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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 001-13735

Midwest Banc Holdings, Inc.

501 West North Avenue, Melrose Park, Illinois 60160

(708) 865-1053

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

10.0% Cumulative Trust Preferred Securities, American Stock Exchange

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

Common Stock, $0.01 par value, Nasdaq National Market

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

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

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes þ          No o

      The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of the registrant on June 30, 2003, based on the last sales price quoted on the Nasdaq National Market System on that date, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $207.9 million.

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

DOCUMENTS INCORPORATED BY REFERENCE

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

MIDWEST BANC HOLDINGS, INC.

FORM 10-K

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PART I

The Company

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

      The Banks are community-oriented, full-service commercial banks, providing traditional banking services to individuals, small-to-medium-sized businesses, government and public entities and not-for-profit organizations. The Banks operate out of 21 locations, with 15 banking centers in the greater Chicago metropolitan area and six banking centers in Western Illinois.

      Porter Insurance Agency, Inc., a subsidiary of Midwest Bank of Western Illinois, acts as an insurance agency for individuals and corporations. Midwest Financial and Investment Services, Inc., a subsidiary of the Company, provides securities brokerage services to customers of each of the Banks. Midwest Bank Insurance Services, L.L.C., a subsidiary of Midwest Bank and Trust Company, acts as an insurance agency for individuals and corporations.

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

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

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

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	*	Provides fixed annuity products to individuals.

	**	Provides additional investment portfolio management to Midwest Bank and Trust Company.

	***	The trust is a statutory business trust formed as a financing subsidiary of the Company.

****	Provides securities brokerage services to individuals and commercial business.

History

      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.

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

      Effective August 19, 2002, Midwest Bank of Hinsdale and Midwest Bank of McHenry County merged into Midwest Bank and Trust Company. Immediately following the merger, the Company contributed to Midwest Bank and Trust Company 100% of the capital stock of First Midwest Data Corp., and thereafter, First Midwest Data Corp. was liquidated. This internal reorganization was the final phase of a multi-phase effort to consolidate backroom functions, reduce duplicative processes, streamline customer service, and enhance marketing efforts and product delivery.

      On January 3, 2003, the Company completed the acquisition of Big Foot Financial Corp. (“BFFC”). BFFC was the holding company for Fairfield Savings Bank, F.S.B. (“Fairfield”) with approximately $200 million in total assets at December 31, 2002, and three locations in the Chicago area. The transaction expanded the Company’s existing branch network in the metropolitan Chicago area by merging Fairfield, with banking centers in Chicago, Long Grove, and Norridge, into Midwest Bank and Trust Company. Final integration of systems and processes were completed in February 2003. The Company issued a total of 1,599,088 shares in the transaction.

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

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

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

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

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

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

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

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

The Banks

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

Markets

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

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

Strategy

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

      The Company plans to continue to implement its growth strategy through selected acquisitions and by adding de novo banking centers in nearby communities where management believes customers would be attracted to a community-banking alternative. The Company intends to establish two de novo banking centers per year. Previously, the Company announced its plans to open two new banking centers in Addison and Glenview, Illinois. The Company anticipates that it will take between 12 to 18 months for a new banking center to become profitable. Any acquisition the Company pursues will ideally be accretive to net income and

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Products and Services

      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.

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

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

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

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

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

      Home equity lines of credit, included within the Company’s consumer real estate loan portfolio, are secured by the borrower’s home and can be drawn on at the discretion of the borrower. These lines of credit

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

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

      The Banks maintain a network of 29 ATM sites generally located within the Banks’ local markets. All except two off-site ATMs are owned by the Banks. Twenty of the ATM sites are located at various banking centers and seven are maintained off-site at hotels, supermarkets, and schools.

      Midwest Bank and Trust Company and Midwest Bank of Western Illinois offer land trusts, personal trusts, custody accounts, retirement plan services, and corporate trust services. As of December 31, 2003, the Trust Department of Midwest Bank and Trust Company maintained trust relationships representing an aggregate market value of $3.5 million in assets with an aggregate book value of $2.9 million. In addition, the Trust Department of Midwest Bank and Trust Company administered 1,808 land trust accounts as of December 31, 2003. Midwest Bank of Western Illinois also provides trust services to its customers and maintained trust accounts with an aggregate market value of $42.8 million and an aggregate book value of $30.7 million as of December 31, 2003.

