UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number: 001-13735

MIDWEST BANC HOLDINGS, INC.

(708) 865-1053
(Registrant’s telephone number, including area code)

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

      Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

MIDWEST BANC HOLDINGS, INC.

Form 10-Q

Table of Contents

 i 

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)

See accompanying notes to unaudited consolidated financial statements.

PAGE 1

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
For the three months ended March 31, 2005 and 2004
(In thousands, except per share data)

See accompanying notes to unaudited consolidated financial statements.

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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
For the three months ended March 31, 2005 and 2004
(In thousands, except share and per share data)

See accompanying notes to unaudited consolidated financial statements.

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MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the three Months Ended March 31, 2005 and 2004
(In thousands)

See accompanying notes to unaudited consolidated financial statements.

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — BASIS OF PRESENTATION

      The consolidated financial statements of Midwest Banc Holdings, Inc. (the “Company”) included herein are unaudited; however, such statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation for the interim periods. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

      The annualized results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results expected for the full year ending December 31, 2005.

NOTE 2 — NEW ACCOUNTING PRONOUNCEMENTS

      In December 2004, the Financial Accounting Standards Board (“FASB”) published FASB Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS 123(R)”). FAS 123(R) requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. FAS 123(R) permits entities to use any option-pricing model that meets the fair value objective in the Statement. Modifications of share-based payments will be treated as replacement awards with the cost of the incremental value recorded in the financial statements.

      FAS 123(R) is effective at the beginning of the first quarter of 2006. As of the date of this filing, no decisions have been made as to whether the Company will apply the modified prospective or retrospective transition method of application.

      On September 30, 2004, the FASB issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) Issue No. 03-1-1 delaying the effective date of paragraphs 10-20 of EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” which provides guidance for determining the meaning of “other-than-temporarily impaired” and its application to certain debt and equity securities within the scope of FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be recorded as other-than-temporarily impaired unless the Company can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value up to or beyond the cost of the investment, which might mean maturity. The delay of the effective date of EITF 03-1 will be superseded concurrent with the final issuance of proposed FSP Issue 03-1-a. Proposed FSP Issue 03-1-a is intended to provide implementation guidance with respect to all securities analyzed for impairment under paragraphs 10-20 of EITF 03-1. Management continues to closely monitor and evaluate how the provisions of EITF 03-1 and proposed FSP Issue 03-1-a will affect the Company.

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 3 — SECURITIES

      The following tables set forth the composition of the Company’s securities portfolio by major category as of March 31, 2005.

      The following is a summary of the fair value of securities held-to-maturity and available-for-sale with unrealized losses and an aging of those unrealized losses:

(1)	Includes obligations of the Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA).
(2)	Includes obligations of the Government National Mortgage Association (GNMA).
(3)	Includes issues from government-sponsored agencies (FNMA and FHLMC).

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Management does not believe any individual unrealized loss as of Marh 31, 2005 represents other-than-temporary impairment.

	•	The unrealized loss for U.S. government-sponsored agency and mortgage-backed securities relate primarily to debt securities issued by FNMA and FHLMC; each security has a stated maturity date. FNMA is rated Aa3, AA- and A+ by Moody’s, S&P and Fitch, respectively. FHLMC is rated Aa3 and AA- by Moody’s and Fitch, respectively. The obligations of U.S. government-sponsored agencies are notes with a weighted average maturity of approximately 8 years and a weighted average rate of 4.18%; these notes are fixed rate obligations. The mortgage-backed securities are notes with a weighted average maturity of approximately 28 years and a weighted average rate of 5.04%.
	•	The unrealized losses on corporate and other debt securities relate to securities which were rated single A minus or better by a nationally recognized rating agency.

      The unrealized losses in the previous table are primarily attributable to changes in interest rates. The Company has both the intent and ability to hold each of the securities shown in the previous table for a time necessary to recover its amortized cost. The unrealized loss on the available-for-sale securities is reflected net of tax in other comprehensive loss, which does not impact regulatory capital.

