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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______

Commission file number 0-29598

MIDWEST BANC HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 36-3252484
(State of Incorporation) (I.R.S. Employer
Identification Number)

501 WEST NORTH AVENUE, MELROSE PARK, ILLINOIS 60160
(Address of principal executive offices, including Zip Code)

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

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

None

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

COMMON STOCK, $0.01 PAR VALUE
(Title of Class)



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

YES [X] NO [ ]

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. [ ]

As of March 17, 1999, the aggregate market value of the registrant's
common stock held by non-affiliates of the registrant was approximately
$100,728,810 based upon the price of the last sale on that date.(1/)

As of March 17, 1999, the number of shares outstanding of the
registrant's common stock, par value $0.01 per share, was 11,102,796.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's Proxy Statement for the 1999 Annual Meeting
of Stockholders are incorporated by reference into Part III.







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(1) Based upon the closing price of the registrant's common stock on March
17, 1999, and reports of beneficial ownership filed by directors and executive
officers of registrant and by beneficial owners of more than 5% of the
outstanding shares of common stock of the registrant. However, such
determination of shares owned by affiliates does not constitute and an admission
of affiliate status or beneficial interest in shares of registrant's common
stock.


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MIDWEST BANC HOLDINGS, INC.
FORM 10-K

INDEX




PAGE NO.
PART I


Item 1. Business.............................................................................................. 1
Item 2. Properties........................................................................................... 15
Item 3. Legal Proceedings.................................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 16

PART II

Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters......................... 17
Item 6. Selected Consolidated Financial Data................................................................. 18
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition................ 19
Item 7a. Quantitative and Qualitative Disclosures about Market Risk........................................... 39
Item 8. Consolidated Financial Statements and Supplementary Data............................................. 41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 41

PART III

Item 10. Directors and Executive Officers of the Registrant................................................... 41
Item 11. Executive Compensation............................................................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and Management....................................... 41
Item 13. Certain Relationships and Related Transactions....................................................... 41

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-k...................................... 41

Signature(s) Page.................................................................................... 43

Index to Consolidated Financial Statements.......................................................... F-1






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PART I

ITEM 1. BUSINESS

THE COMPANY

The Company is a community-based bank holding company headquartered in
Melrose Park, Illinois. The Company 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 four Illinois community
banks: Midwest Bank and Trust Company, Midwest Bank, Midwest Bank of McHenry
County and Midwest Bank of Western Illinois (collectively, the "Banks"). Each of
the Banks is chartered as an Illinois state bank. In addition, the Company has
one nonbank subsidiary that provides data processing services, and three of the
Banks have nonbank subsidiaries that provide trust, mortgage and insurance
services.

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 14 locations with ten banking centers in the greater
Chicago metropolitan area and four banking centers in Western Illinois. Midwest
One Mortgage Services, Inc., a subsidiary of Midwest Bank, is a residential
mortgage brokerage business offering mortgage services throughout the Chicago
metropolitan area. Midwest Trust Services, Inc., a subsidiary of Midwest Bank
and Trust Company, provides trust services for individuals and corporations.
Porter Insurance Agency, Inc., a subsidiary of Midwest Bank of Western Illinois,
acts as an insurance agency for individuals and corporations. First Midwest Data
Corp., a subsidiary of the Company, provides data processing services to the
Company and all subsidiaries except Midwest Bank of Western Illinois and Porter
Insurance Agency, Inc. Midwest One Financial Services, L.L.C., a limited
liability company controlled by Midwest Bank of McHenry County, offers insurance
services and retail brokerage activities within McHenry County.

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, formerly known as First Midwest Corporation of Delaware,
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
consolidated subsidiaries as of December 31, 1998, is set forth below:





COMPANY SUBSIDIARIES HEADQUARTERS MARKET AREA NUMBER OF BANKING
CENTERS OR OFFICES

Banks:

Midwest Bank and Trust Company......... Elmwood Park, IL Chicago, Elmwood Park, 5
Melrose Park, Oak Park,
River Forest, Franklin
Park, River Grove, Maywood

Midwest Bank........................... Hinsdale, IL Hinsdale, Downers Grove, 2
Burr Ridge, Westmont, Oak
Brook, Clarendon Hills


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COMPANY SUBSIDIARIES HEADQUARTERS MARKET AREA NUMBER OF BANKING
CENTERS OR OFFICES

Banks:

Midwest Bank of McHenry County......... Union, IL Union, Algonquin, 3
Marengo, Crystal Lake,
East Dundee, Lake In the
Hills, Huntley, Island
Lake, Wauconda,
Carpentersville

Midwest Bank of Western Illinois....... Monmouth, IL Monmouth, Galesburg, 4
Oquawka, Kirkwood

Nonbanks:
Midwest Trust Services, Inc............ Elmwood Park, IL Chicago metropolitan area 1

Midwest One Mortgage Services, Inc..... Downers Grove, IL Chicago metropolitan area 6

First Midwest Data Corp................ Melrose Park, IL * 1

The Porter Insurance Agency............ Alexis, IL Western Illinois 2
- ----------------------



* Performs data processing services for the Company, all of the Banks except
Midwest Bank of Western Illinois, and all of the nonbank subsidiaries
except Porter Insurance Agency, Inc.