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

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

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

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Competition

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

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

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

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

Employees

      As of December 31, 2003, the Company and its subsidiaries had 436 full-time equivalent employees. Management considers its relationship with its employees to be good.

Recent Regulatory Developments

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

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

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

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

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

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

Available Information

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

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

SUPERVISION AND REGULATION

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

Bank Holding Company Regulation

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

      The BHC Act requires prior Federal Reserve approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares or substantially all the assets of any bank, or for a merger or consolidation of a bank holding company with another bank holding company. With certain exceptions, the BHC Act prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company which is not a bank or

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

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

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

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

      In its capital adequacy guidelines, the Federal Reserve emphasizes that the foregoing standards are supervisory minimums and that banking organizations generally are expected to operate well above the minimum ratios. These guidelines also provide that banking organizations experiencing growth, whether

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      As of December 31, 2003, the Company had regulatory capital in excess of the Federal Reserve’s minimum requirements. The Company had a total capital to risk-weighted assets ratio of 14.7% and a Tier 1 capital to risk-weighted assets ratio of 13.7% and a leverage ratio of 8.9% as of December 31, 2003.

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

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

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

Bank Regulation

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

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

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

      As discussed above, under Illinois law, the Banks are subject to supervision and examination by the Illinois Commissioner, and, as members of the Federal Reserve System, by the Federal Reverse. Each of these regulatory agencies conducts routine, periodic examinations of each of the Banks and the Company. In March 2003, the Federal Reserve and the Illinois Commissioner began a joint examination of the Banks. The exam has involved further review of the adequacy of the Banks’ overall risk management practices, including the proper identification and classifications of problem loans. On April 24, 2003, the Federal Reserve and the Illinois Commissioner completed the on-site portion of their regularly scheduled annual examination of the Company’s banking subsidiaries. The Company received the examination report during the third quarter of

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Financial Institution Regulation

      Transactions with Affiliates. Transactions between a bank and its holding company or other affiliates are subject to various restrictions imposed by state and federal regulatory agencies. Such transactions include loans and other extensions of credit, purchases of securities and other assets and payments of fees or other distributions. In general, these restrictions limit the amount of transactions between a bank and an affiliate of such bank, as well as the aggregate amount of transactions between a bank and all of its affiliates, impose collateral requirements in some cases and require transactions with affiliates to be on terms comparable to those for transactions with unaffiliated entities.

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

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

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

      At December 31, 2003 each of the Banks has a Tier 1 capital to risk-weighted assets ratio and a total capital to risk-weighted assets ratio which meets the above requirements. Midwest Bank and Trust Company has a Tier 1 capital to risk-weighted assets ratio of 12.9% and a total capital to risk-weighted assets ratio of 14.0%. Midwest Bank of Western Illinois has a Tier 1 capital to risk-weighted assets ratio of 12.4% and a total capital to risk-weighted assets ratio of 13.2%.

      Standards for Safety and Soundness. The FDIA, as amended by FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994 requires the Federal Reserve, together with the other federal bank regulatory agencies, to prescribe standards of safety and soundness, by regulations or guidelines, relating generally to operations and management, asset growth, asset quality, earnings, stock valuation and compensation. The Federal Reserve and the other federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards pursuant to FDICIA, as amended. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the Federal Reserve adopted regulations that authorize, but do not require, the Federal Reserve to order an institution that has been given notice by the Federal Reserve that it is not

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

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

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

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

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      During 2003, the Banks were assessed deposit insurance in the aggregate amount of $241,000. Deposit insurance may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Such terminations can only occur, if contested, following judicial review through the federal courts. The management of each of the Banks does not know of any practice, condition or violation that might lead to termination of deposit insurance.

      Federal Reserve System. The Banks are subject to Federal Reserve regulations requiring depository institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve regulations generally require 3% reserves on the first $38.8 million of transaction accounts and 10% on the remainder. The first $6.6 million of otherwise reservable balances (subject to adjustments by the Federal Reserve) are exempted from the reserve requirements. The Banks are in compliance with the foregoing requirements.

