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  • 10-Q (May 13, 2010)
  • 10-Q (Nov 9, 2009)
  • 10-Q (Aug 10, 2009)
  • 10-Q (May 11, 2009)
  • 10-Q (Nov 10, 2008)
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8-K

 
Other

Midwest Banc Holdings 10-Q 2006

Documents found in this filing:

  1. 10-Q
  2. Ex-3.1
  3. Ex-10.1
  4. Ex-31.1
  5. Ex-31.2
  6. Ex-32.1
  7. Ex-32.1
e10vq
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2006
Commission File Number: 001-13735
MIDWEST BANC HOLDINGS, INC.
(Exact name of Registrant as specified in its charter.)
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  36-3252484
(I.R.S. Employer Identification Number)
     
501 W. North Ave.
Melrose Park, Illinois

(Address of principal executive offices)
  60160
(Zip code)
 
(708) 865-1053
(Registrant’s telephone number, including area code)
     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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o      Accelerated filer þ       Non-accelerated filer o
     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
           
 
  Class     Outstanding at August 9, 2006  
 
Common, par value $.01
    24,805,174  
 
 
 

 


 

MIDWEST BANC HOLDINGS, INC.
Form 10-Q
Table of Contents
         
    Page Number
PART I
       
 
       
Item 1. Financial Statements
     
 
       
    17  
 
       
    37  
 
       
    38  
 
       
       
 
       
    42  
 
       
    42  
 
       
    42  
 
       
    42  
 
       
    42  
 
       
    43  
 
       
    43  
 
       
    46  
 Amended and Restated Certificate of Incorporation
 Stock and Incentive Plan
 Certification of Principal Executive Officer
 Certification of Principal Financial Officer
 Section 906 Certifications

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

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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2006     2005     2006     2005  
Interest Income
                               
Loans
  $ 26,663     $ 18,897     $ 51,050     $ 36,139  
Securities
                               
Taxable
    7,469       7,349       15,391       14,063  
Exempt from federal income taxes
    833       145       1,652       239  
Trading securities
          124             190  
Dividend income from Federal Reserve and Federal Home Loan Bank stock
    139       192       276       387  
Federal funds sold and other short-term investments
    186       24       280       245  
 
                       
Total interest income
    35,290       26,731       68,649       51,263  
Interest Expense
                               
Deposits
    12,323       8,323       23,060       16,076  
Federal funds purchased
    150       236       398       287  
Securities sold under agreements to repurchase
    2,208       1,529       4,879       2,593  
Advances from the Federal Home Loan Bank
    1,982       1,594       3,521       3,026  
Junior subordinated debt owed to unconsolidated trusts
    1,074       979       2,077       1,964  
Note payable
                      9  
 
                       
Total interest expense
    17,737       12,661       33,935       23,955  
 
                       
Net interest income
    17,553       14,070       34,714       27,308  
Provision for loan losses
    5,000       813       5,000       1,627  
 
                       
Net interest income after provision for loan losses
    12,553       13,257       29,714       25,681  
Noninterest Income
                               
Customer service fees
    1,415       1,305       2,618       2,531  
Net losses on securities transactions
          (17,184 )     (195 )     (17,440 )
Net trading profits
          118             131  
Gains on sales of loans
    205       76       296       138  
Insurance and brokerage commissions
    486       381       998       766  
Trust
    86       77       163       144  
Increase in cash surrender value of life insurance
    534       542       1,024       888  
Gain on extinguishment of debt
    625             1,250        
Other
    250       259       460       497  
 
                       
Total noninterest income
    3,601       (14,426 )     6,614       (12,345 )
Noninterest Expenses
                               
Salaries and employee benefits
    7,618       6,846       15,100       13,357  
Occupancy and equipment
    1,647       1,538       3,103       3,015  
Professional services
    1,267       1,188       2,347       2,339  
Loss on extinguishment of debt
          13,125             13,125  
Other
    2,509       4,973       4,376       6,550  
 
                       
Total noninterest expenses
    13,041       27,670       24,926       38,386  
 
                       
Income (loss) before income taxes and discontinued operations
    3,113       (28,839 )     11,402       (25,050 )
Provision (benefit) for income taxes
    223       (11,690 )     2,571       (10,878 )
 
                       
Income (loss) from continuing operations
    2,890       (17,149 )     8,831       (14,172 )
 
                       
Discontinued operations
                               
Income from discontinued operations before income taxes
          1,050             2,682  
Provision for income taxes
          251             778  
 
                       
Income from discontinued operations
          799             1,904  
 
                       
Net Income (Loss)
  $ 2,890     $ (16,350 )   $ 8,831     $ (12,268 )
 
                       
Basic earnings per share from continuing operations
  $ 0.13     $ (0.94 )   $ 0.40     $ (0.78 )
 
                       
Basic earnings per share from discontinued operations
  $     $ 0.04     $     $ 0.11  
 
                       
Basic earnings per share
  $ 0.13     $ (0.90 )   $ 0.40     $ (0.67 )
 
                       
Diluted earnings per share from continuing operations
  $ 0.13     $ (0.94 )   $ 0.40     $ (0.78 )
 
                       
Diluted earnings per share from discontinued operations
  $     $ 0.04     $     $ 0.11  
 
                       
Diluted earnings per share
  $ 0.13     $ (0.90 )   $ 0.40     $ (0.67 )
 
                       
Cash dividends declared per common share
  $ 0.13     $ 0.12     $ 0.25     $ 0.24  
 
                       
See accompanying notes to unaudited consolidated financial statements.

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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
For the Six Months Ended June 30, 2006 and 2005
(In thousands, except share and per share data)
                                                         
                                    Accumulated                
            Additional                     Other             Total  
    Common     Paid in     Retained     Restricted     Comprehensive     Treasury     Stockholders’  
    Stock     Capital     Earnings     Stock     Loss     Stock     Equity  
Balance, January 1, 2005
  $ 187     $ 65,781     $ 95,829     $ (2,642 )   $ (16,457 )   $ (5,275 )   $ 137,423  
 
                                                       
Cash dividends declared ($0.24 per share)
                (4,379 )                       (4,379 )
 
                                                       
Issuance of common stock upon exercise of 360,492 stock options, inclusive of tax benefit
          196                         4,011       4,207  
Issuance of 15,000 shares of restricted stock
          137                         161       298  
Stock-based compensation
                      37                   37  
Comprehensive income
                                                       
Net loss
                (12,268 )                       (12,268 )
Net increase in fair value of securities classified as available- for-sale, net of income taxes and reclassification adjustments
                            14,781             14,781  
 
                                                     
Total comprehensive income
                                                    2,513  
 
                                         
 
                                                       
Balance, June 30, 2005
  $ 187     $ 66,114     $ 79,182     $ (2,605 )   $ (1,676 )   $ (1,103 )   $ 140,099  
 
                                         
 
                                                       
Balance, January 1, 2006
  $ 221     $ 134,857     $ 92,121     $ (3,013 )   $ (7,606 )   $ (454 )   $ 216,126  
 
                                                       
Cash dividends declared ($0.25 per share)
                (5,528 )                       (5,528 )
 
                                                       
Issuance of common stock upon exercise of 97,163 stock options, net of tax benefit
    1       1,643                               1,644  
Reclassification of restricted stock in conjunction with the adoption of FAS 123(R)
          (3,013 )           3,013                    
Issuance of 29,316 shares of restricted stock
                                         
Forfeiture of 3,400 shares of restricted stock
          36                         (36 )      
Stock-based compensation
          813                               813  
Comprehensive income
                                                       
Net income
                8,831                         8,831  
Net decrease in fair value of securities classified as available- for-sale, net of income taxes and reclassification adjustments
                            (8,774 )           (8,774 )
 
                                                     
Total comprehensive income
                                                    57  
 
                                         
 
                                                       
 
                                                     
Balance, June 30, 2006
  $ 222     $ 134,336     $ 95,424     $     $ (16,380 )   $ (490 )   $ 213,112  
 
                                         
See accompanying notes to unaudited consolidated financial statements.

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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended June 30, 2006 and 2005
(In thousands)
                 
            Revised(1)  
    2006     2005  
Cash flows from continuing operating activities
               
Net income (loss)
  $ 8,831     $ (12,268 )
Income from discontinued operations
          (1,904 )
Adjustments to reconcile net income to net cash provided by continuing operating activities
               
Depreciation
    1,206       1,184  
Provision for loan losses
    5,000       1,627  
Amortization of other intangibles
    196       215  
Proceeds from sales of trading securities, net
          131  
Amortization of premiums and discounts on securities, net
    470       1,331  
Realized loss on sale of available-for-sale securities, net
    195       17,440  
Net gain on sales of trading securities, net
          (131 )
Net gain on sales of loans held for sale
    (296 )     (138 )
Originations of loans held for sale
    (26,204 )     (9,784 )
Proceeds from sales of loans held for sale
    24,773       9,276  
Increase in cash surrender value of life insurance
    (1,024 )     (888 )
Deferred income taxes
    (1,452 )     (10,092 )
Gain on sale of other real estate, net
          (64 )
Amortization of deferred stock based compensation
    813       335  
Change in other assets
    (314 )     (9,229 )
Change in other liabilities
    328       10,240  
 
           
Net cash provided by (used in) continuing operating activities
    12,522       (2,719 )
Cash flows from continuing investing activities
               
Sales of securities available-for-sale
    24,687       101,807  
Maturities of securities available-for-sale
          218  
Principal payments on securities
    46,179       23,016  
Purchases of securities available-for-sale
    (10,837 )     (320,612 )
Purchases of securities held-to-maturity
          (1,011 )
Maturities of securities held-to-maturity
    2,025       1,475  
Loan originations and principal collections, net
    (74,923 )     (124,484 )
Proceeds from sale of other real estate
    6,182       400  
Investment in life insurance
    (5,926 )      
Additions to property and equipment
    (1,924 )     (369 )
 
           
Net cash used in continuing investing activities
    (14,537 )     (319,560 )
Cash flows from continuing financing activities
               
Net increase in deposits
    60,683       562  
Issuance of junior subordinated debt owed to unconsolidated trusts, net of debt issuance costs
          20,619  
Payments of junior subordinated debt owed to unconsolidated trusts
          (20,619 )
Proceeds from borrowings
    200,000       152,000  
Repayments on borrowings
    (100,000 )     (123,500 )
Cash dividends paid
    (5,290 )     (4,338 )
Change in federal funds purchased and securities sold under agreements to repurchase
    (111,205 )     128,762  
Proceeds from issuance of common or treasury stock under stock and incentive option plan
    1,184       3,965  
 
           
Net cash provided by continuing financing activities
    45,372       157,451  
 
           
Cash flows from discontinued operations
               
Net cash provided by operating activities of discontinued operations
          2,461  
Net cash used in investing activities of discontinued operations
          (25,388 )
Net cash provided by financing activities of discontinued operations
          5,099  
 
           
Net cash used in discontinued operations
          (17,828 )
 
           
 
               
Increase (decrease) in cash and cash equivalents
    43,357       (182,656 )
 
               
Cash and cash equivalents at beginning of period (2)
    70,599       243,431  
 
           
 
               
Cash and cash equivalents at end of period (3)
  $ 113,956     $ 60,775  
 
           
 
(2) Includes following balances from discontinued operations
  $     $ 24,407  
(3) Includes following balances from discontinued operations
          6,579  
See accompanying notes to unaudited consolidated financial statements.