HISTORY

The Banks

Midwest Bank and Trust Company was established in 1959 in Elmwood Park
to provide community and commercial banking services to individuals and
businesses in the contiguous and 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 throughout the 1970s. 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 five full-service banking
centers in diverse markets within Cook County, Illinois.

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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. During the past three years, assets at Midwest Bank of McHenry
County have increased from $95 million to $210 million as of December 31, 1998.
As a result of this growth, Midwest Bank of McHenry County ranked as the fifth
largest among 21 banks operating within McHenry County as of September 30, 1998.

The Company established a Ade novo" bank, Midwest Bank of DuPage
County, in Hinsdale in 1991. 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, and Midwest Bank in 1996.
Midwest Bank opened a convenience banking center in 1996 in Downers Grove,
within DuPage County, which has been expanded into a full-service banking
center.

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

Nonbank Subsidiaries

The Company's nonbank subsidiaries were created to support the core
retail and commercial banking activities of the Company and the Banks. First
Midwest Data Corp. was established in 1991 to replace third party data
processing services and provide competitive advantages in terms of service and
delivery for the Banks. First Midwest Data Corp. provides a variety of services
to the Company and all of the Banks except Midwest Bank of Western Illinois,
including processing of demand deposits, savings accounts, time deposits, loans
and general ledgers, and managing telephone banking and on-line computer
services for retail and commercial customers. Midwest Bank of Western Illinois
provides its own data processing services.

Midwest Trust Services, Inc. and Midwest One Mortgage Services, Inc.
were established to provide specialized financial services to support the
additional needs of banking customers on a value-added basis. These subsidiaries
also maintain independent customer bases that can serve as referral leads for
prospective retail and commercial relationships for the Banks.

Midwest Trust Services, Inc. was a spin-off of the trust department of
Midwest Bank and Trust Company in 1994 and was initially formed as a
wholly-owned subsidiary of the Company to provide trust services and related
specialized programs supporting each of the Banks. The Company transferred
ownership of the subsidiary to Midwest Bank and Trust Company as a capital
contribution in 1995. Effective February 1999, Midwest Trust Services, Inc. and
Midwest Bank and Trust Company assigned trusts representing certain lines of
trust business, including personal trusts, individual retirement accounts and
life insurance trusts, to a third party.

Midwest One Mortgage Services, Inc. was formed by the Company in 1994
to provide secondary market mortgage origination for the Banks and independent
customers. Mortgages originated by Midwest One Mortgage Services, Inc. are
generally sold with servicing rights released to a large, diversified group of
qualified secondary market investors. The Company transferred ownership of the
subsidiary to Midwest Bank as a capital contribution in 1997.

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.

Midwest One Financial Services, L.L.C. was organized in January 1999 as
a joint venture between Midwest Bank of McHenry County and First Midwest
Financial Group, Inc. to provide insurance services and products within McHenry
County. In addition, Midwest One Financial Services, L.L.C. will provide retail
securities brokerage


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activities. Midwest Bank of McHenry County owns 51% of the company and will
serve as the managing member. Regulatory approval was received in December 1998
and actual operations began in January 1999.

THE BANKS

The Company functions as a network of autonomous 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 and regulatory compliance.

Set forth below is selected financial and other information for each
Bank for the year ended December 31, 1998.



TOTAL TOTAL NET
ASSETS EQUITY INCOME


Midwest Bank and Trust Company(1) $492,710 $35,069 $6,516

Midwest Bank(2) 210,134 14,547 2,239

Midwest Bank of McHenry County 209,778 14,119 2,003

Midwest Bank of Western Illinois(3) 150,943 12,058 1,053



- --------------------
(1)Does not include financial information for Midwest Trust Services, Inc.
(2)Does not include financial information for Midwest One Mortgage
Services, Inc.
(3)Does not include financial information for Porter Insurance Agency, Inc.

The Banks accounted for nearly 99.0% of assets and virtually all net
income of the Company as of and for the years ended 1998, 1997 and 1996.

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
County and West Central Illinois. The market in Hinsdale is a more affluent and
upwardly mobile segment with a higher percentage of white collar professionals.
The southern portion of McHenry County is a high growth market characterized by
a core middle class base, augmented by a rapid influx of young families and
professional couples.

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 10 full-service locations in the Chicago metropolitan area and out of
four 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.


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STRATEGY

The Company believes that its continued success is dependent on its
ability to provide to 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, further develop its mortgage, trust, insurance and
securities brokerage activities, and expand into other financial services. Key
aspects of the Company's strategy include the following: (i) maintaining high
levels of customer service through decentralized operating structure; (ii)
increasing market share within existing markets and expand into new markets;
(iii) enhancing cross-selling of value-added products and services; (iv)
maintaining a leadership position in product development and marketing; (v)
increasing the revenue base of nonbank financial service subsidiaries; (vi)
increasing existing loan-to-deposit ratios of the Banks; and (vii) expanding
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 and allow it to maintain consistent high performance and leadership
positions in its markets.