NOTE 4 — LOANS

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

Included in consumer real estate are $801,000 and $693,000 of loans held for sale at March 31, 2005 and December 31, 2004, respectively.

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 5 — ALLOWANCE FOR LOAN LOSSES

      Following is a summary of changes in the allowance for loan losses for the three months ended March 31:

NOTE 6 — GOODWILL AND INTANGIBLES

      The following table presents the amortization of intangible assets (in thousands):

      The following table presents the changes in the carrying amount of goodwill and other intangibles during the three months ended March 31, 2005 (in thousands):

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 7 — EARNINGS PER SHARE

      For purposes of per share calculations, the Company had 18,241,151 shares of common stock outstanding at March 31, 2005, and 17,869,366 shares of common stock outstanding at March 31, 2004. Basic earnings per share for the three months ended March 31, 2005 and 2004 were computed by dividing net income by the weighted average number of shares outstanding during each period. Diluted earnings per share for the three months ended March 31, 2005 and 2004 were computed by dividing net income by the weighted average number of shares outstanding during each period, adjusted for the dilutive effect of the outstanding stock options. Computations for basic and diluted earnings per share are provided below.

      Options to purchase 112,000 shares at $22.03 were not included in the computation of diluted earnings per share for the three months ended March 31, 2005 because the options’ exercise price was greater than the average market price of the common stock and were, therefore, antidilutive. All outstanding options were included in the computation of diluted earnings per share for the three months ended March 31, 2004. Restricted shares in the amount of 120,000 were not included in the computation of diluted earnings per share for the three months ended March 31, 2005 because these shares would have an antidilutive effect.

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 8 — STOCK OPTIONS AND COMPENSATION

      During the first quarter of 2005, 279,424 options were exercised by individuals who are no longer with the Company. The total stock options outstanding were 804,102 at March 31, 2005 with exercise prices ranging between $5.42 and $22.03 and expiration dates between 2006 and 2014. No stock options were granted in the three months ended March 31, 2005.

      Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation.”

      The impact of this statement on the Company in 2006 and beyond will depend upon various factors, among them the Company’s future compensation strategy. The pro forma compensation costs presented in this and prior filings for the Company have been calculated using a Black-Scholes option pricing model and may not be indicative of amounts which should be expected in future periods.

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 9 — TRUST PREFERRED SECURITIES

      In May 2000, the Company formed the MBHI Capital Trust I (“Trust”). The Trust is a statutory business trust formed under the laws of the State of Delaware and is wholly owned by the Company. In June 2000, the Trust issued 10.0% Company obligated mandatory redeemable trust preferred securities with an aggregate liquidation amount of $20.0 million ($25 per preferred security) to third-party investors in an underwritten public offering. The Company issued 10.0% junior subordinated debentures aggregating $20.0 million to the Trust. The junior subordinated debentures are the sole assets of the Trust. The Company obligated mandatory redeemable trust preferred securities and the junior subordinated debentures pay distributions and dividends, respectively, on a quarterly basis, which are included in interest expense. The Company obligated mandatory redeemable trust preferred securities will mature on June 7, 2030, at which time the preferred securities must be redeemed. The Company obligated mandatory redeemable trust preferred securities and junior subordinated debentures can be redeemed contemporaneously, in whole or in part, beginning June 7, 2005 at a redemption price of $25 per preferred security. The Company has provided a full, irrevocable, and unconditional guarantee on a subordinated basis of the obligations of the Trust under the preferred securities in the event of the occurrence of an event of default, as defined in such guarantee. The Company has given notice to the trustee and the trustee has given notice to the security holders that these securities will be redeemed on June 7, 2005. The Company intends to issue $20.0 million of trust preferred securities in a private placement on or before June 7, 2005.