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

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

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

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

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

      While the State of Illinois has adopted legislation “opting in” to interstate bank mergers, it did not allow out of state banks to enter the Illinois market through de 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. Midwest Bank Insurance Services, L.L.C. is an independent insurance agency established by Midwest Bank and Trust Company in 1998. Porter Insurance Agency, Inc. and Midwest Bank Insurance Services, L.L.C. are registered with, and subject to examination by, the Illinois Department of Insurance, and the Company believes that each is operating in compliance with applicable laws of the State of Illinois.

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

Monetary Policy and Economic Conditions

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

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

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES

      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.

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

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

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

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

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

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

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

EXECUTIVE OFFICERS OF THE REGISTRANT

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

      Brad A. Luecke (53) has been President and Chief Executive Officer of the Company since July 2000. He has also served as a director of the Company since June 2002. Mr. Luecke became Vice Chairman of Midwest Bank and Trust Company in 2000 and continues to serve as Chief Executive Officer and a director since 1991. Mr. Luecke was named chairman and director of Midwest Financial and Investment Services, Inc. in March 2002. Mr. Luecke was named Chairman, President, and director of MBTC Investment Company in August 2002. He also served as president of Midwest Bank and Trust Company from 1991 to 2000. Mr. Luecke was a director of Midwest Bank of Hinsdale and First Midwest Data Corp from 2000 to August 2002.

      Daniel R. Kadolph, CPA (41) was named Senior Vice President and Chief Financial Officer in 2000. Mr. Kadolph was also named director of Midwest Financial and Investment Services, Inc. in March 2002. Mr. Kadolph was also named director of MBTC Investment Company in August 2002. He has served as Comptroller of the Company since 1994 and Treasurer since 1997. Mr. Kadolph had served as a director of First Midwest Data Corp. from 2000 to August 2002 and has served in various management capacities at the Company and Midwest Bank and Trust Company since 1988.

      Edward H. Sibbald (55) was named Executive Vice President, Director of Marketing and Director of Investor Relations in 2000. Previously he served as a Senior Vice President of the Company in 2000 and as

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      Mary C. Ceas, SPHR (46) was named Senior Vice President — Human Resources of the Company in 2000. Previously, Ms. Ceas was Vice President — Human Resources since 1997 and served as Director — Training and Development from 1995 to 1997.

      Michelle T. Holman (44) was named Senior Vice President — Risk Management in 2000. Ms. Holman had served as a director of First Midwest Data Corp. from 2000 to August 2002. Previously, she served as Vice President of Loan Review since 1988 and in various management capacities at the Company and Midwest Bank and Trust Company since 1985.

      Sheldon Bernstein (57) was named a Senior Vice President of the Company in 2001. Mr. Bernstein has served as President of Midwest Bank and Trust Company, Cook County Region since 2000. Previously, Mr. Bernstein served as Chief Operating Officer and Executive Vice President-Lending of Midwest Bank and Trust Company since 2000 and 1993, respectively. He was also named director of Midwest Financial and Investment Services, Inc. in March 2002. Mr. Bernstein was a director of First Midwest Data Corp from 2001 to August 2002.

      Mary M. Henthorn (46) was named a Senior Vice President of the Company in 2001. Ms. Henthorn was named President of Midwest Bank and Trust Company, DuPage County Region in August 2002. She was also named director of Midwest Financial and Investment Services, Inc. in March 2002. Ms. Henthorn served as President and Chief Executive Officer of Midwest Bank of Hinsdale from 2000 to August 2002. Previously, she served as Executive Vice President and a director of Midwest Bank of Hinsdale from 1996 to August 2002. She held various management positions at Midwest Bank of Hinsdale and Midwest Bank and Trust Company since 1992.

      Stephen M. Karaba (46) was named a Senior Vice President of the Company in 2000. Mr. Karaba was named President of Midwest Bank and Trust Company, McHenry County Region in 2002. He was also named director of Midwest Financial and Investment Services, Inc. in March 2002. Mr. Karaba had served as president and director of Midwest Bank of McHenry County from 1994 to August 2002. Previously, Mr. Karaba held various management and executive positions within Midwest Bank and Trust Company and Midwest Bank of McHenry County since 1989.