PRODUCTS AND SERVICES

Deposit Products

Management believes the Company and the Banks are leaders in developing
and marketing innovative deposit products and programs which address the needs
of customers in each of the local markets served. These products include:

Checking Accounts. The Company has developed a range of different
checking account products designed and priced to meet specific target segments
(e.g., age and industry groups) of the local markets served by each Bank.

NOW/Money Market Accounts. The Company offers several types of premium
rate NOW accounts and money market accounts with interest rates indexed to the
prime rate or the 91-day U.S. Treasury bill rate. The Banks were one of the
first to offer these products in their respective local markets.

Time Deposits. The Company offers a wide range of innovative time
deposits, usually offered at premium rates with special features to protect the
customer's interest earnings in changing interest rate environments. For
example, specific products include the FlexRate CD, which permits interest rate
adjustments at the customer's option, the Customer Choice CD, which has limited
or reduced prepayment penalties, and the ADDvantage CD where customers can add
additional amounts to an existing certificate at any time prior to maturity.

Lending Services

The Company aggressively seeks quality loan relationships. 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 loans. Management of the Company 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. The Company has concentrated its efforts on building its lending
business in the following areas:

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

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 retained by the Company for its portfolio are
generally short-term balloon loans and adjustable rate mortgages with initial
fixed terms of one to five years.


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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 and Midwest Bank of McHenry County has a small agricultural loan
portfolio in Northern 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,
virtually all one- to five-year adjustable rate loans originated pursuant to
Fannie Mae and FHLMC guidelines are sold in the secondary market. In the normal
course of business, the Company retains medium-term fixed-rate loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."

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

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

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

ATMs

The Banks maintain a network of 20 ATM sites generally located within
the Banks' local markets. All ATM equipment is owned by the Banks. Twelve of the
ATM sites are located at various banking centers, and eight are maintained
off-site at hotels, supermarkets and schools.

Trust Activities

Midwest Trust Services, Inc. is a full-service Illinois trust company
offering land trusts, personal trusts, custody accounts, retirement plan
services and corporate trust services. As of December 31, 1998, Midwest Trust
Services, Inc. maintained relationships representing an aggregate market value
of $210.6 million in assets with an aggregate book value of $162.5 million. In
addition, Midwest Trust Services, Inc. administered 2,032 land trust accounts as
of December 31, 1998. Effective February 1999, Midwest Trust Services, Inc. and
Midwest Bank and Trust Company assigned certain trusts representing certain
lines of trust business, including personal trusts, individual retirement
accounts and life insurance trusts, to a third party.

Midwest Bank of Western Illinois also provides trust services to its
customers and maintained trust accounts with an aggregate market value of $41.0
million and an aggregate book value of $24.6 million as of December 31, 1998.

Mortgage Services

Midwest One Mortgage Services, Inc. serves customers, residents and
realtors in local markets within the Chicago metropolitan area through loan
originators located at banking centers in Elmwood Park, Melrose Park, Downers
Grove, Hinsdale and Algonquin. The primary services offered by Midwest One
Mortgage Services, Inc. include conventional first and second mortgages on
one-to four-family housing on a new issue or refinancing basis, as well as
special programs for first-time homebuyers, reverse mortgages, and loans for
individuals with a history of credit problems, generally classified or described
as "B", "C", and "D" paper within the mortgage industry. Midwest One Mortgage
Services, Inc. offers a range of products with varied terms, rates and
maturities to meet the needs of customers within local markets. Fixed rate
mortgages are offered from three to thirty years, and adjustable rate mortgages
are


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available with different options and rate adjustment dates. The majority of
mortgage loans are sold in the secondary market to a range of investors that
offer a complementary mix of conventional and specialty loan programs.

Insurance Services

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

Securities Brokerage

Securities brokerage services are provided through arrangements with
two independent regional brokerage firms. Licensed brokers are located at four
banking centers and provide services with respect to stocks and securities
trading, financial planning, mutual funds sales, fixed and variable rate
annuities and tax-exempt and conventional unit trusts.

COMPETITION

The Company competes in the financial services industry through the
Banks, Midwest One Mortgage Services, Inc., Midwest Trust Services, Inc., Porter
Insurance Agency, Inc. and Midwest One Financial Services, L.L.C. 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 Bank competes for deposits
principally by offering depositors a variety of deposit programs, convenient
office locations, 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, 1998, the Company and its subsidiaries had 266
full-time employees and 124 part-time employees, or 317 full-time equivalent
employees. Management considers its relationship with its employees to be good.