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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) – (Continued)
                 
    2006   2005
Supplemental disclosures
               
Cash paid during period for:
               
Interest
  $ 32,346     $ 23,947  
Income taxes
    736       2,338  
Dividends declared not paid
  $ 2,875     $ 2,190  
 
(1)   The Unaudited Consolidated Statement of Cash Flows for the six months ended June 30, 2005 has been revised to separately disclose the operating, investing, and financing portions of the cash flows attributable to discontinued operations. The previous statement filed in the Company’s June 30, 2005 Quarterly Report on Form 10-Q did not include discontinued operations.
See accompanying notes to unaudited consolidated financial statements.

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION
     The consolidated financial statements of Midwest Banc Holdings, Inc. (the “Company”) included herein are unaudited; however, such statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation for the interim periods. The Company sold Midwest Bank of Western Illinois, one of its wholly owned subsidiaries, on September 30, 2005. This divestiture is accounted for in the accompanying financial statements as discontinued operations. Please see Note 3 to the notes to the unaudited consolidated financial statements for more details. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
     The annualized results of operations for the three and six months ended June 30, 2006 are not necessarily indicative of the results expected for the full year ending December 31, 2006.
NOTE 2 – NEW ACCOUNTING PRONOUNCEMENTS
     In December 2004, the Financial Accounting Standards Board (“FASB”) published Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“FAS 123(R)”). FAS 123(R) requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. FAS 123(R) permits entities to use any option-pricing model that meets the fair value objective in FAS 123(R). Modifications of share-based payments will be treated as replacement awards with the cost of the incremental value recorded in the financial statements. FAS 123(R) is effective at the beginning of the first quarter of 2006. The Company applied the modified prospective transition method of application. This statement did not have a material impact on the Company’s consolidated financial statements. Please see Note 9 to the notes to the unaudited consolidated financial statements for more details.
     In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” This statement applies to all voluntary changes in accounting principle as well as correction of errors. It requires retrospective application of changes in accounting principle as if that principle had always been used or as an adjustment of previously issued financial statements to reflect a change in the reporting entity, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The statement does not change previous guidance for reporting (i) the correction of an error in previously issued financial statements or (ii) a change in accounting estimate. This statement applies for fiscal years beginning after December 15, 2005. This statement did not have a material impact on the Company’s consolidated financial statements.
     On November 3, 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” which provides guidance for the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP is applicable for debt and equity securities within the scope of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” This guidance requires the evaluation of investments that have a fair value less than cost and the determination of whether an impairment is other than temporary. This guidance also requires the disclosure of quantitative information as well as additional information the company used to reach its conclusion. FSP No. FAS 115-1 applies for reporting periods beginning after December 15, 2005. This FSP did not have a material impact on the Company’s consolidated financial statements.

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
     In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting and reporting for uncertainties in application of income tax law, providing a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax positions taken, or expected to be taken in income tax returns. The Company will adopt FIN 48 in the first quarter of 2007 and is in the process of evaluating the effect that adoption of FIN 48 will have on its consolidated financial position and results of operations.
NOTE 3 – DISCONTINUED OPERATIONS
     The Company sold Midwest Bank of Western Illinois, one of its wholly owned subsidiaries (“MBWI”), on September 30, 2005 with a sale price of $32.0 million. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the results of operations of MBWI are shown in the Company’s consolidated statements of income for the three and six months ended June 30, 2005 as “discontinued operations.”
     The results of discontinued operations for the three and six months ended June 30, 2005 were as follows (in thousands):
                 
    Three Months     Six Months  
    Ended     Ended  
    June 30,     June 30,  
    2005     2005  
Interest income
  $ 3,553     $ 6,747  
Interest expense
    1,474       2,785  
 
           
 
               
Net interest income
    2,079       3,962  
 
               
Provision for loan losses
    100       (283 )
 
           
 
               
Net interest income after provision for loan losses
    1,979       4,245  
 
               
Noninterest income
    484       1,322  
Noninterest expense
    1,413       2,885  
 
           
 
               
Income before income taxes
    1,050       2,682  
Provision for income taxes
    251       778  
 
           
Income from discontinued operations
  $ 799     $ 1,904  
 
           

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

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
     The following is a summary of the fair value of securities held-to-maturity and available-for-sale with unrealized losses and an aging of those unrealized losses:
                                                 
    June 30, 2006  
    Less Than 12 Months     12 Months or More     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
    (In thousands)  
Securities available-for-sale:
                                               
Obligations of states and political subdivisions
  $ 80,405     $ (2,696 )   $ 4,048     $ (172 )   $ 84,453     $ (2,868 )
Mortgage-backed securities:
                                               
U.S. government agencies (1)
    13             642       (14 )     655       (14 )
U.S. government-sponsored entities (2)
    69,590       (2,288 )     388,572       (18,661 )     458,162       (20,949 )
Equity securities (3)
    60,995       (2,579 )                 60,995       (2,579 )
Corporate and other debt securities
                9,989       (1,055 )     9,989       (1,055 )
 
                                   
Total available-for-sale
    211,003       (7,563 )     403,251       (19,902 )     614,254       (27,465 )
 
                                   
Securities held-to-maturity:
                                               
Obligations of states and political subdivisions
    983       (24 )                 983       (24 )
Mortgage-backed securities:
                                               
U.S. government agencies (1)
    10,401       (512 )                 10,401       (512 )
U.S. government-sponsored entities (2)
    6,095       (172 )     29,034       (2,046 )     35,129       (2,218 )
 
                                   
Total held-to-maturity
    17,479       (708 )     29,034       (2,046 )     46,513       (2,754 )
 
                                   
 
Total temporarily impaired securities
  $ 228,482     $ (8,271 )   $ 432,285     $ (21,948 )   $ 660,767     $ (30,219 )
 
                                   
 
(1)   Includes obligations of the Government National Mortgage Association (GNMA).
 
(2)   Includes obligations of the Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA).
 
(3)   Includes issues from government-sponsored entities (FNMA and FHLMC).
     Management does not believe any individual unrealized loss as of June 30, 2006 identified in the preceding table represents other-than-temporary impairment.
    The unrealized loss for U.S. government-sponsored entities mortgage-backed securities relate primarily to debt securities issued by FNMA and FHLMC; each security has a stated maturity date. FNMA is rated Aa3, AA- and A+ by Moody’s, S&P and Fitch, respectively. FHLMC is rated Aa3 and AA- by Moody’s and Fitch, respectively. The mortgage-backed securities are notes with a weighted average maturity of approximately 23 years and a weighted average interest rate of 4.87%.
 
    The unrealized losses on corporate and other debt securities relate to securities which were rated A- or better by either Moody’s or S&P. These debt securities have a weighted average maturity of approximately 7 1/2 years and a weighted average interest rate of 4.73%.
     The unrealized losses in the previous table are primarily attributable to changes in interest rates. The Company has both the intent and ability to hold each of the securities shown in the table for the time necessary to recover its amortized cost. The unrealized loss on available-for-sale securities is included net of tax in other comprehensive income.

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 5 – LOANS
     The following table sets forth the composition of the Company’s loan portfolio as of the indicated dates.
                                 
    June 30,     December 31,  
    2006     2005  
            % of             % of  
            Gross             Gross  
    Amount     Loans     Amount     Loans  
    (Dollars in thousands)  
Commercial
  $ 205,536       14.4 %   $ 201,284       14.9 %
Construction
    416,996       29.3       358,785       26.6  
Commercial real estate
    502,057       35.4       496,819       36.8  
Consumer
                               
Home equity
    109,918       7.7       115,429       8.5  
Other consumer
    4,766       0.3       4,273       0.3  
 
                       
Total consumer
    114,684       8.0       119,702       8.8  
Residential mortgage
    184,130       12.9       174,184       12.9  
 
                       
Total loans, gross
    1,423,403       100.0 %     1,350,774       100.0 %
Net deferred fees
    (573 )             (778 )        
 
                           
Total loans, net
  $ 1,422,830             $ 1,349,996          
 
                           
 
                               
Loans held for sale
  $ 3,639             $ 1,912          
NOTE 6 – ALLOWANCE FOR LOAN LOSSES
     Following is a summary of changes in the allowance for loan losses for the six months ended June 30:
                 
    2006     2005  
    (In thousands)  
Balance, January 1
  $ 17,760     $ 16,217  
Provision charged to operations
    5,000       1,627  
Loans charged off
    (2,288 )     (687 )
Recoveries
    402       262  
 
           
 
               
Balance, June 30
  $ 20,874     $ 17,419  
 
           

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 7 – GOODWILL AND INTANGIBLES
     The following table presents the carrying amount and accumulated amortization of intangible assets (in thousands):
                                                 
    June 30, 2006   December 31, 2005
    Gross Carrying   Accumulated   Net Carrying   Gross Carrying   Accumulated   Net Carrying
    Amount   Amortization   Amount   Amount   Amortization   Amount
Amortized intangible assets:
                                               
Core deposit and other intangibles
  $ 3,130     $ (1,538 )   $ 1,592     $ 3,130     $ (1,342 )   $ 1,788  
     The amortization of intangible assets was $89,000 and $196,000 for the three and six months ended June 30, 2006, respectively. At June 30, 2006, the expected amortization of intangible assets is $373,000 for the year ending December 31, 2006 and $354,000 for the years ending December 31, 2007 through 2010. The amortization of intangible assets is anticipated to increase as a result of the acquisition of Royal American Corporation on July 1, 2006. See Note 12 – Business Combination for further details.
     The following table presents the changes in the carrying amount of goodwill and other intangibles during the six months ended June 30, 2006 (in thousands):
                 
            Core Deposit  
            and Other  
    Goodwill     Intangibles  
Balance, January 1
  $ 891     $ 1,788  
Amortization
          (196 )
 
           
Balance, June 30
  $ 891     $ 1,592  
 
           

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 8 – EARNINGS PER SHARE
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(In thousands, except per share data)   2006     2005     2006     2005  
Basic
                               
Income (loss) from continuing operations
  $ 2,890     $ (17,149 )   $ 8,831     $ (14,172 )
Income from discontinued operations
          799             1,904  
 
                       
Net income (loss)
  $ 2,890     $ (16,350 )   $ 8,831     $ (12,268 )
 
                       
Weighted average common shares outstanding
    21,942       18,245       21,907       18,196  
 
                       
Basic earnings per share from continuing operations
  $ 0.13     $ (0.94 )   $ 0.40     $ (0.78 )
 
                       
Basic earnings per share from discontinued operations
  $     $ 0.04     $     $ 0.11  
 
                       
Basic earnings per share
  $ 0.13     $ (0.90 )   $ 0.40     $ (0.67 )
 
                       
 
                               
Diluted
                               
Income (loss) from continuing operations
  $ 2,890     $ (17,149 )   $ 8,831     $ (14,172 )
Income from discontinued operations
          799             1,904  
 
                       
Net income (loss)
  $ 2,890     $ (16,350 )   $ 8,831     $ (12,268 )
 
                       
Weighted average common shares outstanding
    21,942       18,245       21,907       18,196  
Dilutive effect of stock options (1)
    211       220       219       237  
Dilutive effect of restricted stock (1)
    23             27       1  
 
                       
Diluted average common shares
    22,176       18,465       22,153       18,434  
 
                       
 
                               
Diluted average common shares – continuing operations
    22,176       18,245       22,153       18,196  
 
                       
Diluted average common shares – discontinued operations
    22,176       18,465       22,153       18,434  
 
                       
 
                               
Diluted earnings per share from continuing operations
  $ 0.13     $ (0.94 )   $ 0.40     $ (0.78 )
 
                       
Diluted earnings per share from discontinued operations
  $     $ 0.04     $     $ 0.11  
 
                       
Diluted earnings per share
  $ 0.13     $ (0.90 )   $ 0.40     $ (0.67 )
 
                       
 
(1)   No dilutive shares from stock options or restricted stock were included in the computation of earnings per share if there was a resulting loss from continuing operations or net loss.
     Options to purchase 113,500 shares at $22.03 were not included in the computation of diluted earnings per share for the three and six months ended June 30, 2005 because the exercise price for the options was greater than the average market price of the common stock, thus making the options antidilutive.