      The Company has formed three statutory trusts between October 2002 and December 2003 to issue $34.0 million in floating rate trust preferred securities. The three floating rate offerings were pooled private placements exempt from registration under the Securities Act pursuant to Section 4(2) thereunder. The Company has provided a full, irrevocable, and unconditional subordinated guarantee of the obligations of these trusts under the preferred securities. The Company is obligated to fund dividends on these securities before it can pay dividends on its shares of common stock.

      The following table details the four trusts formed by the Company:

      As of March 31, 2005, assuming the Company was not permitted to include the $54.0 million in trust preferred securities issued by MBHI Capital Trust I, II, III, and IV in its Tier 1 capital, the Company would still exceed the regulatory required minimums for capital adequacy purposes. If the trust preferred securities were no longer permitted to be included in Tier 1 capital, the Company would also be permitted to redeem the capital securities without penalty.

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MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 10 — DERIVATIVE INSTRUMENTS

      The Company enters into interest rate swaps to reduce exposure to changes in interest rates. As of March 31, 2005, the Company had various interest rate swap transactions, which result in the Company synthetically converting $137.5 million of its FHLB advance fixed rate debt to floating rate debt. The swap transactions require payment of interest by the Company at the one-month LIBOR plus a spread and, in turn, the Company receives a fixed rate. The Company has documented these to be fair value hedges that are carried at their estimated fair value with the changes in fair values recorded as a basis adjustment to the hedged items.

      Summary information about interest rate swaps at March 31 is as follows:

      The Company has also bought and sold various put and call options with terms less than 90 days on U.S. Treasury and government-sponsored agency obligations, mortgage-backed securities, and futures contracts. These are stand-alone derivatives that are carried at their estimated fair value with the corresponding gain or loss recorded in net trading profits or losses. The Company did not have any put or call options outstanding at March 31, 2005 and March 31, 2004.

      During the first quarter of 2004, the Company had 3,000 U.S. Treasury 10-year note futures contracts with a notional value of $300.0 million and a delivery date of June 2004. The Company sold these contracts in order to hedge certain U.S. government-sponsored agency notes held in its available-for-sale portfolio. The Company’s objective was to offset changes in the fair market value of the U.S. government-sponsored agency notes with changes in the fair market value of the futures contracts, thereby reducing interest rate risk. The Company has documented these futures contracts as fair value hedges with the changes in market value of the futures contracts as well as the changes in the market value of the hedged items charged or credited to earnings on a quarterly basis in net gains on securities transactions. For the three months ending March 31, 2004, the change in the market values resulted in a net loss of $1.7 million. Gains or losses for fair value hedges occur when changes in the market value of the hedged items are not identical to changes in the market value of hedge instruments during the reporting period. The Company de-designated this hedge as of December 31, 2004 and the futures contracts were written down to their fair value. These futures contracts, including an additional 300 contracts acquired during the third quarter of 2004, all which were stand-alone derivatives, were terminated in January 2005 at a gain of $393,000 above the year-end book value.

      In the fourth quarter of 2004, the Company entered into spread lock swap agreements with a notional value of $280.0 million, determination date of March 31, 2005, and spread lock strike of 0.41%. The Company entered into these agreements in order to minimize earnings volatility associated with spread widening of the hedged U.S. government-sponsored agency notes through the first quarter of 2005. These are stand-alone derivatives that are carried at their estimated fair value with the corresponding gain or loss recorded in net trading profits or losses. The Company terminated these agreements in January 2005 at a loss of $449,000.

PAGE 12

MIDWEST BANC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 11 — OFF-BALANCE-SHEET RISK

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

      At March 31, 2005, commitments to extend credit included $27.8 million of fixed rate loan commitments. These commitments are due to expire within 30 to 90 days of issuance and have rates ranging from 4.88% to 7.75%. Substantially all of the unused lines of credit are at adjustable rates of interest. Also included in commitments to extend credit were $194.8 million loan pipeline commitments.