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SUPERVISION AND REGULATION

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

BANK HOLDING COMPANY REGULATION

The Company is registered as a Abank holding company" with the Federal
Reserve and, accordingly, is subject to supervision by the Federal Reserve under
the Bank Holding Company Act (the Bank Holding Company Act and the regulations
issued thereunder are collectively 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 Midwest One Mortgage
Services, Inc., Midwest Trust Services, Inc., Midwest One Financial Services,
L.L.C., Porter Insurance Agency, Inc. and First Midwest Data Corp.

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 five percent of the voting shares or
substantially all the assets of any bank or bank holding company, or for a
merger or consolidation of a bank holding company with another bank holding
company. With certain exceptions, the BHC Act prohibits a bank holding company
from acquiring direct or indirect ownership or control of voting shares of any
company which is not a bank or bank holding company and from engaging directly
or indirectly in any activity other than banking or managing or controlling
banks or performing services for its authorized subsidiaries. A bank holding
company may, however, engage in or acquire an interest in a company that engages
in activities which the Federal Reserve has determined, by regulation or order,
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto, such as owning and operating the trust business of
Midwest Trust Services, Inc., the mortgage lending business of Midwest One
Mortgage Services, Inc. and the data processing operations of First Midwest Data
Corp. Under the BHC Act, the Company and the Banks are prohibited from engaging
in certain tie-in arrangements in connection with an extension of credit, lease,
sale of property, or furnishing of services.

Any company, including associates and affiliates of and groups acting
in concert with such company, which purchases or subscribes for five percent or
more of the Company's Common Stock may be required to obtain prior approval of
the Illinois Office of Banks and Real Estate (the "Illinois Commissioner") and
the Federal Reserve. Prior regulatory notice and approval requirements under the
Change in Bank Control Act and the Illinois Banking Act may also apply with
respect to any person who acquires stock of the Company such that its interest
exceeds ten percent of the Company. In addition, any corporation, partnership,
trust or organized group that acquires a controlling interest in the Company or
the Banks may have to obtain approval of the Federal Reserve to become a bank
holding company and thereafter be subject to regulation as such.

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 standards in relation to assets
and off-balance sheet exposures, as adjusted for credit risks. 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 Abank-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 Acore" capital consists of common stockholders'
equity, noncumulative perpetual preferred stock (including related surplus),
cumulative perpetual preferred stock (including related surplus) (subject to
certain


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limitations) and minority interests in the common equity accounts of
consolidated subsidiaries, and is reduced by goodwill, certain other intangible
assets and certain investments in other corporations ("Tier 1 Capital"). Tier 2
capital consists of the allowance for loan and lease losses (subject to certain
limitations), perpetual preferred stock and related surplus (subject to certain
conditions), Ahybrid capital instruments," perpetual debt, mandatory convertible
debt securities, term subordinated debt and intermediate-term preferred stock
(including related surplus) (subject to certain limitations).

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 eight percent, of which at least four percent 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 three percent, except that bank
holding companies not rated in the highest category under the regulatory rating
system are required to maintain a leverage ratio of one percent to two percent
above such minimum. The three percent Tier 1 Capital to total assets ratio
constitutes the minimum leverage standard for bank holding companies, and will
be used in conjunction with the risk-based ratio in determining the overall
capital adequacy of banking organizations. 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 internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum levels.

As of December 31, 1998, 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 14.64% and a Tier 1 capital to risk-weighted
assets ratio of 13.47% as of December 31, 1998.

BANK REGULATION

Under Illinois law, the Banks and Midwest Trust Services, Inc. are
subject to supervision and examination by the Illinois Commissioner. As
affiliates of the Banks, the Company, Midwest One Mortgage Services, Inc.,
Porter Insurance Agency, Inc., and Midwest One Financial, L.L.C. are also
subject to 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.

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.

Furthermore, banks are affected by the credit policies of other
monetary authorities, including the Federal Reserve, which regulate 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.

All banks located in Illinois have traditionally been restricted as to
the number and geographic location of branches which they may establish. The
Illinois Banking Act was amended in June 1993, however, to eliminate such
branching restrictions. Accordingly, banks located in Illinois are now permitted
to establish branches anywhere in Illinois without regard to the location of
other banks' main offices or the number of branches previously maintained by the
bank establishing the branch.

Midwest Trust Services, Inc. is a trust company subject to the Illinois
Corporate Fiduciary Act and is regulated by the Illinois Commissioner. In
addition, as subsidiaries of a bank holding company, each of Midwest One
Mortgage


9

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Services, Inc., Midwest Trust Services, Inc., First Midwest Data Corp., Porter
Insurance Agency, Inc. and Midwest One Financial Services, L.L.C. may be
examined by the Federal Reserve.

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

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

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 revenue is dividends the Company receives and expects to receive from
the Banks, the Company's ability to pay dividends is likely to be dependent on
the amount of dividends paid by the Banks. No assurance can be given that the
Banks will, in any circumstances, pay such dividends to the Company on their
stock.