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 9 – STOCK COMPENSATION AND RESTRICTED STOCK AWARDS
     Under the Company’s Stock and Incentive Plan (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 in installments of 25% a year on each of the first through the fourth anniversaries of the grant date or may be issued subject to performance targets. In all cases, the options have a maximum term of ten years. The Plan also permits the issuance of nonqualified stock options, stock appreciation rights, restricted stock, and restricted stock units. The Plan authorizes a total of 3,900,000 shares for issuance. There are 2,355,888 shares remaining for issuance under the Plan at June 30, 2006. It is the Company’s policy to issue new shares of its common stock in conjunction with the exercise of stock options or grants of restricted stock. The Company has issued treasury shares in the past in conjunction with the exercise of stock options or grants of restricted stock.
     During the first six months of 2006, 97,163 employee stock options were exercised; of those 88,614 employee stock options were exercised by individuals who are no longer with the Company. As a result of the exercises of employee stock options, the Company received $1.2 million in cash and realized a tax benefit of $459,000. Total employee stock options outstanding at June 30, 2006 were 581,654 with exercise prices ranging between $8.50 and $22.03 and expiration dates between 2007 and 2015. All options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. No stock options were granted in the first six months of 2006.
     Information about option grants follows:
                         
            Weighted Average     Weighted Average  
    Number of     Exercise Price     Grant-Date Fair Value  
    Options     Per Share     Per Share  
Outstanding at January 1, 2006
    687,942     $ 13.83     $ 4.57  
Granted
                 
Exercised
    (97,163 )     12.19       3.81  
Forfeited
    (9,125 )     17.63       6.80  
 
                     
Outstanding at June 30, 2006
    581,654       14.05       4.52  
 
                     
     Options outstanding were as follows:
                                 
    Outstanding     Exercisable  
            Weighted Average                
            Remaining             Weighted Average  
Range of Exercise Price   Number     Contractual Life     Number     Exercise Price  
$8.50-10.59
    232,467       4.05       232,467     $ 9.63  
$10.75-14.90
    166,687       3.90       166,687       13.43  
$18.34-22.03
    182,500       7.77       132,625       20.72  
 
                           
Outstanding at June 30, 2006
    581,654       4.81       531,779       13.59  
 
                           

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
     The Company adopted SFAS No. 123(R), “Share-Based Payment,” in the first quarter of 2006 using the modified prospective application. Employee compensation expense for stock options previously granted was recorded in the consolidated income statement based on the grant’s vesting schedule. Forfeitures of stock option grants are estimated for those stock options where the requisite service is not expected to be rendered. The grant-date fair value for each grant was calculated using the Black-Scholes option pricing model. For the three and six months ended June 30, 2006, employee compensation expense related to stock options was $60,000 and $145,000, respectively. The total compensation cost related to nonvested stock options not yet recognized was $195,000 at June 30, 2006 and the weighted average period over which this cost is expected to be recognized is 15 months.
     No stock-based compensation cost is reflected in net income of prior periods. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” for the three and six months ended June 30, 2005.
                 
    Three Months     Six Months  
    Ended     Ended  
    June 30,     June 30,  
(In thousands, except per share data)   2005     2005  
Net loss as reported
  $ (16,350 )   $ (12,268 )
Deduct: stock-based compensation expense determined under fair value based method
    94       188  
 
           
Pro forma net loss
  $ (16,444 )   $ (12,456 )
 
           
 
               
Basic earnings per share as reported
  $ (0.90 )   $ (0.67 )
Pro forma basic earnings per share
    (0.90 )     (0.68 )
 
               
Diluted earnings per share as reported
  $ (0.90 )   $ (0.67 )
Pro forma diluted earnings per share
    (0.90 )     (0.68 )
     The pro forma compensation costs presented in this and prior filings for the Company have been calculated using a Black-Scholes option pricing model.

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
     Under the Plan, officers, directors, and key employees may also be granted restricted shares of the Company’s common stock. Holders of restricted shares are entitled to receive cash dividends paid to the Company’s common stockholders and have the right to vote the restricted shares prior to vesting. The existing restricted share grants vest over a time period not exceeding five years and/or are subject to performance targets. Compensation expense for the restricted shares equals the market price of the related stock at the date of grant and is amortized on a straight-line basis over the vesting period assuming certain performance targets are met when applicable. All restricted shares had a grant-date fair value equal to or greater than the market price of the underlying common stock at date of grant.
     Information about restricted share grants follows:
                 
    Number of     Weighted Average  
    Restricted     Grant-Date Fair Value  
    Shares     Per Share  
Outstanding at January 1, 2006
    178,700     $ 18.97  
Granted
    29,316       22.25  
Vested
    (30,000 )     18.71  
Forfeited
    (3,400 )     19.43  
 
             
Outstanding at June 30, 2006
    174,616       19.55  
 
             
     For the three and six months ended June 30, 2006, the Company recognized $334,000 and $668,000, respectively, in compensation expense related to the restricted stock grants compared to $170,000 and $335,000 for the three and six months ended June 30, 2005, respectively. The total compensation cost related to nonvested restricted shares not yet recognized was $2.9 million at June 30, 2006 and the weighted average period over which this cost is expected to be recognized is 27 months.
NOTE 10 – DERIVATIVE INSTRUMENTS
     As of June 30, 2006, the Company does not have any outstanding derivatives. In January 2005, the Company terminated U.S. Treasury 10-year note futures contracts with a notional value of $290.0 million at a gain of $336,000. The Company also terminated spread lock swap agreements with a notional value of $247.0 million in January 2005 at a loss of $425,000. The respective gain and loss on the futures contracts and spread lock swap agreements, all of which were stand-alone derivatives, were reflected in net trading profits.

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
NOTE 11 – OFF-BALANCE-SHEET RISK
     The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet financing needs of customers. Since many commitments to extend credit expire without being used, the amounts below do not necessarily represent future cash commitments. These financial instruments include lines of credit, letters of credit, and commitments to extend credit. These are summarized as follows as of June 30, 2006:
                                         
    Amount of Commitment Expiration Per Period  
    Within                     After        
    1 Year     1-3 Years     4-5 Years     5 Years     Total  
    (In thousands)  
Lines of Credit:
                                       
Commercial real estate
  $ 164,375     $ 45,537     $ 1,032     $ 36     $ 210,980  
Consumer real estate
    20,422       5,298       17,115       59,350       102,185  
Consumer
                      2,070       2,070  
Commercial
    67,090       10,162       220       1,244       78,716  
Letters of credit
    35,858       11,007       290       375       47,530  
Commitments to extend credit
    72,597                         72,597  
 
                             
Total commercial commitments
  $ 360,342     $ 72,004     $ 18,657     $ 63,075     $ 514,078  
 
                             
     At June 30, 2006, commitments to extend credit included $802,000 of fixed rate loan commitments. These commitments are due to expire within 30 to 90 days of issuance and have rates ranging from 7.00% to 10.50%. Substantially all of the unused lines of credit are at adjustable rates of interest.
     In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s financial position or results of operations.
NOTE 12 – BUSINESS COMBINATION
     On February 8, 2006, the Company entered into an agreement and plan of merger with Royal American Corporation (“Royal American”) for a cash and stock merger transaction. This transaction closed on June 30, 2006 with an effective date of July 1, 2006. The Company’s stock comprised approximately 50% of the purchase price, at an exchange ratio of 3.58429 shares for each Royal American common share, and the remainder was paid in cash at the rate of $80 per Royal American common share. The Company issued 2.9 million common shares and paid $64.6 million in cash for a total purchase price of $128.4 million.

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     The following discussion and analysis is intended as a review of significant factors affecting the financial condition and results of operations of the Company for the periods indicated. The discussion should be read in conjunction with the unaudited Consolidated Financial Statements and the Notes thereto presented herein. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed in this report.
Critical Accounting Policies and Estimates
     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. Those critical accounting policies that are of particular significance to the Company are discussed in Item 7 of the Company’s 2005 Annual Report on Form 10-K.
     In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting and reporting for uncertainties in application of income tax law, providing a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax positions taken or expected to be taken in income tax returns. The Company will adopt FIN 48 on the first quarter of 2007 and is in the process of evaluating the effect that adoption of FIN 48 will have on its consolidated financial position and results of operations.
Strategy
     The Company’s strategic plan emphasizes expanded penetration of the community banking market in the Chicago metropolitan area, along with strong management of asset quality and risk. Repositioning initiatives implemented in recent quarters have increased the level of stockholders’ equity, added to the depth of management at the Bank and Company, and improved operational controls. Among the strategies developed to achieve growth targets are:
     Expand and diversify loan portfolio. The Company has increased its staff of commercial loan officers and assigned more aggressive goals for loan origination. Beyond loan growth itself, the Company has placed an emphasis on developing more commercial and industrial loans and retail lending to provide balance to the strong penetration of real estate lending in the Bank’s markets.
     Expand deposit base. To fund loan growth, the Company is focused on deposit generation, including demand deposits, interest-bearing demand deposits, money market, and savings accounts. The Company has changed and expanded staffing and management at its banking centers and initiated a number of customer outreach initiatives in order to increase deposits in a highly competitive market. The Company is in the process of creating a performance-driven sales environment and taking steps designed to increase customer activity in its branches.
     Expand footprint in Chicago market. The Company plans to expand in the Chicago market through acquisitions and selective branch opportunities, in addition to internal growth. The Company opened a branch in Franklin Park, Illinois in June 2006. Management, however, believes the Chicago market to be somewhat saturated with branches creating less opportunities to open new branches. Therefore, acquiring existing branches at a reasonable cost is generally believed to be a preferable means of expansion. As part of this strategy, the Company closed on the merger with Royal American Corporation on June 30, 2006, as discussed further in Note 12 of the notes to the unaudited consolidated financial statements. The merger expanded the

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Company’s number of branches from 18 to 24. The new branches are located in the following suburbs of Chicago: Bensenville, Buffalo Grove, Bloomingdale, Inverness, Naperville, and Elgin.
     Expand noninterest income. The Company is focusing on opportunities to build the contribution of fees as a percentage of revenue, emphasizing corporate cash management, insurance and investment services, trust services, and secondary-market mortgage lending.
     Management believes its growth strategies to be fundamentally sound and based on reasonable opportunities available in the Chicago market. The Company has established internal benchmarks for each growth initiative and has taken a number of steps to align compensation with achievement of these benchmarks.
Results of Operations – Three Months Ended
June 30, 2006 and 2005
     Set forth below are some highlights of the second quarter 2006 results compared to the second quarter of 2005 and first quarter of 2006. In accordance with SFAS No. 144, the results of operations for MBWI for the three months ended June 30, 2005 are reflected in the Company’s statement of income as “discontinued operations” and are not reflected below.
    Basic and diluted earnings per share from continuing operations for the three months ended June 30, 2006 were $0.13 compared to $(0.94) for the comparable period in 2005 and $0.27 for the first quarter of 2006.
 