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

NOTE 12 — REGULATORY MATTERS

      The Company and Midwest Bank and Trust Company (“the Bank”) entered into a written agreement with the Federal Reserve Bank of Chicago and Illinois Department of Financial and Professional Regulation on March 11, 2004. Management believes compliance with the written agreement will not have a material effect on the Company’s financial position or results of operations. This agreement required the Company and the Bank take corrective action, in the Company’s overall risk management, lending, and credit review practices, including the engagement of third party consultants. Management believes the Company and the Bank are in compliance with this agreement.

      On April 16, 2004, the Company was informed by a letter from the Securities and Exchange Commission that the Commission was conducting an inquiry in connection with the Company’s restatement of its September 30, 2002 financial statements. The Company is cooperating fully with the Commission on this matter.

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ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      The following discussion and analysis is intended as a review of significant factors affecting the financial condition and results of operations of the Company for the periods indicated. The discussion should be read in conjunction with the unaudited Consolidated Financial Statements and the Notes thereto presented herein. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed in this report. Also, see “Note 12 — Regulatory Matters” to our unaudited consolidated financial statements for a discussion of certain regulatory matters.

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 Company’s methodology for determining the allowance for loan losses represents an estimation pursuant to both Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies, and SFAS 114, Accounting by Creditors for Impairment of a Loan. The allowance reflects expected losses resulting from analyses developed through specific loss allocations for individual loans and historical loss experience for each loan category. The specific loss allocations are based on regular analyses of all commercial, commercial real estate, and agricultural loans over $300,000 where the internal credit rating is assigned to the substandard, doubtful, or loss 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 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 might possibly 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.

      A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage and consumer loans, and on an individual basis for other loans. A portion of the allowance is allocated to impaired loans.

      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 due to 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.

Strategy

      On September 28, 2004, the Board of Directors of the Company named James J. Giancola as President and Chief Executive Officer of the Company. The Company has begun to implement its turnaround strategy. As part of the 2005 corporate plan, the Company has adopted a number of short-term and long-term strategies, including:

	•	Recruitment of seasoned commercial lenders, credit analysts, and key risk and operations managers.
	•	Diversification of the loan portfolio mix by reducing the concentration in commercial real estate lending and expanding commercial, consumer real estate, and consumer lending.
	•	Modifying the structure and mix of the securities portfolio. The Company’s focus on future investment security purchases is to maintain an adequate level of liquidity and to shorten the duration of its securities portfolio.
	•	Expanding its focus on retail banking activities including traditional and non-deposit investment products, and placing greater emphasis on transactional deposit growth.

      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 and ethics. The growth strategy of the Company is to increase

PAGE 15

its core banking business, develop its insurance and retail brokerage activities, and expand into new markets as well as to diversify the financial services it offers. The Company’s strategy includes the following objectives:

	•	Reducing earnings volatility and the risk in the securities portfolio by exiting hedge accounting on futures contracts, terminating certain stand-alone derivatives positions, and instituting a pre-purchase pricing discipline.
	•	Implementing ongoing risk and credit management processes that provide strong levels of control, minimize risk, and anticipate potential problems.
	•	Developing a growing, well diversified, well priced, and fundamentally sound loan portfolio.
	•	Focusing deposit efforts on transaction account growth, especially demand deposit growth.
	•	Developing additional sources of fee income.

      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. Any acquisition the Company pursues will ideally be accretive to net income and diluted earnings per share within the first full year following consolidation, with cost savings targeted to be realized in the first phase of integration post closing. The Company’s growth strategy of establishing de novo banking centers and selected acquisitions is dependent on many factors, including regulatory approval that may limit or prohibit such expansion plans.

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Results of Operations — Three Months Ended
March 31, 2005 and 2004

      Set forth below are some highlights of first quarter 2005 results compared to the first quarter of 2004.