As Illinois state-chartered banks, none of the Banks may pay dividends
in an amount greater than its current net profits after deducting losses and bad
debts out of undivided profits provided that its surplus equals or exceeds its
capital. 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 ("BDICATE"), 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.

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 adopted, effective August 9, 1995, a set of
guidelines prescribing safety and soundness standards pursuant to FDICIA, as
amended. The guidelines establish general standards relating to internal
controls and information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, and compensation,
fees and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures
specified in the guidelines. The guidelines prohibit excessive compensation as
an unsafe and unsound practice and describe compensation as excessive when the
amounts paid are unreasonable or disproportionate to the services performed by
an executive officer, employee, director or principal shareholder. In addition,
the Federal Reserve adopted regulations that authorize, but do not require, the
Federal Reserve to order an institution that has been given notice by the
Federal Reserve that it is not satisfying any of such safety and soundness
standards to submit a compliance plan. If, after being so notified, an
institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the Federal Reserve
must issue an order directing action to correct the deficiency and may issue an



10

13

order directing other actions of the types to which an undercapitalized
association is subject under the Aprompt corrective action" provisions of
FDICIA. If an institution fails to comply with such an order, the Federal
Reserve may seek to enforce such order in judicial proceedings and to impose
civil money penalties. The Federal Reserve and the other federal bank regulatory
agencies also adopted guidelines for asset quality and earnings standards.

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

In August 1995, the Federal Reserve, FDIC and other federal banking
agencies published a final rule modifying their existing risk-based capital
standards to provide for consideration of interest rate risk when assessing the
capital adequacy of a bank. Under the final 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
certain 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 an 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 certain
designated reserve ratios in the insurance funds and to impose special
additional assessments. The FDIC recently amended the risk-based assessment
system and on December 11, 1995, adopted a new assessment rate schedule for
BIF-insured deposits. The new assessment rate schedule, effective with respect
to the semiannual premium assessment beginning January 1, 1996, provides for an
assessment range of zero to 0.27% (subject to a $2,000 minimum) of deposits
depending on capital and supervisory factors. Each depository institution is
assigned to one of three capital groups: "well capitalized," "adequately
capitalized" or Aless than adequately capitalized." Within each capital group,
institutions are assigned to one of three supervisory subgroups: "healthy,"
"supervisory concern" or "substantial supervisory concern." Accordingly, there
are nine combinations of capital groups and supervisory subgroups to which
varying assessment rates would be applicable. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned.

During 1998, the Banks were assessed deposit insurance in the aggregate
amount of $95,824. 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. The management of each of the
Banks does not know any practice, condition or violation that might lead to
termination of deposit insurance.


11


14


The Economic Growth and Regulatory Paperwork Reduction Act of 1996
enacted on September 30, 1996 provides that beginning with semi-annual periods
after December 31, 1996, Bank Insurance Fund deposits will also be assessed to
pay interest on the bonds issued in the late 1980s by the Financing Corporation
(the AFICO Bonds") to recapitalize the now defunct Federal Savings & Loan
Insurance Corporation. For purposes of the assessments to pay interest on the
FICO Bonds, BIF deposits will be assessed at a rate of 20% of the assessment
rate applicable to SAIF deposits until December 31, 1999. After the earlier of
December 31, 1999 or the date on which the last savings association ceases to
exist, full pro rata sharing of FICO assessments will begin. It has been
estimated that the rates of assessment for the payment of interest on the FICO
Bonds will be approximately 1.3 basis points for BIF-assessable deposits and
approximately 6.4 basis points for SAIF-assessable deposits. The payment of the
assessment to pay interest on the FICO Bonds should not materially affect the
Banks.

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 three percent
reserves on the first $51.9 million of transaction accounts and $1.6 million
plus ten percent on the remainder. The first $4.0 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. 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.

In April 1995, the Federal Reserve and other federal banking agencies
adopted amendments revising their CRA regulations. Among other things, the
amended CRA regulations substitute for the prior process-based assessment
factors a new evaluation system that would rate an institution based on its
actual performance in meeting community needs. In particular, the proposed
system would focus on three tests: (i) a lending test, to evaluate the
institution's record of making loans in its assessment areas; (ii) an investment
te st, to evaluate the institution's record of investing in community
development projects, affordable housing, and programs benefiting low or
moderate income individuals and businesses; and (iii) a service test, to
evaluate the institution's delivery of services through its branches, ATMs and
other offices. The amended CRA regulations also clarify how an institution's CRA
performance would be considered in the application process. All of the Banks,
except Midwest Bank and Trust Company, have been examined under the revised CRA
regulations.

Consumer Compliance. Midwest Bank has been made aware of certain
deficiencies in its consumer compliance program. Management believes that any
deficiencies have already been corrected. In the event that such deficiencies
were to continue over time, enforcement or administrative actions by the
appropriate federal banking regulators may impact the Company's ability to
implement its growth strategy.

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
receivership, conservatorship or the termination of deposit insurance.