    Income from continuing operations for the second quarter of 2006 was $2.9 million, an 116.9% increase when compared to a $17.1 million loss for the second quarter of 2005, but a 51.4% decrease when compared to the first quarter of 2006. Core income from continuing operations (defined as net income excluding the balance sheet repositioning charges as reconciled below) was $1.9 million for the three months ended June 30, 2005, or $0.10 per diluted share.
 
    Net interest income increased 24.8% to $17.6 million in the second quarter of 2006 compared to $14.1 million in the second quarter of 2005 as a result of loan growth and increased loan rates. The net interest margin was 3.46% for the three months ended June 30, 2006 compared to 3.08% for the similar period of 2005 and 3.39% for the three months ended March 31, 2006.
 
    Interest income on loans increased 41.1% to $26.7 million in the second quarter of 2006 compared to $18.9 million for the comparable period in 2005. Interest income on loans increased 9.3% when compared to the first quarter of 2006.
 
    The annualized return on average assets from continuing operations for the three months ended June 30, 2006 was 0.50% compared to a negative 2.95% for the similar period in 2005 and 1.05% for the first quarter of 2006; annualized core return on average assets from continuing operations was 0.32% for second quarter in 2005.
 
    The annualized return on average equity from continuing operations for the three months ended June 30, 2006 was 5.31% compared to a negative 48.38% for the similar period in 2005 and 11.06% for the first quarter of 2006; annualized core return on average equity from continuing operations was 5.24% for the second quarter of 2005.
 
    The provision for loan losses was $5.0 million in the second quarter of 2006 compared to $813,000 for the comparable period in 2005. This increase was related to a downgrading of $15.3 million of a loan relationship; $5.0 million of this loan relationship is on nonaccrual status. Additional portions of this loan relationship may be placed on nonaccrual status depending on many variables. Additional loan proceeds may also be provided as part of the loan workout strategy.

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    Excluding losses on securities, noninterest income increased 30.6% to $3.6 million in the second quarter of 2006 compared to $2.8 million in the second quarter of 2005 primarily as a result of the gain on extinguishment of debt of $625,000 from the assignment of a $50.0 million FHLB advance in the second quarter of 2006. Compared to the first quarter of 2006, noninterest income exluding losses on securities increased by 12.3%.
 
    Noninterest expenses decreased 52.9% to $13.0 million in the second quarter of 2006 compared to $27.7 million in the second quarter of 2005, due to the $13.1 million loss on extinguishment of debt in 2005 relating to the balance sheet repositioning. Noninterest expenses increased 9.7% when compared to the first quarter of 2006. Since June 30, 2005, there have been 42 new full-time equivalent employees added to revenue production, support, and risk management.
     Set forth below are some highlights of the six months ended June 30, 2006 results compared to the results for the six months ended June 30, 2005. In accordance with SFAS No. 144, the results of operations for MBWI for the six months ended June 30, 2005 are reflected in the Company’s statement of income as “discontinued operations” and are not reflected below.
    Basic and diluted earnings per share from continuing operations for the six months ended June 30, 2006 were $0.40 compared to $(0.78) for the same period in 2005.
 
    Income from continuing operations for the first six months of 2006 was $8.8 million, an 162.3% increase when compared to the $14.2 million loss for the first six months of 2005. Core income from continuing operations for the six months ended June 30, 2005 was $4.8 million or $0.26 per diluted share.
 
    Net interest income increased by 27.1% to $34.7 million in the first half of 2006 compared to $27.3 million in the first half of 2005.
 
    Interest income on loans increased 41.3% to $51.1 million in the first six months of 2006 compared to $36.1 million for the same period in 2005 as a result of increases in rates as well as balances.
 
    The annualized return on average assets from continuing operations for the six months ended June 30, 2006 was 0.77% compared to a negative 1.25% for the same period in 2005; core annualized return on average assets from continuing operations was 0.43% for the six months ended June 30, 2005.
 
    The annualized return on average equity from continuing operations for the six months ended June 30, 2006 was 8.16% compared to a negative 20.16% for the same period 2005; core annualized return on average equity from continuing operations was 6.87% for the six months ended June 30, 2005.
 
    The provision for loan losses rose to $5.0 million in the first half of 2006 compared to $1.6 million for the comparable period in 2005, as a result of the downgrading of $15.3 million of a loan relationship.
 
    Excluding losses on securities, noninterest income increased 33.6% to $6.8 million in the first half of 2006 compared to $5.1 million in the same period of 2005 primarily as a result of the gain on extinguishment of debt in the first and second quarters of 2006.
 
    Noninterest expenses decreased 35.1% to $24.9 million in the first half of 2006 compared to $38.4 million in the same period of 2005 as a result of the loss on extinguishment of debt totaling $13.1 million in 2005.

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     Core income from continuing operations is income from continuing operations excluding the balance sheet repositioning charges. Core income from continuing operations provides greater insight into comparisons between periods by eliminating the impact of specific charges relating to the balance sheet repositioning. Management believes that core net income is a more useful measure of operating performance since it excludes items that are not recurring in nature. In addition, management believes core net income is more reflective of current trends. The following table reconciles reported income from continuing operations to core income from continuing operations for the three and six months ended June 30, 2005:
                 
    Three Months     Six Months  
    Ended     Ended  
    June 30,     June 30,  
    2005     2005  
Loss from continuing operations
  $ (17,149 )   $ (14,172 )
Loss on U.S. Agency debt securities, net of tax
    10,595       10,595  
Charge from prepayment of FHLB advances, net of tax
    5,886       5,886  
Charge from unwinding swaps, net of tax
    2,206       2,206  
Charge from redemption of trust preferred securities, net of tax
    318       318  
 
           
Core income from continuing operations
  $ 1,856     $ 4,833  
 
           
Net Interest Income
     Net interest income is the difference between interest income and fees on earning assets and interest expense on deposits and borrowings. Net interest margin represents net interest income on a tax equivalent basis as a percentage of average earning assets during the period. Net interest margin reflects the spread between average yields earned on interest earning assets and the average rates paid on interest bearing deposits and borrowings.

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

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    For the Six Months Ended  
    June 30, 2006     June 30, 2005  
    Average             Average     Average             Average  
    Balance     Interest     Rate     Balance     Interest     Rate  
    (Dollars in thousands)  
Interest-Earning Assets:
                                               
Federal funds sold and interest- bearing deposits due from banks
  $ 10,892     $ 280       5.14 %   $ 22,654     $ 245       2.16 %
Securities:
                                               
Taxable(1)
    626,512       16,230       5.18       661,244       15,057       4.55  
Exempt from federal income taxes(1)
    86,503       2,542       5.88       11,326       367       6.48  
 
                                       
Total securities
    713,015       18,772       5.26       672,570       15,424       4.58  
FRB and FHLB stock
    14,757       276       3.74       13,830       387       5.60  
Loans:
                                               
Commercial loans(1)(3)(4)
    202,269       7,876       7.79       181,747       5,596       6.16  
Commercial real estate loans(1)(3)(4)
    963,188       35,815       7.44       805,343       25,878       6.43  
Agricultural loans(3)(4)
    2,276       86       7.56       1,352       45       6.66  
Consumer real estate loans(3)(4)
    223,977       7,243       6.47       163,541       4,637       5.67  
Consumer installment loans(3)(4)
    4,500       173       7.69       3,766       140       7.43  
 
                                       
Total loans
    1,396,210       51,193       7.34       1,155,749       36,296       6.28  
 
                                       
Total interest-earning assets
  $ 2,134,874     $ 70,521       6.60 %   $ 1,864,803     $ 52,352       5.62 %
 
                                       
Interest-Bearing Liabilities:
                                               
Deposits:
                                               
Interest-bearing demand deposits
  $ 140,328     $ 549       0.78 %   $ 190,965     $ 1,471       1.54 %
Money-market demand accounts and savings accounts
    285,062       2,373       1.66       356,040       2,988       1.68  
Time deposits less than $100,000
    760,415       14,760       3.88       730,766       10,822       2.96  
Time deposits of $100,000 or more
    224,170       5,087       4.54       54,172       694       2.56  
Public funds
    13,199       291       4.41       8,843       101       2.28  
 
                                       
Total interest-bearing deposits
    1,423,174       23,060       3.24       1,340,786       16,076       2.40  
Borrowings:
                                               
Federal funds purchased and repurchase agreements
    245,813       5,277       4.29       207,261       2,880       2.78  
FHLB advances
    188,674       3,521       3.73       118,125       3,026       5.12  
Notes payable and other borrowings
    55,672       2,077       7.46       56,080       1,973       7.04  
 
                                       
Total borrowings
    490,159       10,875       4.44       381,466       7,879       4.14  
 
                                       
Total interest-bearing liabilities
  $ 1,913,333     $ 33,935       3.54 %   $ 1,722,252     $ 23,955       2.78 %
 
                                       
Net interest income (tax equivalent)(1)(5)
          $ 36,586       3.06 %           $ 28,397       2.84 %
 
                                           
Net interest margin (tax equivalent)(1)
                    3.43 %                     3.05 %
 
                                               
Net interest income(2)(5)
          $ 34,714                     $ 27,308          
 
                                           
Net interest margin(2)
                    3.25 %                     2.93 %
 
(1)   Adjusted for 35% tax rate in 2006 and 2005 and adjusted for the dividends-received deduction where applicable.
 
(2)   Not adjusted for 35% tax rate in 2006 and 2005 or for the dividends-received deduction.
 
(3)   Nonaccrual loans are included in the average balance; however, these loans are not earning any interest.
 
(4)   Includes loan fees which are immaterial.
 
