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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

Commission file number 001-13735

MIDWEST BANC HOLDINGS, INC.

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

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

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

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

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

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

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

YES o         NO x

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

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

YES x        NO o

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

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

Documents Incorporated by Reference

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

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MIDWEST BANC HOLDINGS, INC.
FORM 10-K

INDEX

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PART I

ITEM 1. BUSINESS

The Company

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

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

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

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

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

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History

The Banks

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

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

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

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

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

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

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

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

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

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

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

Nonbank Subsidiaries

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

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

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

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

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

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

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

The Banks

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

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

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

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Markets

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

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

Strategy

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

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

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

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

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

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

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Products and Services

Deposit Products

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

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

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

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

Lending Services

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

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

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

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

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

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

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

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

ATMs

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

Trust Activities

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

Insurance Services

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

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

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Securities Brokerage

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

Competition

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

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

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

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

Employees

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

Available Information

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

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SUPERVISION AND REGULATION

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

Bank Holding Company Regulation

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

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

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

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

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

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

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

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

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

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

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

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

Bank Regulation

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

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

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

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

Financial Institution Regulation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Monetary Policy and Economic Conditions

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

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

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

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EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

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

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

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

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

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

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

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

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

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

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ITEM 2. PROPERTIES

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

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ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

     None.

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PART II

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

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

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

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

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

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

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

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

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

Overview

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

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

Recent Developments

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

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

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

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

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

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

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

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

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

     The following discussion and analysis is intended as a review of significant factors affecting the financial condition and results of operations of the Company for the periods indicated. The discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and the Selected Consolidated Financial Data presented herein. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed in this report.

Critical Accounting Policies and Estimates

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

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

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

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

Consolidated Results of Operations

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

2002 Compared to 2001

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

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

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

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

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

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

2001 Compared to 2000

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

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

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

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

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

Interest-Earning Assets and Interest-Bearing Liabilities

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

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