------------------------------ | ------------------------------------- | ---- | ------ |  | ---- | ---- | ------ |  | - | ---- | ------ | 
|                                  |                                            | 2003                                  |      | 2002   |  | 2001
|                                  |                                            |                                       |      |        |  |     
|                                  |                                            |                                      
|                                  |                                            | (In thousands, except per share data)
|Basic                             |                                            |                                       |      |        |  |      |      |        |  |   |      |       
|                                  | Net income                                 |                                       | $    | 22,781 |  |      | $    | 16,308 |  |   | $    | 17,882 | 
|                                  |                                            |                                       |      |        |  |      |      |        |  |   |      |       
|                                  | Weighted average common shares outstanding |                                       |      | 17,798 |  |      |      | 16,122 |  |   |      | 16,104 | 
|                                  |                                            |                                       |      |        |  |      |      |        |  |   |      |       
|                                  | Basic earnings per common share            |                                       | $    | 1.28   |  |      | $    | 1.01   |  |   | $    | 1.11   | 
|                                  |                                            |                                       |      |        |  |      |      |        |  |   |      |       
|Diluted                           |                                            |                                       |      |        |  |      |      |        |  |   |      |       
|                                  | Net income                                 |                                       | $    | 22,781 |  |      | $    | 16,308 |  |   | $    | 17,882 | 
|                                  |                                            |                                       |      |        |  |      |      |        |  |   |      |       
|                                  | Weighted average common shares outstanding |                                       |      | 17,798 |  |      |      | 16,122 |  |   |      | 16,104 | 
|                                  | Dilutive effect of stock options           |                                       |      | 420    |  |      |      | 379    |  |   |      | 226    | 
|                                  |                                            |                                       |      |        |  |      |      |        |  |   |      |       
|                                  | Dilutive average common shares outstanding |                                       |      | 18,218 |  |      |      | 16,501 |  |   |      | 16,330 | 
|                                  |                                            |                                       |      |        |  |      |      |        |  |   |      |       
|Diluted earnings per common share |                                            | $                                     | 1.25 |        |  | $    | 0.99 |        |  | $ | 1.09 |       
|                                  |                                            |                                       |      |        |  |      |      |        |  |   |      |       

Note 23  Other Comprehensive
Income

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

|                                                                                                        |                                   |                          |         |         |   |      |        |        |  |   |        |       | 
|------------------------------------------------------------------------------------------------------- | --------------------------------- | ------------------------ | ------- | ------- | - | ---- | ------ | ------ |  | - | ------ | ----- | 
|                                                                                                        |                                   |                         
|                                                                                                        |                                   | Years Ended December 31,
|                                                                                                        |                                   |                         
|                                                                                                        |                                   | 2003                     |         | 2002    |   | 2001
|                                                                                                        |                                   |                          |         |         |   |     
|                                                                                                        |                                   |                         
|                                                                                                        |                                   | (In thousands)          
|Unrealized holding gains (losses) on securities
    available-for-sale                                  |                                   | $                        | (32,087 | )       |   | $    | 14,051 |        |  | $ | 7,406  |      
|Reclassification adjustment for gains recognized
    in income                                          |                                   |                          | (5,340  | )       |   |      | (1,522 | )      |  |   | (2,761 | )    
|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 |                                   |                          | (595    | )       |   |      | (331   | )      |  |   |       |      
|                                                                                                        |                                   |                          |         |         |   |      |        |        |  |   |        |      
|                                                                                                        | Net unrealized gains (losses)     |                          |         | (38,022 | ) |      |        | 13,594 |  |   |        | 4,645 | 
|Tax effect                                                                                              |                                   |                          | 15,053  |         |   |      | 5,392  |        |  |   | 1,841  |      
|                                                                                                        |                                   |                          |         |         |   |      |        |        |  |   |        |      
|                                                                                                        | Other comprehensive income (loss) |                          | $       | (22,969 | ) |      | $      | 8,202  |  |   | $      | 2,804 | 
|                                                                                                        |                                   |                          |         |         |   |      |        |        |  |   |        |      