(5)   The following table reconciles reported net interest income on a tax equivalent basis for the periods presented:
                 
    2Q06     2Q05  
Net interest income
  $ 34,714     $ 27,308  
Tax equivalent adjustment to net interest income
    1,872       1,089  
 
           
Net interest income, tax equivalent basis
  $ 36,586     $ 28,397  
 
           
(6)   Includes construction loans.
     Net interest income was $17.6 million and $14.1 million for the three months ended June 30, 2006 and 2005, respectively, an increase of 24.8%. For the first six months of 2006 and 2005, net interest income was $34.7 million and $27.3 million, respectively, an increase of 27.1%. The strong loan growth and increase in rates fueled the improvement in net interest income. Evidence of this is the increase in the Company’s net interest margin (tax equivalent net interest income as a percentage of earning assets) to 3.46% and 3.43% for the three and six months ended June 30, 2006, respectively, compared to 3.08% and 3.05% for the comparable periods in 2005. The net interest margin for the second quarter of 2006 increased 7 basis points when compared to the first quarter of 2006.

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

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    accounts into certificates of deposit and the reliance on more expensive wholesale funds contributed to the increase in the cost of funds.
    Average borrowings increased by $49.9 million in the second quarter of 2006 while yields increased by 48 basis points to 4.60% compared to the second quarter of 2005. Measured to the first quarter of 2006, yields on borrowings increased by 32 basis points while average balances decreased by $40.7 million.
 
    The Company increased its FHLB borrowings by $50.0 million in the second quarter of 2006. Average rates paid on FHLB borrowings for the second quarter of 2006 declined by 155 basis points to 3.84% compared to the second quarter of 2005. Average rates paid also decreased by 139 basis points for the first six months of 2006 and average balances increased by $70.5 million when compared to the same period in 2005.
 
    Average Federal funds and repurchase agreements decreased by $38.5 million, while average rates increased 167 basis points compared to the second quarter of 2005. Average rates on Federal funds and repurchase agreements increased 151 basis points in the first six months of 2006 compared to the similar period in 2005, and average balances increased by $38.6 million.
 
    As part of the Royal American acquisition in the third quarter of 2006, the Company paid out $64.6 million in cash that was held in a noninterest bearing account at the Bank. An increase in funding costs is anticipated as a result of replacing these funds with more expensive borrowings, which is expected to be offset by the anticipated increase in net interest income resulting from the Royal American acquisition.
Noninterest Income
     Noninterest income, excluding net losses on securities transactions, was $3.6 million for the three months ended June 30, 2006, an increase of $843,000, or 30.6%, over the comparable period in 2005 and was $393,000 higher than the first quarter of 2006. Noninterest income, excluding net losses on securities transactions, was $6.8 million for the six months ended June 30, 2006, an increase of $1.7 million, or 33.6%, over the comparable period in 2005. The noninterest income, excluding net losses on securities transactions, to average assets ratio was 0.62% for the three months ended June 30, 2006 compared to 0.47% for the same period in 2005 and 0.56% for the three months ended March 31, 2006. The increase in noninterest income was due primarily to the following factors:
    As part of its program of repositioning the maturities of its borrowings, the Company recognized a gain on the extinguishment of debt of $625,000 in the second quarter of 2006 as a result of the assignment of a $50.0 million FHLB advance and recognized another $625,000 gain in the first quarter of 2006 as a result of the prepayment of a $28.0 million repurchase agreement.
 
    Insurance and brokerage commissions increased by $105,000 in the three months ended June 30, 2006 compared to the similar period in 2005 as a result of increased staff and brokerage activity. For similar reasons, insurance and brokerage commission increased by $232,000 during the first six months of 2006 compared to the same period in 2005. When compared to the first quarter of 2006, insurance and brokerage commission slightly decreased by 5.1%.
 
    Customer service fees increased by $110,000 to $1.4 million in the second quarter of 2006 compared to the second quarter of 2005 and increased by $212,000 compared to the first quarter of 2006. For the first six months of 2006, customer service fees increased by $87,000 when

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      compared with the same period in 2005. This improvement is a result of the increase in the number of deposit accounts, increased fees, and less waived fees.
 
    Gains on sales of loans increased during the second quarter of 2006 by 169.7% or $129,000 to $205,000 compared to the second quarter of 2005 and by $114,000 or 125.3% when compared to the first quarter of 2006, due to a higher level of mortgage refinancing volume. For the six months ended June 30, 2006, gains on sales of loans more than doubled when compared to the same period in 2005.
 
    Increase in the cash surrender value of life insurance slightly decreased by $8,000 to $534,000 during the three months ended June 30, 2006 compared to the similar period in 2005, but was $44,000 higher compared to the first quarter of 2006. For the first half of 2006, the increase in the cash surrender value of life insurance was $136,000 higher than the first half of 2005. The Company made an additional purchase of bank owned life insurance of $5.0 million in the first quarter of 2006.
 
    There were no gains or losses on securities for the second quarter of 2006. Net losses on securities transactions were $17.2 million in the second quarter of 2005 as a result of the balance sheet repositioning and were $195,000 during the first quarter of 2006.
Noninterest Expenses
     Total noninterest expenses decreased 52.9%, or $14.6 million, to $13.0 million during the second quarter of 2006 compared to $27.7 million for the similar period in 2005. Total noninterest expenses in 2005 reflect a $13.1 million loss on extinguishment of debt relating to the balance sheet repositioning. In comparison to the first quarter of 2006, total noninterest expenses increased $1.2 million. For the six months ended June 30, 2006, total noninterest expenses decreased by $13.5 million to $24.9 million when compared to the same period of 2005. The noninterest expenses to average assets ratio was 2.25% for the three months ended June 30, 2006 compared to 4.75% for the same period in 2005 and 2.09% for the three months ended March 31, 2006. The noninterest expenses to average assets ratio was 2.17% for the six months ended June 30, 2006 compared to 3.38% for the same period in 2005.
     The efficiency ratio was 57.38% for the three months ended June 30, 2006 compared to 140.49% for the same period in 2005 and 55.20% for the first quarter of 2006. The efficiency ratio was 56.31% for the first half of 2006 and 104.43% for the same period in 2005. Excluding the balance sheet repositioning charges, the core efficiency ratio was 65.04% and 65.25% for the three and six months ended June 30, 2005, respectively. The efficiency ratio is equal to noninterest expenses less amortization and other real estate expenses divided by the sum of net interest income on a fully tax-equivalent basis plus noninterest income excluding security gains or losses. The decrease in the efficiency ratio compared to the prior year was due primarily to the increase in net interest income on a fully tax-equivalent basis and in noninterest income during 2006. The efficiency ratio rose in the second quarter of 2006 when compared to the first quarter of 2006 mainly due to the increase in noninterest expenses. The number of full-time equivalent employees increased by 8 compared to the first quarter of 2006 and 42 compared to June 30, 2005. The Company has added to its management structure in the areas of revenue production, support, and risk management, and at the same time, was able to improve its efficiency ratio.
     Total noninterest expenses increased due to the following factors:
    During the second quarter of 2005, a $13.1 million loss on the early extinguishment of FHLB advances was recorded as a result of the balance sheet repositioning consisting of $9.5 million in prepayment penalties and $3.6 million to unwind the interest rate swaps associated with the advances.

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    Reflected in the noninterest expenses also was the $2.4 million write-down of the townhouse project held in other real estate owned taken in the second quarter of 2005. The Company recognized $178,000 in expenses with the sale of properties included in this townhouse project during the second quarter of 2006.
 
    Salaries and benefits expense increased by $772,000, or 11.3%, during the second quarter of 2006 compared to the second quarter of 2005 and $136,000, or 1.8%, compared to the first quarter of 2006, reflecting the additions to management. Similarly, salaries and benefits expense increased by $1.7 million, or 13.1%, to $15.1 million for the first half of 2006 compared to the same period in 2005.
 
    Occupancy and equipment expense increased by $109,000 during the second quarter of 2006 to $1.6 million compared to the similar period in 2005 and $191,000 compared to the first quarter of 2006. Occupancy and equipment expense increased slightly by $88,000 to $3.1 million for the first half of 2006 compared to the same period in 2005.
 
    Professional services expense rose by $79,000, or 6.7%, to $1.3 million in the second quarter of 2006 compared to the second quarter of 2005 and $187,000, or 17.3%, compared to the first quarter of 2006 due in the most part to new hire placement fees. Professional services expense for the first half of 2006 increased less than 1.0% compared to the six months ended June 30, 2005.
 
    Marketing expenses in the second quarter of 2006 were $69,000 higher than in the second quarter of 2005, but increased by $134,000 compared to the first quarter of 2006 as a result of launching a branding effort and a more consistent marketing strategy. Marketing expenses for the first half of 2006 were at the same level as the first half of 2005.
Income Taxes
     The Company recorded income tax expense of $223,000 and a tax benefit of $11.7 million for the quarters ended June 30, 2006 and 2005, respectively. For the first half of 2006, the Company recorded $2.6 million in income tax expense compared to a tax benefit of $10.9 million for the same period of 2005. Set forth below is a reconciliation of the effective tax rate from continuing operations as of June 30, 2006 and 2005.
                 
    Six Months Ended  
    June 30,  
    2006     2005  
    (In thousands)  
Income taxes (benefit) computed at the statutory rate
  $ 3,991     $ (8,767 )
Tax-exempt interest income on securities and loans
    (556 )     (168 )
General business credits
    (60 )     (60 )
State income taxes, net of federal tax benefit
    (36 )     (1,188 )
Cash surrender value increase, net of premiums
    (359 )     (309 )
Dividends received deduction
    (445 )     (582 )
Other
    36       196  
 
           
Total provision (benefit) for income taxes
  $ 2,571     $ (10,878 )
 
           

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

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Loans
          The following table sets forth the composition of the Company’s loan portfolio as of the indicated dates.
                                 
    June 30,     December 31,  
    2006     2005  
            % of             % of  
            Gross             Gross  
    Amount     Loans     Amount     Loans  
    (Dollars in thousands)  
Commercial
  $ 205,536       14.4 %   $ 201,284       14.9 %
Construction
    416,996       29.3       358,785       26.6  
Commercial real estate
    502,057       35.4       496,819       36.8  
Consumer
                               
Home equity
    109,918       7.7       115,429       8.5  
Other consumer
    4,766       0.3       4,273       0.3  
 
                       
Total consumer
    114,684       8.0       119,702       8.8  
Residential mortgage
    184,130       12.9       174,184       12.9  
 
                       
Total loans, gross
    1,423,403       100.0 %     1,350,774       100.0 %
Net deferred fees
    (573 )             (778 )        
 
                           
Total loans, net
  $ 1,422,830             $ 1,349,996          
 
                           
 
                               
Loans held for sale
  $ 3,639             $ 1,912          
          Total loans increased $72.8 million, or 5.4%, to $1.4 billion at June 30, 2006 from December 31, 2005; however, the mix did not change materially. Set forth below are other highlights of the loan portfolio.
    Commercial loans increased $4.3 million to $205.5 million as of June 30, 2006 from $201.3 million as of December 31, 2005.
 
    Construction loans increased by $58.2 million to $417.0 million as of June 30, 2006 from $358.8 million at December 31, 2005.
 
    Commercial real estate loans rose to $502.1 million at June 30, 2006 compared to $496.8 million at December 31, 2005.
 
    Consumer loans decreased to $114.7 million as of June 30, 2006 compared to $119.7 million at December 31, 2005.
 
    Residential mortgage loans increased $9.9 million to $184.1 million as of June 30, 2006 from $174.2 million as of December 31, 2005.
          Many 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. Loans held for sale were $3.6 million at June 30, 2006 compared to $1.9 million at December 31, 2005. 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.