•

Earnings per share:

	•	Basic earnings per share for the three months ended March 31, 2005 were $0.22, 18.5% lower than for the comparable period in 2004.
	•	Diluted earnings per share for the three months ended March 31, 2005 were $0.22, 15.4%, lower than for the comparable period in 2004.

	•	Consolidated net income for the first quarter of 2005 was $4.1 million, a 15.4% decrease when compared to $4.8 million for the first quarter of 2004. This decrease is mainly attributed to the $877,000 decrease in net gains on securities transactions and trading activity and the $924,000 increase in salaries and benefits expense.
	•	The return on average assets for the three months ended March 31, 2005 was 0.74% compared to 0.85% for the similar period in 2004.
	•	The return on average equity for the three months ended March 31, 2005 was 11.71% compared to 13.45% for the similar period in 2004.
	•	Net interest income increased 6.7% to $15.1 million in the first quarter of 2005 compared to $14.2 million in the first quarter of 2004 as a result of loan growth.
	•	Interest income on loans increased 16.9% to $19.3 million in the first quarter of 2005 compared to $16.5 million for the comparable period in 2004.
	•	Core deposit pricing was reduced at the end of the quarter while still maintaining competitive rates.
	•	The provision for loan losses decreased by 43.1% to $430,000 for the first quarter of 2004 compared to $756,000 for the comparable period in 2004, reflecting the improvement in asset quality.
	•	Excluding gains on securities, noninterest income increased 160.6% to $2.8 million in the first quarter of 2005 compared to $1.1 million in the first quarter of 2004.
	•	Noninterest expenses increased 10.4% to $12.2 million in the first quarter of 2005 compared to $11.0 million in the first quarter of 2004.

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      Set forth below are some highlights of first quarter 2005 results compared to the fourth quarter of 2004.

	•	Basic and diluted earnings per share for the three months ended March 31, 2005 were $0.22, 171.0% higher than for the quarter ended December 31, 2004.
	•	Consolidated net income for the first quarter of 2005 was $4.1 million, a 172.9% improvement when compared to the $5.6 million loss for the fourth quarter of 2004. The fourth quarter results reflect a $10.1 million impairment charge on equity securities.
	•	The provision for loan losses decreased by 80.1% to $430,000 for the first quarter of 2004 compared to $2.2 million for the fourth in 2004, reflecting the improvement in asset quality.
	•	The return on average assets for the three months ended March 31, 2005 was 0.74% compared to (0.96%) for the fourth quarter of 2004.
	•	The return on average equity for the three months ended March 31, 2005 was 11.71% compared to (16.01%) for the fourth quarter of 2004.
	•	Net interest income decreased 6.4% to $15.1 million in the first quarter of 2005 compared to $16.2 million in the fourth quarter of 2004 as a result of a purchase accounting adjustment related to prepaid FHLB advances.
	•	Interest income on loans increased 7.2% to $19.3 million in the first quarter of 2005 compared to $18.0 million for the comparable period in 2004.
	•	Excluding gains on securities, noninterest income decreased 10.6% to $2.8 million in the first quarter of 2005 compared to $3.1 million in the fourth quarter of 2004.
	•	Noninterest expenses decreased 27.5% to $12.2 million in the first quarter of 2005 compared to $16.8 million in the fourth quarter of 2004. The fourth quarter reflects the retirement benefit obligation of $1.5 million and $4.2 million in prepayment penalties associated with the prepaid FHLB advances.

Net Interest Income

      Net interest income is the difference between interest income and fees on earning assets and interest expense on deposits and borrowings. Net interest margin represents net interest income on a tax equivalent basis as a percentage of average earning assets during the period. Net interest margin reflects the spread between average yields earned on interest earning assets and the average rates paid on interest bearing deposits and borrowings.

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      The following table sets forth the average balances, net interest income and expense and average yields and rates for the Company’s interest-earning assets and interest-bearing liabilities for the indicated periods on a tax-equivalent basis assuming a 35.0% tax rate for 2005 and 2004.