      Christopher J. Gavin (42) was named a Senior Vice President of the Company in 2000 and has served as President and Chief Executive Officer of Midwest Bank of Western Illinois since 1998. Mr. Gavin was named director of Midwest Financial and Investment Services, Inc. in March 2002. He also has been a director of Midwest Bank of Western Illinois since 1997 and has served as a director of Porter Insurance Agency, Inc. since 1998. Mr. Gavin was Executive Vice President and Chief Credit Officer of Midwest Bank of Western Illinois from 1997 to 1998.

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

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	*	Branches acquired through BFFC acquisition effective January 3, 2003.

**	Land is leased and building is owned.

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

      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.

      None.

PART II

      The Company’s common stock is traded over-the-counter and quoted on the Nasdaq National Market under the symbol “MBHI.” As of March 12, 2004, the Company had approximately 2,000 stockholders of record. The table below sets forth the high and low sale prices of the common stock during the periods indicated. The Company repurchased 35,000 common shares in 2002, and no common shares were purchased in 2003. The prices reflected below have been adjusted to reflect the 3-for-2 stock split (effected in the form of a 50% common stock dividend) paid on July 9, 2002 to stockholders of record on July 1, 2002.

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      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 may be declared by the Board of Directors from time to time and paid out of funds legally available therefore. Because the Company’s consolidated net income consists largely of net income of the Banks, the Company’s ability to pay dividends depends upon its receipt of dividends from the Banks. The Banks’ ability to pay dividends is regulated by banking statutes. See “Supervision and Regulation — Dividend Limitations.” The declaration of dividends by the Company is discretionary and depends on the Company’s earnings and financial condition, regulatory limitations, tax considerations and other factors including limitations imposed by the terms of the Company’s revolving lines of credit and limitations imposed by the terms of the Company’s outstanding Company’s obligated mandatory redeemable trust preferred securities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity.” While the Board of Directors expects to continue to declare dividends quarterly, there can be no assurance that dividends will be paid in the future.

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

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

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

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

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

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

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

Critical Accounting Policies and Estimates

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

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

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

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

      Evaluation of Securities for Impairment: Securities are classified as held-to-maturity when the Company has the ability and management has the positive intent to hold those securities to maturity. Accordingly, they are stated at cost adjusted for amortization of premiums and accretion of discounts. Securities are classified as available-for-sale when the Company may decide to sell those securities for changes in market interest rates, liquidity needs, changes in yields or alternative investments, and for other reasons. They are carried at fair value with unrealized gains and losses, net of taxes, reported in other comprehensive income (loss). Interest income is reported net of amortization of premium and accretion of discount. Realized gains and losses on disposition of securities available-for-sale are based on the net proceeds and the adjusted carrying amounts of the securities sold, using the specific identification method. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other than temporary losses, management considers (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The evaluation also considers the impact that impairment may have on future capital, earnings, and liquidity.

      Fair Value of Financial Instruments and Derivatives: Fair values of financial instruments, including derivatives, are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for the particular items. There is no ready market for a significant portion of the Company’s financial instruments. Accordingly, fair values are based on various factors relative to expected loss experience, current economic conditions, risk characteristics, and other factors. The assumptions and estimates used in the fair value determination process are subjective in nature and involve uncertainties and significant judgment. As a consequence, fair values cannot be determined with precision. Changes in assumptions or in market conditions could significantly affect these estimates.

Consolidated Results of Operations

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

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

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

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

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

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

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

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

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

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

These increases contributed to an increase in the efficiency ratio from 50.74% for the year ended December 31, 2003 compared to 47.40% in 2002.

      Federal and State Income Tax. The Company’s consolidated income tax rate varies from statutory rates principally due to interest income from tax-exempt securities and loans. The Company recorded income tax expense of $8.9 million in 2003 compared to $4.7 million in 2002, an increase of 90.7%. The effective tax rate in 2003 was 28.1% compared to 22.2% in 2002. The 22.2% tax rate in 2002 was a result of a new favorable regulation issued by the Illinois Department of Revenue related to apportionment of business income of financial organizations, the favorable settlement of an Illinois Department of Revenue exam and various other tax planning initiatives.