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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.
Allowance for Loan Losses
          The allowance for loan losses has been established to provide for those loans that may not be repaid in their entirety for a variety of reasons. The allowance is maintained at a level considered by management to be adequate to provide for probable incurred losses. The allowance is increased by provisions charged to earnings and is reduced by chargeoffs, net of recoveries. The provision for loan losses is based upon past loan loss experience and management’s evaluation of the loan portfolio under current economic conditions. Loans are charged to the allowance for loan losses when, and to the extent, they are deemed by management to be uncollectible. The allowance for loan losses is composed of allocations for specific loans and a historical loss portion for all other loans.
          Following is a summary of changes in the allowance for loan losses for the six months ended June 30:
                 
    2006     2005  
    (In thousands)  
Balance, January 1
  $ 17,760     $ 16,217  
Provision charged to operations
    5,000       1,627  
Loans charged off
    (2,288 )     (687 )
Recoveries
    402       262  
 
           
Balance, June 30
  $ 20,874     $ 17,419  
 
           
          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 deemed 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 and information provided during 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 Company meets to review the adequacy of the allowance for loan losses. Each loan officer grades his or her individual commercial credits and the Company’s independent loan review personnel reviews the officers’ grades. In the event that the loan is 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 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

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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 Company’s methodology for determining the allowance for loan losses represents an estimation done pursuant to SFAS No. 5, “Accounting for Contingencies,” and SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” The allowance 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 commercial, commercial real estate and agricultural loans over $300,000 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 factors are updated quarterly. The allowance for loan losses also includes consideration of concentrations and changes in portfolio mix and volume, and other qualitative factors. In addition, regulatory agencies, as an integral part of their examinations, may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.
          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 the Company’s earnings or financial position in future periods.
          A provision for loan losses of $5.0 million was taken for the first half of 2006 compared to a provision of $1.6 million for the similar period in 2005. This increase in provision is a result of the deterioration in the credit quality of a long-standing loan relationship. Although payments remain current on the account, recent developments in the customer’s operations, relating to uncertainty of the customer’s ability to collect a large account receivable, prompted the Bank to downgrade $15.3 million in loans to a substandard classification. A total of $8.3 million in specific reserves have been allocated to the loan relationship, including $3.3 million of existing reserves plus the $5.0 million second quarter provision. Management believes that the allowance is adequate, but the ultimate ability to collect on this downgraded loan relationship remains uncertain.
          The Company had net charged-off loans of $1.9 for the first half of 2006 compared to $425,000 for the same period in 2005. During the second quarter of 2006, the Company charged off a $1.9 million loan for which specific reserves were allocated at December 31, 2005. The following table sets forth certain asset quality ratios on a quarter-to-date basis as of the indicated dates.
                         
    June 30,   December 31,   June 30,
    2006   2005   2005
Net loans charged off to average loans during quarter
    0.53 %     0.12 %     0.13 %
Provision for loan losses to total loans
    1.41       0.04       0.27  
Allowance for loan losses to total loans
    1.47       1.32       1.43  
Allowance to nonaccruing loans
    1.91 x     2.25 x     2.63 x
The asset quality ratios above can be affected if there is further deterioration in the loan portfolio.

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Nonaccruing Loans and Nonperforming Assets
          In the second quarter of 2006, the Company sold properties included in a townhouse project previously held in other real estate. As a result of this sale, other real estate declined to $5.2 million on June 30, 2006 from $11.2 million on December 31, 2005. Nonperforming assets declined to $16.2 million at June 30, 2006 compared to $19.1 million at December 31, 2005. The remaining five units of the townhouse project are being retained and are being marketed by the Company. It is anticipated that the Company will not suffer a loss on the sale of these units. Total nonperforming assets to total assets declined to 0.68 basis points from 0.83 basis points at December 31, 2005.
          Nonaccruing loans increased $3.0 million to $10.9 million at June 30, 2006 from December 31, 2005. The downgraded $15.3 million of a loan relationship accounts for $5.0 million in nonaccruing loans. Additional portions of this loan relationship may be placed on nonaccrual status depending on many variables. Typically, these loans have adequate collateral protection or personal guaranties to provide a source of repayment to the Bank.
          The following table sets forth information on the Company’s nonaccruing loans and nonperforming assets as of the indicated dates.
                 
    June 30,     December 31,  
    2006     2005  
    (Dollars in thousands)  
Impaired and other loans 90 days past due and accruing
  $ 14     $ 4  
 
           
 
               
Nonaccrual and impaired loans not accruing
  $ 10,925     $ 7,905  
Other real estate
    5,237       11,154  
 
           
Total nonperforming assets
  $ 16,162     $ 19,059  
 
           
Total nonaccruing loans to total loans
    0.77 %     0.59 %
Total nonperforming assets to total loans and other real estate
    1.13       1.40  
Total nonperforming assets to total assets
    0.68       0.83  
Securities
          The Company manages its securities portfolio to provide a source of both liquidity and earnings. The Company has an asset/liability committee which develops current investment policies based upon its operating needs and market circumstances. The investment policy of the 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. The Bank’s investment policy is formally reviewed and approved annually by its Board of Directors. The asset/liability committee of the Bank is responsible for reporting and monitoring compliance with the investment policy. Reports are provided to the Bank’s Board of Directors and the Board of Directors of the Company on a regular basis.

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          The following tables set forth the composition of the Company’s securities portfolio by major category as of June 30, 2006.
                                                         
    June 30, 2006  
    Held-to-Maturity     Available-for-Sale     Total  
    Amortized     Fair     Amortized     Fair     Amortized     Fair     % of  
    Cost     Value     Cost     Value     Cost     Value     Portfolio  
    (Dollars in thousands)  
Obligations of states and political subdivisions
  $ 4,103     $ 4,099     $ 95,774     $ 92,906     $ 99,877     $ 97,005       14.21 %
Mortgage-backed securities
    48,260       45,530       480,286       459,332       528,546       504,862       75.18  
Equity securities
                63,574       60,995       63,574       60,995       9.04  
Other bonds
                11,044       9,989       11,044       9,989       1.57  
 
                                         
Total
  $ 52,363     $ 49,629     $ 650,678     $ 623,222     $ 703,041     $ 672,851       100.00 %
 
                                         
          Securities available-for-sale are carried at fair value, with related unrealized net gains or losses, net of deferred income taxes, recorded as an adjustment to equity capital. At June 30, 2006, unrealized losses, net of taxes, on securities available-for-sale, were $16.4 million compared to $7.6 million at December 31, 2005.
          Securities available-for-sale decreased to $623.2 million at June 30, 2006 from $687.9 million at December 31, 2005:
    Cash flow from principal payments of $46.2 million received on mortgage-backed securities in the available-for-sale and held-to-maturity portfolios were used to fund loan growth during the first half of 2006.
 
    U.S. government agency and government-sponsored entity mortgage-backed securities decreased 10.2%, or $52.0 million, from $511.3 million at December 31, 2005 to $459.3 million at June 30, 2006.
 
    Equity securities decreased $1.9 million to $61.0 million at June 30, 2006 from December 31, 2005 as a result of the decrease in fair value. Equity securities included capital securities of U.S. government-sponsored entities.
 
    Obligations of state and political subdivisions increased $14.6 million to $92.9 million at June 30, 2006 from December 31, 2005. The Company continued to build its tax-exempt municipal bond position in the securities portfolio.
 
    Other bonds decreased $637,000 to $10.0 million at June 30, 2006 compared to $10.6 million at December 31, 2005. Other bonds include high grade corporate bonds primarily issued by financial institutions.
          Securities held-to-maturity decreased $7.1 million, or 11.9%, from $59.5 million at December 31, 2005 to $52.4 million at June 30, 2006 due to principal payments and maturities.
          There were no trading securities held at June 30, 2006 or December 31, 2005. When acquired, the Company holds trading securities and derivatives on a short-term basis based on market and liquidity conditions.
          The Company has implemented strategies to reduce its securities as a percentage of earning assets and provide funding for higher yielding loans. The proceeds of the principal paydowns from mortgage-backed securities of $46.2 million during the first half of 2006 were used to fund loan growth. This strategy will continue as long as yields on average loans are more than 175 basis points more than yields on average securities.

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Other Assets
     The Company’s holdings in bank-owned life insurance (“BOLI”) increased by $7.0 million during the first six months of 2006, including an additional $6.0 million BOLI purchase in 2006. The BOLI is intended to produce revenue which will offset a portion of future Supplemental Executive Retirement Plan and other employee benefit plan liabilities.
Deposits and Borrowed Funds
     Total deposits of $1.6 billion at June 30, 2006 represented an increase of $60.7 million, or 4.0%, from December 31, 2005. Changes in the Company’s deposit mix are noted below.
    Noninterest-bearing deposits were $165.8 million at June 30, 2006, $7.4 million more than the $158.4 million level at December 31, 2005. Noninterest-bearing deposits increased by $4.3 million when compared to March 31, 2006.
 
    Over the same period, interest-bearing deposits grew $53.3 million to $1.4 billion at June 30, 2006 compared to December 31, 2005.
 
    Core deposits, which include demand deposit, interest-bearing demand deposit, money market, and savings accounts, decreased $55.1 million to $566.0 million at June 30, 2006 from $621.0 million at December 31, 2005.
 
    Certificates of deposit under $100,000 increased $5.1 million from December 31, 2005 to $757.1 million at June 30, 2006.
 
    Certificates of deposit over $100,000 and public funds increased $110.7 million from December 31, 2005 to $261.0 million at June 30, 2006. The majority of the increase was a result of increased brokered certificates of deposit coupled with the migration of balances in core deposits to certificates of deposits as a result of the increase in rates. Interest rates on brokered certificates of deposit, in many instances, are less than advertised interest rates for retail certificates of deposit in the market.
     The Company competes for core deposits in the over-banked Chicago Metropolitan Statistical Area. Competitive pricing has made it difficult to maintain and grow these types of deposits. The level of pressure for core deposits is not expected to ease in the near term. To overcome this challenge, the Company has changed and expanded staffing and management at its banking centers and initiated a number of customer outreach initiatives to expand deposits. In addition, the Company is in the process of creating a performance-driven sales environment and increasing activity in its branches. Deposit growth is expected in the future as new customers are added due to the addition of new small business and commercial and industrial loans and a commitment to relationship banking.