12

15

Interstate Banking and Branching Legislation. On September 29, 1994,
the Riegle-Neal Interstate Banking and Efficiency Act of 1994 (the "Interstate
Banking Act") was enacted. Under the Interstate Banking Act, adequately
capitalized and adequately managed bank holding companies will be allowed to
acquire banks across state lines subject to certain limitations. In addition,
under the Interstate Banking Act, since June 1, 1997, banks have been 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.

In 1997, the State of Illinois enacted legislation allowing a state
bank 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. In December 1998,
Midwest Bank of McHenry County acquired a majority interest in Midwest One
Financial Services, L.L.C., a newly formed limited liability company whose
purpose is to engage in the insurance agency business. Porter Insurance Company,
Inc. and Midwest One Financial 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.

MONETARY POLICY AND ECONOMIC CONDITIONS

The earnings of banks and bank holding companies are affected by
general economic conditions and also 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 companies cannot fully predict the nature or the extent of any effects
which fiscal or monetary policies may have on their business and earnings.


SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995


This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor



13

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provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies, and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the Company and its subsidiaries include, but
are not limited to, changes in interest rates; general economic conditions;
legislative/regulatory changes; monetary and fiscal policies of the U.S.
government, including policies of the U.S. Treasury and the Federal Reserve
Board; the quality or composition of the loan or investment portfolios; demand
for loan products; deposit flows; competition; demand for financial services in
the Company's market area; the effectiveness of the Company's compliance review
and implementation plan to identify and resolve year 2000 issues; and accounting
principles, policies, and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.


EXECUTIVE OFFICERS OF THE REGISTRANT

The following executive officers were employed by the Company and its
subsidiaries as of December 31, 1998.

Robert L. Woods (69) has served as President and Chief Executive
Officer and as a director of the Company since 1983. Previously, he was the
President of Midwest Bank and Trust Company from 1967 to 1992. Mr. Woods also
serves as Chairman of the Board of Directors of Midwest Bank. In addition, he is
a director of Midwest One Mortgage Services, Inc. and First Midwest Data Corp.

Edward H. Sibbald (50) was named Executive Vice President and Chief
Financial Officer of the Company in October 1997. Previously, Mr. Sibbald served
as Senior Vice President-Administration since 1991. Mr. Sibbald also serves as
Chairman of the Executive Committee and director of Midwest Bank of Western
Illinois and as a director of Midwest Bank of McHenry County. In addition, he is
a Vice President, Secretary and director of Midwest One Mortgage Services, Inc.,
and serves as a director of First Midwest Data Corp.

Brad A. Luecke (48) has served as President and Chief Executive Officer
of Midwest Bank and Trust Company since 1991. Mr. Luecke also serves as
President, Trust Officer and director of Midwest Trust Services, Inc. and as a
director of Midwest One Mortgage Services, Inc.

James I. McMahon (45) has served as President and Chief Executive
Officer and a director of Midwest Bank since 1991. Mr. McMahon has been a Vice
President of the Company since 1987. He was elected President of Midwest One
Mortgage Services, Inc. in 1997. He has served as director of Midwest One
Mortgage Services, Inc. and Midwest Trust Services, Inc. since 1994.

Stephen M. Karaba (41) has served as President of Midwest Bank of
McHenry County since 1994. Mr. Karaba also serves as Chairman of Midwest One
Financial Services, L.L.C. Previously, Mr. Karaba was an Executive Vice
President of Midwest Bank of McHenry County and served as Vice
President-Commercial Lending of Illinois State Bank, and subsequently, Midwest
Bank and Trust Company beginning in 1989. Mr. Karaba has been a director of
Midwest Bank of McHenry County, Midwest Trust Services, Inc. and Midwest One
Mortgage Services, Inc. since 1994 and Midwest Bank of Western Illinois since
1998.

Christopher J. Gavin (37) has served as President and Chief Executive
Officer of Midwest Bank of Western Illinois since 1998. He also has been a
director of Midwest Bank of Western Illinois since 1997. Mr. Gavin was Executive
Vice President and Chief Credit Officer of Midwest Bank of Western Illinois from
1997 to 1998. Previously, Mr. Gavin had fifteen years of experience in
commercial and community banking with Monmouth Trust and Savings Bank.

14


17


ITEM 2. PROPERTIES

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






LOCATION DATE ACQUIRED NET BOOK VALUE AT LEASED OR
DECEMBER 31, 1998 OWNED
(IN THOUSANDS)
Principal Office

501 West North Avenue 1987 $2,459 Owned
Melrose Park, Illinois 60160

Midwest Bank and Trust Company Facilities
1606 North Harlem Avenue 1959 1,958 Owned
Elmwood Park, Illinois 60607

300 South Michigan Avenue 1986 -0- Leased
Chicago, Illinois 60604

4012 North Pulaski Road 1993 1,338 Owned
Chicago, Illinois 60641

7227 West Addison Street 1996 1,325 Owned
Chicago, Illinois 60634

Midwest Bank Facilities
500 West Chestnut Street 1991 2,196 Owned
Hinsdale, Illinois 60521