      Net Interest Income. Net interest income on a tax-equivalent basis increased $12.2 million, or 24.4%, to $62.3 million in 2002 from $50.1 million in 2001. While interest income on total earning assets decreased slightly by $145,000 for the year ended December 31, 2002 compared to December 31, 2001, total interest expense decreased dramatically as the Company was able to reprice its deposit in a lower interest rate environment in 2001.

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

	•	Interest income on loans (on a fully tax-equivalent basis) decreased $1.9 million to $74.9 million in 2002 from $76.8 million in 2001 due to a decrease in average rates paid on loans from 8.37% to 6.87%, an increase in nonaccrual loans, despite the increase in average loans outstanding of $172.7 million.
	•	Interest expense on interest-bearing liabilities decreased $12.3 million primarily due to the repricing opportunities on core deposits and certificates of deposits.
	•	Interest expense on other borrowings increased slightly due primarily to an $111.3 million increase in average fed funds purchased and repurchase agreements during 2002 even though average FHLB advances decreased by $7.8 million.
	•	The Company issued $15.0 million in Company obligated mandatory redeemable trust preferred securities in October 2002 at an initial rate of 5.27% with a maturity of 30 years. The increased interest expense will be fully recognized is 2003.

      Provision for Loan Losses. The provision for loan losses increased $16.3 million, or 734.8%, to $18.5 million in 2002 from $2.2 million in 2001 primarily due to additional provisions relating to increased

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      Other Income. The Company’s total other income increased $1.2 million, or 9.4%, to $14.0 million in 2002 from $12.8 million in 2001. Other income as a percentage of average assets was 0.74% for the year ended 2002 compared to 0.80% for the year ended 2001. The increase in total other income in 2002 compared to 2001 was primarily due to a $1.3 million increase in option income to $1.8 million for the year ended December 31, 2002, as a result of the purchase or sale of various covered put or call options, with terms less than 90 days, on mortgage-backed securities This increase in option income was offset by a $1.8 million decrease in net securities gains and trading profits. The following other income items increased in 2002: Insurance and brokerage commissions, service charges on deposits as a result of a larger deposit base, mortgage banking fees, and increase in cash surrender value of life insurance increased by $695,000, $678,000, $88,000, and $143,000, respectively.

      Other Expenses. The Company’s total other expenses increased $2.4 million, or 7.8%, to $33.9 million in 2002 from $31.5 million in 2001. Other expenses as a percentage of average assets were 1.79% for the year ended 2002 compared to 1.97% for the year ended 2001. Net overhead expenses were 1.15% and 1.17% as a percentage of average assets in 2002 and 2001, respectively. The increase in total other expenses in 2002 was primarily due to the following factors: salaries and employee benefits increased $1.9 million or 10.1% compared to the similar period in 2001 due to additional staffing in Midwest Financial and Investment Services, Inc., growth in existing banking centers, and annual merit increases; professional services increased $681,000 for 2002 compared to 2001 due to higher legal, consulting, and ATM charges. These modest increases coupled with the increases in other income contributed to the lowering of the efficiency ratio was 47.40% for the year ended December 31, 2002 compared to 52.2% in 2001.

      Federal and State Income Tax. The Company’s consolidated income tax rate varies from statutory rates principally due to interest income from tax-exempt securities and loans. The Company recorded income tax expense of $4.7 million in 2002 compared to $8.7 million in 2001, a decrease of 46.4%, due to changes in income. The effective tax rate in 2002 was 22.2% compared to 32.7% in 2001. These declines are a result of a new regulation issued by the Illinois Department of Revenue related to apportionment of business income of financial organizations, the favorable settlement of an Illinois Department of Revenue exam and various other tax planning initiatives.

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Interest-Earning Assets and Interest-Bearing Liabilities

      The following table sets forth the average balances, net interest income and expense and average yields and rates for the Company’s interest-earning assets and interest-bearing liabilities for the indicated periods on a tax-equivalent basis assuming a 35.0% tax rate for 2003, 2002, and 2001.