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     Borrowed funds at June 30, 2006 and December 31, 2005 are listed below:
                 
    2006     2005  
    (In thousands)  
Federal funds purchased
  $     $ 68,000  
Securities sold under agreements to repurchase
    221,603       264,808  
Federal Home Loan Bank advances
    250,000       150,000  
Junior subordinated debt owed to unconsolidated trusts
    55,672       55,672  
 
           
Total
  $ 527,275     $ 538,480  
 
           
     Federal Home Loan Bank advances were $250.0 million at June 30, 2006 and $150.0 million at December 31, 2005. During the second quarter of 2006, the Company assigned a $50.0 million advance with a rate of 3.47% and recognized a $625,000 gain on the extinguishment of debt. In addition, a $50.0 million advance with a rate of 3.44% was called by the FHLB. During the first half of 2006, the Company entered into new advances totaling $150.0 million that bear a weighted average fixed rate of 4.77% and a weighted average maturity of slightly over four and a half years with one-time call provisions after nine to twelve months. The Company also entered into a $50.0 million short-term advance with a rate of 5.25%.
     The Company also utilizes securities sold under repurchase agreements as a source of funds that do not increase the Company’s reserve requirement. The Company had $221.6 million in securities sold under repurchase agreements at June 30, 2006 compared to $264.8 million at December 31, 2005. These repurchase agreements are with primary dealers and have maturities of one week to fifteen months. The Company settled a $28.0 million repurchase agreement in the first quarter of 2006 for $27.4 million resulting in a $625,000 gain.
     The Company has a credit agreement with a correspondent bank, which provides the Company with a revolving line of credit with a maximum availability of $50.0 million. This revolving line of credit matures on March 23, 2007.
Capital Resources
     Stockholders’ equity decreased $3.0 million from December 31, 2005 to $213.1 million at June 30, 2006. Total capital to average risk-weighted assets decreased to 17.4% on June 30, 2006 from 18.1% on December 31, 2005.
     The Company and its subsidiary bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors, and the regulators can lower classifications in certain areas. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements.
     The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is not required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.

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     Midwest Bank and Trust Company was categorized as well capitalized as of June 30, 2006. Management is not aware of any conditions or events since the most recent regulatory notification that would change the Company’s or the Bank’s categories.
     Capital levels and minimum required levels:
                                                 
    At June 30, 2006
                    Minimum Required   Minimum Required
    Actual   for Capital Adequacy   to be Well Capitalized
    Amount   Ratio   Amount   Ratio   Amount   Ratio
    (Dollars in thousands)
Total capital to risk-weighted assets Company
  $ 299,303       17.4 %   $ 137,341       8.0 %     n/a       n/a  
Midwest Bank and Trust Company
    218,997       12.8       136,556       8.0     $ 170,695       10.0 %
 
                                               
Tier I capital to risk-weighted assets Company
    278,429       16.2       68,671       4.0       n/a       n/a  
Midwest Bank and Trust Company
    198,123       11.6       68,278       4.0       102,417       6.0  
 
                                               
Tier I capital to average assets Company
    278,429       12.0       92,789       4.0       n/a       n/a  
Midwest Bank and Trust Company
    198,123       8.6       92,255       4.0       115,319       5.0  
                                                 
    At December 31, 2005
                    Minimum Required   Minimum Required
    Actual   for Capital Adequacy   to be Well Capitalized
    Amount   Ratio   Amount   Ratio   Amount   Ratio
    (Dollars in thousands)
Total capital to risk-weighted assets Company
  $ 292,168       18.1 %   $ 129,381       8.0 %     n/a       n/a  
Midwest Bank and Trust Company
    205,866       12.8       128,844       8.0     $ 161,055       10.0 %
 
                                               
Tier I capital to risk-weighted assets Company
    274,408       17.0       64,691       4.0       n/a       n/a  
Midwest Bank and Trust Company
    188,106       11.7       64,422       4.0       96,633       6.0  
 
                                               
Tier I capital to average assets Company
    274,408       12.2       90,083       4.0       n/a       n/a  
Midwest Bank and Trust Company
    188,106       8.4       89,635       4.0       112,044       5.0  
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 June 30, 2006, the Company had cash and cash equivalents of $114.0 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.
     In the event of short-term liquidity needs, the Bank may purchase federal funds from correspondent banks. In addition, the Company has established repurchase agreements and brokered certificates of deposit

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arrangements with various financial sources. The Bank’s membership in the Federal Home Loan Bank System gives it the ability to borrow funds from the Federal Home Loan Bank of Chicago for short- or long-term purposes under a variety of programs.
     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 are factored in, including estimated loan funding requirements, estimated loan payoffs, securities portfolio maturities or calls, and anticipated depository buildups or runoffs.
     The Company classifies the majority of its securities as available-for-sale, thereby maintaining significant liquidity. The Company’s liquidity position is further enhanced by the structuring of a majority of its loan portfolio interest payments as monthly and also by the 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. See Statement of Cash Flows in the Consolidated Financial Statements.

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ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Interest Rate Sensitivity Analysis
     The Company performs a net interest income analysis as part of its asset/liability management practices. 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 decreases in market interest rates. The tables below present the Company’s projected changes in net interest income for the various rate shock levels at June 30, 2006 and December 31, 2005, respectively.
                                         
    Change in Net Interest Income Over One Year Horizon
    June 30, 2006   December 31, 2005   Guideline
                                    Maximum
    Dollar   %   Dollar   %   %
    Change   Change   Change   Change   Change
    (Dollars in thousands)
+200 bp
  $ (719 )     (1.08 )%   $ 167       0.26 %     (15.0 )%
+100 bp
    (228 )     (0.34 )     99       0.15       (15.0 )
-100 bp
    1,456       2.19       696       1.09       (15.0 )
-200 bp
    (148 )     (0.22 )     (3,481 )     (5.44 )     (15.0 )
     As shown above, at June 30, 2006, the effect of an immediate 200 basis point increase in interest rates would decrease the Company’s net interest income by 1.08%, or $719,000. The effect of an immediate 200 basis point reduction in rates would decrease the Company’s net interest income by 0.22%, or $148,000.
     The change in the net interest income over the one year horizon from June 30, 2006 compared to December 31, 2005 can be attributed to decreases in core deposits and increase in short-term certificates of deposits and borrowings. Interest bearing assets and liabilities are shocked +/-100 and +/-200 basis points simultaneously, except interest-bearing core deposits, where they are modeled to increase 25 basis points in a +100 basis points shock and increase 50 basis points in a +200 basis point shock. Under a declining rate shock, they have a 25 basis points floor. Core deposits are priced off various internal indices set by management. Management will adjust the indices accordingly, depending on rate movements and market conditions. An analysis of core deposit pricing for the past five years indicates that, for a cumulative 100 basis points increase in rates, the cumulative core deposit rate increases did not exceed 25 basis points, except for the master money market rate which was then priced off the 91-day U.S. Treasury bill rate. The master money market was de-coupled from the 91-day U.S. Treasury bill rate in mid-2005 and is now priced off an internal index. The Company offers special promotions to attract deposits as needed.
     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, and 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.

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ITEM 4 – CONTROLS AND PROCEDURES
Evaluation of Disclosure 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 disclosure controls and procedures were effective as of June 30, 2006 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.
Changes in Internal Controls Over Financial Reporting
     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.

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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: 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 Bank’s loan portfolio and individual large loans;
 
    The effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer

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

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    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.

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PART II
Item 1. Legal Proceedings
          There are no material pending legal proceedings to which the Company or its subsidiaries are a party other than ordinary routine litigation incidental to their respective businesses.
Item 1A. Risk Factors
          There were no material changes in the Company’s risk factors contained in the Company’s 2005 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
          None
Item 3. Defaults Upon Senior Securities
          None
Item 4. Submission of Matters to a Vote of Security Holders
          The annual meeting of stockholders of the Company was held on May 3, 2006. Four proposals were submitted to a vote of the stockholders as described in the Company’s proxy statement dated April 3, 2006. The following is a brief description of the matters voted upon, as well as the outcome of the vote:
          1. To elect ten members to serve on the Company’s Board of Directors for a term of one year:
                 
Nominee   For   Withheld
E.V. Silveri
    18,061,663       863,866  
James J. Giancola
    18,101,909       823,620  
Angelo DiPaolo
    17,573,072       1,352,457  
Barry I. Forrester, CFA
    18,306,971       618,558  
Robert J. Genetski, PhD
    18,020,401       905,128  
Gerald F. Hartley, CPA
    18,133,251       792,278  
Homer J. Livingston, Jr.
    18,169,547       755,982  
Joseph Rizza
    14,817,812       4,107,717  
Kenneth Velo
    18,264,419       661,110  
Leon Wolin
    17,884,032       1,041,497  
          2. To amend the Company’s Stock and Incentive Plan:
                 
 
  Votes For:     11,346,498      
 
  Against:     3,934,153      
 
  Abstain:     173,742      
 
  Nonvotes:     3,471,136      

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          3. To amend the amended and restated certificate of incorporation of the Company:
                 
 
  Votes For:     17,717,681      
 
  Against:     1,176,099      
 
  Abstain:     31,749      
          4. To ratify the appointment of PricewaterhouseCoopers LLP:
                 
 
  Votes For:     18,892,015      
 
  Against:     16,087      
 
  Abstain:     17,427      
Item 5. Other Information
          None
Item 6. Exhibits
          The following exhibits are either filed as part of this report or are incorporated herein by reference:
     
2.1
  Stock Purchase Agreement between Western Illinois Bancshares, Inc. and Midwest Banc Holdings, Inc. (incorporated by reference to Registrant’s Report on Form 8-K filed June 1, 2005, File No. 001-13735).
 
   
2.2
  Amendment to Stock Purchase Agreement between Western Illinois Bancshares, Inc. and Midwest Banc Holdings, Inc. (incorporated by reference to Registrant’s Form 10-Q for the quarter ended June 30, 2005, File No. 001-13735).
 
   
2.3
  Second Amendment to Stock Purchase Agreement between Western Illinois Bancshares, Inc. and Midwest Banc Holdings, Inc. (incorporated by reference to Registrant’s Report on Form 8-K filed August 29, 2005, File No. 001-13735).
 
   
2.4
  Third Amendment to Stock Purchase Agreement between Western Illinois Bancshares, Inc. and Midwest Banc Holdings, Inc. (incorporated by reference to Registrant’s Report on Form 8-K filed October 5, 2005, File No. 001-13735).
 
   
2.5
  Fourth Amendment to Stock Purchase Agreement between Western Illinois Bancshares, Inc. and Midwest Banc Holdings, Inc. (incorporated by reference to Registrant’s Report on Form 8-K filed November 3, 2005, File No. 001-13735).
 
   
2.6
  Agreement and Plan of Merger, dated as of February 8, 2006, by and between Midwest Banc Holdings, Inc. and Royal American Corporation (incorporated by reference to Registrant’s Report on Form 8-K filed February 8, 2006, File No. 001-13735).
 
   
2.7
  Form of Stockholder Voting Agreement, dated as of February 8, 2006, by and among Midwest Banc Holdings, Inc. and certain stockholders of Royal American Corporation (incorporated by reference to Registrant’s Report on Form 8-K filed February 8, 2006, File No. 001-13735).
 
   
3.1
  Amended and Restated Certificate of Incorporation, as amended.
 
   
3.2
  Amended and Restated By-laws, filed September 27, 2005 (incorporated by reference to Registrant’s Report on Form 8-K filed September 27, 2005, File No. 001-13735).

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4.1
  Specimen Common Stock Certificate (incorporated by reference to Registrant’s Registration Statement on Form S-1, Registration No. 333-42827).
 
   
4.2
  Certain instruments defining the rights of the holders of long-term debt of the Company and certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis, have not been filed as Exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the SEC upon request.
 
   
*10.1
  Midwest Banc Holdings, Inc. Stock and Incentive Plan.
 