F-32



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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 24  Quarterly Results of
Operations (Unaudited)

|                                     |            |                                       |        |         |  |              |        |             |  |   |        |      |  |   |        |      | 
|------------------------------------ | ---------- | ------------------------------------- | ------ | ------- |  | ------------ | ------ | ----------- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                                     |            |                                      
|                                     |            | Three Months Ended                   
|                                     |            |                                      
|2003                                 |            | March 31                              |        | June 30 |  | September 30 |        | December 31
|                                     |            |                                       |        |         |  |              |        |            
|                                     |            |                                      
|                                     |            | (In thousands, except per share data)
|Interest income                      |            | $                                     | 29,982 |         |  | $            | 27,576 |             |  | $ | 27,137 |      |  | $ | 27,384 |     
|Interest expense                     |            |                                       | 13,016 |         |  |              | 12,749 |             |  |   | 12,257 |      |  |   | 11,775 |     
|                                     |            |                                       |        |         |  |              |        |             |  |   |        |      |  |   |        |     
|Net interest income                  |            |                                       | 16,966 |         |  |              | 14,827 |             |  |   | 14,880 |      |  |   | 15,609 |     
|Provision for loan losses            |            |                                       | 990    |         |  |              | 755    |             |  |   | 7,743  |      |  |   | 717    |     
|Other income                         |            |                                       | 4,062  |         |  |              | 7,939  |             |  |   | 5,790  |      |  |   | 5,295  |     
|Other expense                        |            |                                       | 10,783 |         |  |              | 10,672 |             |  |   | 10,665 |      |  |   | 11,375 |     
|                                     |            |                                       |        |         |  |              |        |             |  |   |        |      |  |   |        |     
|Income/(loss) before income taxes    |            |                                       | 9,255  |         |  |              | 11,339 |             |  |   | 2,262  |      |  |   | 8,812  |     
|Provision/(benefit) for income taxes |            |                                       | 2,861  |         |  |              | 3,548  |             |  |   | (21    | )    |  |   | 2,499  |     
|                                     |            |                                       |        |         |  |              |        |             |  |   |        |      |  |   |        |     
|Net income                           |            | $                                     | 6,394  |         |  | $            | 7,791  |             |  | $ | 2,283  |      |  | $ | 6,313  |     
|                                     |            |                                       |        |         |  |              |        |             |  |   |        |      |  |   |        |     
|Earnings per common share            |            |                                       |        |         |  |              |        |             |  |   |        |      |  |   |        |     
|                                     | Basic      |                                       | $      | 0.36    |  |              | $      | 0.44        |  |   | $      | 0.13 |  |   | $      | 0.35 | 
|                                     | Diluted(a) |                                       |        | 0.35    |  |              |        | 0.43        |  |   |        | 0.12 |  |   |        | 0.34 | 

|                                     |            |                                       |        |         |  |                 |        |             |  |   |        |      |  |   |         |      | 
|------------------------------------ | ---------- | ------------------------------------- | ------ | ------- |  | --------------- | ------ | ----------- |  | - | ------ | ---- |  | - | ------- | ---- | 
|                                     |            |                                      
|                                     |            | Three Months Ended                   
|                                     |            |                                      
|2002                                 |            | March 31                              |        | June 30 |  | September 30(d) |        | December 31
|                                     |            |                                       |        |         |  |                 |        |            
|                                     |            |                                      
|                                     |            | (In thousands, except per share data)
|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      |                                       | $      | 0.39    |  |                 | $      | 0.40        |  |   | $      | 0.02 |  |   | $       | 0.20 | 
|                                     | Diluted(a) |                                       |        | 0.39    |  |                 |        | 0.39        |  |   |        | 0.02 |  |   |         | 0.20 | 



---



|    |  |                                                                                                                                                                                                                                                                                                                                                  
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 at December 31, 2002. In addition
    to this, the provision/(benefit) for income taxes was also
    impacted by a new regulation issued

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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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.