   
*10.4
  Form of Transitional Employment Agreements (incorporated by reference to Registrant’s Registration Statement on Form S-1, Registration No. 333-42827).
 
   
10.5
  Lease dated as of December 24, 1958, between Western National Bank of Cicero and Midwest Bank and Trust Company, as amended (incorporated by reference to Registrant’s Registration Statement on Form S-1, Registration No. 333-42827).
 
   
10.6
  Britannica Centre Lease, dated as of May 1, 1994, between Chicago Title and Trust Company, as Trustee under Trust Agreement dated November 2, 1977 and known as Trust No. 1070932 and Midwest Bank and Trust Company (incorporated by reference to Registrant’s Registration Statement on Form S-1, Registration No. 333-42827).
 
   
10.7
  Lease dated as of March 20, 1996 between Grove Lodge No. 824 Ancient Free and Accepted Masons and Midwest Bank of Hinsdale (incorporated by reference to Registrant’s Registration Statement on Form S-1, Registration No. 333-42827).
 
   
10.8
  Office Lease, undated, between Grove Lodge No. 824 Ancient Free and Accepted Masons and Midwest Bank of Hinsdale (incorporated by reference to Registrant’s Registration Statement on Form S-1, Registration No. 333-42827).
 
   
*10.15
  Form of Supplemental Executive Retirement Agreement (incorporated by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2001, File No. 001-13735).
 
   
*10.16
  Form of Transitional Employment Agreement (Executive Officer Group) (incorporated by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2001, File No. 001-13735).
 
   
10.17
  Form of Restricted Stock Award Agreement for Officers, Restricted Stock Grant Notice for Officers, Incentive and Nonqualified Stock Options Award Agreements, and Stock Option Grant Notice for Officers (incorporated by reference to Registrant’s Report on Form 8-K filed August 29, 2005, File No. 001-13735).
 
   
*10.18
  Form of Supplemental Executive Retirement Agreement and First Amendment to the Form of Supplemental Executive Retirement Agreement (incorporated by reference to Registrant’s Report on Form 8-K filed October 28, 2005, File No. 001-13735).
 
   
10.19
  Form of Restricted Stock Award Agreement for Non-employee Directors and Restricted Stock Grant Notice for Non-employee Directors (incorporated by reference to Registrant’s Report on Form 8-K filed October 28, 2005, File No. 001-13735).
 
   
10.21
  Lease dated as of April 29, 1976, between Sanfilippo, Joseph C. and Grace Ann and Fairfield Savings and Loan Association, as amended (incorporated by reference to Registrant’s Form 10-K for the year ended December 31, 2003, File No. 001-13735).
 
   
10.22
  Lease dated as of August 28, 2002 between Glen Oak Plaza and Midwest Bank and Trust Company (incorporated by reference to Registrant’s Form 10-K for the year ended December 31, 2003, File No. 001-13735).

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10.24
  Loan Agreement as of March 24, 2006, between the Company and M&I Marshall & Ilsley Bank (incorporated by reference to Registrant’s Report on Form 8-K filed March 24, 2006, File No. 001-13735).
 
   
10.25
  Employment Agreement as of September 28, 2004 between the Company and the Chief Executive Officer (incorporated by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2004, File No. 001-13735).
 
   
10.26
  Retirement Agreement as of September 28, 2004 between the Company and retiring Chief Executive Officer (incorporated by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2004, File No. 001-13735).
 
   
10.27
  Midwest Banc Holdings, Inc. Severance Policy as of June 28, 2005 (incorporated by reference to Registrant’s Report on Form 8-K dated June 28, 2005, File No. 001-13735).
 
   
10.29
  Midwest Banc Holdings, Inc. Directors Deferred Compensation Plan (incorporated by reference to Registrant’s Report on Form 8-K filed December 16, 2005, File No. 001-13735).
 
   
10.30
  Amendment to Employment Agreement as of September 28, 2004 between the Company and the Chief Executive Officer (incorporated by reference to Registrant’s Report on Form 8-K filed March 24, 2006, File No. 001-13735).
 
   
*10.31
  Amended and Restated Employment Agreement dated February 8, 2006 by and between Royal American Bank and Jay Fritz, assumed by the Company as of July 1, 2006 (incorporated by reference to Registrant’s Report on Form 8-K filed July 7, 2006, File No. 001-13735).
 
   
31.1
  Rule 13a-14(a) Certification of Principal Executive Officer.
 
   
31.2
  Rule 13a-14(a) Certification of Principal Financial Officer.
 
   
32.1
  Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, from the Company’s Chief Executive Officer and Chief Financial Officer.
 
*   Indicates management contracts or compensatory plans or arrangements required to be filed as an exhibit.

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SIGNATURES
          Pursuant to the requirements 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.
Date: August 9, 2006
             
    MIDWEST BANC HOLDINGS, INC.    
    (Registrant)    
 
           
 
  By:   /s/ James J. Giancola
 
   
    James J. Giancola,    
    President and Chief Executive Officer    
 
           
 
  By:   /s/ Daniel R. Kadolph
 
   
    Daniel R. Kadolph,    
    Executive Vice President and
Chief Financial Officer
   

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Exhibit Index
     
2.1
  Stock Purchase Agreement between Western Illinois Bancshares, Inc. and Midwest Banc Holdings, Inc. (incorporated by reference to Registrant’s Report on Form 8-K filed June 1, 2005, File No. 001-13735).
 
   
2.2
  Amendment to Stock Purchase Agreement between Western Illinois Bancshares, Inc. and Midwest Banc Holdings, Inc. (incorporated by reference to Registrant’s Form 10-Q for the quarter ended June 30, 2005, File No. 001-13735).
 
   
2.3
  Second Amendment to Stock Purchase Agreement between Western Illinois Bancshares, Inc. and Midwest Banc Holdings, Inc. (incorporated by reference to Registrant’s Report on Form 8-K filed August 29, 2005, File No. 001-13735).
 
   
2.4
  Third Amendment to Stock Purchase Agreement between Western Illinois Bancshares, Inc. and Midwest Banc Holdings, Inc. (incorporated by reference to Registrant’s Report on Form 8-K filed October 5, 2005, File No. 001-13735).
 
   
2.5
  Fourth Amendment to Stock Purchase Agreement between Western Illinois Bancshares, Inc. and Midwest Banc Holdings, Inc. (incorporated by reference to Registrant’s Report on Form 8-K filed November 3, 2005, File No. 001-13735).
 
   
2.6
  Agreement and Plan of Merger, dated as of February 8, 2006, by and between Midwest Banc Holdings, Inc. and Royal American Corporation (incorporated by reference to Registrant’s Report on Form 8-K filed February 8, 2006, File No. 001-13735).
 
   
2.7
  Form of Stockholder Voting Agreement, dated as of February 8, 2006, by and among Midwest Banc Holdings, Inc. and certain stockholders of Royal American Corporation (incorporated by reference to Registrant’s Report on Form 8-K filed February 8, 2006, File No. 001-13735).
 
   
3.1
  Amended and Restated Certificate of Incorporation, as amended.
 
   
3.2
  Amended and Restated By-laws, filed September 27, 2005 (incorporated by reference to Registrant’s Report on Form 8-K filed September 27, 2005, File No. 001-13735).
 
   
4.1
  Specimen Common Stock Certificate (incorporated by reference to Registrant’s Registration Statement on Form S-1, Registration No. 333-42827).
 
   
4.2
  Certain instruments defining the rights of the holders of long-term debt of the Company and certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis, have not been filed as Exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the SEC upon request.
 
   
*10.1
  Midwest Banc Holdings, Inc. Stock and Incentive Plan.
 
   
*10.4
  Form of Transitional Employment Agreements (incorporated by reference to Registrant’s Registration Statement on Form S-1, Registration No. 333-42827).
 
   
10.5
  Lease dated as of December 24, 1958, between Western National Bank of Cicero and Midwest Bank and Trust Company, as amended (incorporated by reference to Registrant’s Registration Statement on Form S-1, Registration No. 333-42827).

 


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10.6
  Britannica Centre Lease, dated as of May 1, 1994, between Chicago Title and Trust Company, as Trustee under Trust Agreement dated November 2, 1977 and known as Trust No. 1070932 and Midwest Bank and Trust Company (incorporated by reference to Registrant’s Registration Statement on Form S-1, Registration No. 333-42827).
 
   
10.7
  Lease dated as of March 20, 1996 between Grove Lodge No. 824 Ancient Free and Accepted Masons and Midwest Bank of Hinsdale (incorporated by reference to Registrant’s Registration Statement on Form S-1, Registration No. 333-42827).
 
   
10.8
  Office Lease, undated, between Grove Lodge No. 824 Ancient Free and Accepted Masons and Midwest Bank of Hinsdale (incorporated by reference to Registrant’s Registration Statement on Form S-1, Registration No. 333-42827).
 
   
*10.15
  Form of Supplemental Executive Retirement Agreement (incorporated by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2001, File No. 001-13735).
 
   
*10.16
  Form of Transitional Employment Agreement (Executive Officer Group) (incorporated by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2001, File No. 001-13735).
 
   
10.17
  Form of Restricted Stock Award Agreement for Officers, Restricted Stock Grant Notice for Officers, Incentive and Nonqualified Stock Options Award Agreements, and Stock Option Grant Notice for Officers (incorporated by reference to Registrant’s Report on Form 8-K filed August 29, 2005, File No. 001-13735).
 
   
*10.18
  Form of Supplemental Executive Retirement Agreement and First Amendment to the Form of Supplemental Executive Retirement Agreement (incorporated by reference to Registrant’s Report on Form 8-K filed October 28, 2005, File No. 001-13735).
 
   
10.19
  Form of Restricted Stock Award Agreement for Non-employee Directors and Restricted Stock Grant Notice for Non-employee Directors (incorporated by reference to Registrant’s Report on Form 8-K filed October 28, 2005, File No. 001-13735).
 
   
10.21
  Lease dated as of April 29, 1976, between Sanfilippo, Joseph C. and Grace Ann and Fairfield Savings and Loan Association, as amended (incorporated by reference to Registrant’s Form 10-K for the year ended December 31, 2003, File No. 001-13735).
 
   
10.22
  Lease dated as of August 28, 2002 between Glen Oak Plaza and Midwest Bank and Trust Company (incorporated by reference to Registrant’s Form 10-K for the year ended December 31, 2003, File No. 001-13735).
 
   
10.24
  Loan Agreement as of March 24, 2006, between the Company and M&I Marshall & Ilsley Bank (incorporated by reference to Registrant’s Report on Form 8-K filed March 24, 2006, File No. 001-13735).
 
   
10.25
  Employment Agreement as of September 28, 2004 between the Company and the Chief Executive Officer (incorporated by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2004, File No. 001-13735).
 
   
10.26
  Retirement Agreement as of September 28, 2004 between the Company and retiring Chief Executive Officer (incorporated by reference to Registrant’s Form 10-Q for the quarter ended September 30, 2004, File No. 001-13735).
 
   
10.27
  Midwest Banc Holdings, Inc. Severance Policy as of June 28, 2005 (incorporated by

 


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

 

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