Note 25  Business
Combination

On January 3, 2003, the Company acquired Big
Foot Financial Corp. (BFFC) through the issuance of
approximately 1,599,088 shares of common stock at
$18.81 per share and cash paid of $1.4 million, and
incurred acquisition costs of $557,000, resulting in total
consideration of $32.0 million. BFFC was merged into the
Company, and its banking subsidiary was merged into and its
offices became branches of Midwest Bank and Trust Company. At
closing the Company transferred $3.4 million of securities
categorized as held-to-maturity to available-for-sale under
permissible provisions of FASB Statement No. 115. During
the first quarter of 2003, the Company sold the mortgage loans
and mortgage servicing rights of $141.9 million of the
acquired loans on a non-recourse basis.

The business combination is accounted for under
the purchase method of accounting. Accordingly, the results of
operations of BFFC have been included in the Companys
results of operations since January 3, 2003, the date of
acquisition. Under this method of accounting, the purchase price
is allocated to the respective assets acquired and liabilities
assumed based on their estimated fair values. The excess of
purchase price over the net assets acquired is recorded as
goodwill.

The following is the unaudited proforma
consolidated results of operation of the Company for the year
ended December, 2002 as though BFFC had been acquired as of
January 1, 2002.

|                           |  |                       |        | 
|-------------------------- |  | --------------------- | ------ | 
|                           |  | Year ended           
|                           |  | December 31, 2002    
|                           |  |                      
|                           |  | (In thousands, except
|                           |  | per share data)      
|Net interest income        |  | $                     | 67,489 | 
|Net income                 |  |                       | 1,604  | 
|Basic Earnings per share   |  |                       | 0.91   | 
|Diluted Earnings per share |  |                       | 0.89   | 

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

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.

Note 27  Capital Contribution
and Regulatory Matters

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
(Federal Reserve) and the Illinois Office of Banks
and Real Estate (OBRE) regarding additional
provisions for loan losses that the Federal Reserve and OBRE
determined were appropriate based on their review of a series of
loans to an individual borrower 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 (Affiliated Companies). As a result of
further communication with

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##### Table of Contents



MIDWEST BANC HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

the Federal Reserve and OBRE, additional analysis
completed by the Company, and the receipt of a supplemental
letter from the Federal Reserve 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.

As previously reported by the Company, on
March 26, 2003, Midwest Bank and Trust Company
(Bank) received proceeds from an entity indirectly
owned by certain directors and family members of directors of
the Bank of approximately $13.3 million in connection with
the sale of previously classified loans, which consisted of
$12.5 million of the loan principal balance, $750,000 for
the letter of credit and $67,000 of accrued interest and late
charges. As a result, the Bank recognized a $4.0 million
after-tax capital contribution as a result of the sale of these
loans to the related parties. As of December 31, 2002,
$6.3 million of the $12.5 million outstanding
principal amount of these loans was considered impaired.

On April 24, 2003, the Federal Reserve and
the OBRE completed the on-site portion of their regularly
scheduled examination of the Companys banking
subsidiaries. The examination included, among other items, a
review of the Companys over-all risk management, lending
and credit review practices. The Company received the
examination report during the third quarter of 2003.

On December 29, 2003, the Company and the
Bank received a proposed written agreement from the Federal
Reserve and OBRE which detailed recommended corrective actions
in the Companys over all risk management, lending and
credit review practices, including the engagement of third party
consultants. Following discussions with the regulators, the
Company and the Bank received a revised written agreement from
the Federal Reserve and OBRE on March 11, 2004. The
regulators have requested the Company and the Bank take action
on the proposed written agreement by March 15, 2004.
Management believes compliance with the written agreement is not
expected to have a material effect on the Companys
financial position or results of operations. The written
agreement will be filed upon execution by the Company and the
Bank. See Item 1 Business  Recent
Regulatory Developments on page 7 for a discussion of
certain possible effects of this regulatory action.

F-35