927 Curtiss Street 1996 5 Leased
Downers Grove, Illinois 60515

Midwest Bank of McHenry County Facilities
17622 Depot Street 1987 53 Owned
Union, Illinois 60180

2045 East Algonquin Road 1994 1,034 Owned
Algonquin, Illinois 60102

204 E. State Road 1998 380 Owned
Island Lake, IL 60042

Midwest Bank of Western Illinois Facilities
100 East Broadway 1993 397(1) Owned
Monmonth, Illinois 61462

208 East Broadway 1993 -- Owned
Monmouth, Illinois 61462

612 West Main Street 1996 596 Owned
Galesburg, Illinois 61401

106 South Kirk 1993 -0- Owned
Kirkwood, Illinois 61473



15

18




LOCATION DATE ACQUIRED NET BOOK VALUE AT LEASED OR
DECEMBER 31, 1998 OWNED
(IN THOUSANDS)


Schuyler Street 1991 105 Owned
Oquawka, Illinois 6146



- --------------------
(1) Includes net book value for the 208 East Broadway facility.

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

16

19
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS

The Company's common stock is traded over-the-counter and quoted on the
Nasdaq National Market under the symbol "MBHI". As of March 17, 1999, the
Company had 2,532 stockholders. The table below sets forth the high and low sale
prices of the Common Stock during the periods indicated. Such over-the-counter
market quotations reflect interdealer prices, without retail markup, markdown or
commission and may not necessarily represent actual transactions.






HIGH LOW
1997

First Quarter.......................................... $9.00 $8.50
Second Quarter......................................... 9.50 9.00
Third Quarter.......................................... 11.00 9.50
Fourth Quarter......................................... 14.00 10.25
1998
First Quarter.......................................... $17.75 $14.00
Second Quarter......................................... 20.50 17.00
Third Quarter.......................................... 18.50 14.06
Fourth Quarter ........................................ 15.88 14.50

The Company has declared per share cash dividends with respect to its Common
Stock as follows:

1997
First Quarter.......................................... $0.010
Second Quarter......................................... 0.010
Third Quarter.......................................... 0.010
Fourth Quarter......................................... 0.025
1998
First Quarter.......................................... $0.020
Second Quarter......................................... 0.020
Third Quarter.......................................... 0.030
Fourth Quarter ........................................ 0.075


Holders of Common Stock are entitled to receive such dividends as may
be declared by the Board of Directors from time to time and paid out of funds
legally available therefor. Because the Company's consolidated net income
consists largely of net income of the Banks, the Company's ability to pay
dividends depends, in part, upon its receipt of dividends from the Banks. The
Banks' ability to pay dividends is regulated by banking statutes. See
"Supervision and RegulationCDividend 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. See "Management's Discussion and Analysis of Financial
Condition and Results of OperationsCLiquidity." 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.

17
20

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

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





YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------ ------------- ------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:

Total interest income......................... $74,827 $67,326 $57,298 $47,603 $36,406
Total interest expense........................ 41,014 35,311 28,918 22,619 14,557
------ ------ ------ ------ ------
Net interest income........................... 33,813 32,015 28,380 24,984 21,849
Provision for loan losses..................... 1,326 2,454 1,718 1,542 1,966
Other income (loss)........................... 6,787 5,563 4,410 3,522 (196)
Other expenses................................ 22,895 21,076 19,167 17,781 17,276
------ ------ ------ ------ ------
Income before income tax expense.............. 16,379 14,048 11,905 9,183 2,411
Income tax expense............................ 5,974 5,537 4,597 3,151 509
------ ------ ------ ------- ------
Net income.................................... $10,405 $ 8,511 $ 7,308 $ 6,032 $ 1,902
====== ====== ====== ======= ======
PER SHARE DATA: (1)
Net income.................................... $ 0.94 $ 0.85 $0.73 $0.60 $0.19
Cash dividends declared....................... 0.145 0.055 0.055 0.055 0.055
Book value at end of period................... 6.88 5.29 4.29 3.83 2.55
Tangible book value at end of period.......... 6.65 5.05 4.03 3.55 2.26

SELECTED FINANCIAL RATIOS:
Return on average assets...................... 1.04% 1.01% 1.01% 1.02% 0.38%
Return on average equity...................... 14.60 18.36 19.36 18.65 6.24
Dividend payout ratio......................... 15.72 6.47 7.53 9.70 28.91
Average equity to average assets.............. 7.11 5.51 5.20 5.49 6.05
Net interest margin (tax equivalent).......... 3.61 4.11 4.27 4.67 4.83
Allowance for loan losses to total loans at
the end of period.......................... 1.26 1.26 1.27 1.28 1.31
Nonperforming loans to total loans at the
end of period (2).......................... 0.90 0.66 1.03 0.60 1.08
Net loans charged off to average total loans. 0.18 0.36 0.26 0.28 0.46
Tier 1 risk-based capital..................... 13.47 9.60 9.57 7.64 9.27
Total risk-based capital...................... 14.64 10.78 10.76 8.66 10.44




DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------ -----
BALANCE SHEET DATA:
Total assets.................................. $ 1,071,314 $908,642 $786,070 $660,315 $533,157
Total earning assets.......................... 1,014,691 855,675 737,338 611,597 480,171
Average assets (3)........................... 1,002,848 841,707 725,420 589,102 503,834
Total loans................................... 521,880 488,099 420,655 359,639 304,242
Allowance for loan losses..................... 6,576 6,143 5,342 4,603 3,979
Total deposits................................ 869,152 794,362 701,205 590,671 482,892
Borrowings(4)................................. 107,800 42,575 27,495 16,077 13,490
Shareholders' equity.......................... 77,629 52,960 42,962 38,387 26,605
Tangible book value........................... 77,629 50,536 40,344 35,554 23,557



- -------------------
(1) All per share amounts have been adjusted to reflect two-for-one stock splits
effective on December 17, 1997 and in April 1996.

(2) Includes total nonaccrual, impaired and all other loans 90 days past due.

(3) Average for the year ended.

(4) Borrowings do not include short term Federal funds purchased or securities
sold under agreements to repurchase.






18

21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION

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
Results of Operations and Financial Condition 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 elsewhere in this report.

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 investment portfolios and its cost of funds, which
consists of interest paid on deposits and borrowings. The provision for loan
losses reflects the cost of credit risk in the Company's loan portfolio. Other
income consists of service charges on deposit accounts, securities gains, gains
on sale of loans and fees and commissions. Other expenses include salaries and
employee benefits, as well as occupancy and equipment expenses, and other
noninterest expenses.

Net interest income is dependent on the amounts and yields of
interest-earning assets as compared to the amounts of and rates on
interest-bearing liabilities. Net interest income is sensitive to changes in
market rates of interest and the Company's asset/liability management procedures
in coping with such changes. The provision for loan losses is dependent upon
management's assessment of the collectibility of the loan portfolio under
current economic conditions. Other expenses are heavily 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.

CONSOLIDATED RESULTS OF OPERATIONS

Total assets increased $162.7 million or 17.9% to $1.07 billion as of
December 31, 1998 from $908.6 million as of December 31, 1997. Net income
increased $1.9 million or 22.3% to $10.4 million for the year ended December 31,
1998 compared to $8.5 million for the year ended December 31, 1997. The return
on average assets was 1.04% in 1998 compared to 1.01% in 1997. The return on
average equity decreased to 14.60% in 1998 from 18.36% in 1997.

Total assets increased $122.6 million or 15.6% to $908.6 million as of
December 31, 1997 from $786.1 million as of December 31, 1996. Net income
increased $1.2 million or 16.5% to $8.5 million for the year ended December 31,
1997 compared to $7.3 million for the year ended December 31, 1996. The return
on average assets was 1.01% with a return on average equity of 19.36% for 1996.

1998 COMPARED TO 1997

Net Interest Income. Net interest income on a tax-equivalent basis
increased $1.9 million or 5.8% to $34.5 million in 1998 from $32.6 million in
1997. Interest income on total earning assets increased $7.6 million in 1998
from 1997. Interest income on loans increased $3.7 million in 1998 from 1997 due
to a $47.8 million increase in average loans outstanding, offsetting a decrease
in average loan rates from 9.56% to 9.39%. Interest expense on interest-bearing
liabilities increased $5.7 million in 1998 from 1997, as a result of a $3.4
million increase in interest expense on deposits and a $2.3 million increase in
interest expense on other borrowings. The increase in interest expense was due
primarily to a combination of a $71.3 million increase in average deposits and a
decrease in the average rate paid on deposits to 4.91% from 4.92%. The increase
in interest expense on other borrowings was due primarily to a $57.6 million
increase in average FHLB advances. The increase was offset, in part, by a $9.4
million decrease in average notes under existing lines of credit, and a decrease
in overall interest rates on borrowings from 6.24% in 1997 to 5.46% in 1998. The
net

19
22
interest margin on a tax equivalent basis decreased to 3.61% in 1998 from 4.11%
for 1997. The primary reason for the decrease in net interest margin was the
decrease in average yields on securities from 7.23% in 1997 to 6.24% in 1998.

Provision for Loan Losses. The provision for loan losses decreased $1.2
million or 46.0% to $1.3 million in 1998 from $2.5 in 1997. The decrease in the
provision for loan losses was due to a general improvement in the credit quality
of the loan portfolio in 1998 compared to 1997. As of December 31, 1998, the
allowance for loan losses totaled $6.6 million, or 1.26% of total loans, and was
equal to 139% of nonperforming loans. The amounts of the provision and allowance
for loan losses are influenced by current economic conditions, actual loss
experience, industry trends and management's assessment of current collection
risks within its loan portfolio.

Other Income. The Company's total other income increased $1.2 million
or 22.0% to $6.8 million in 1998 from $5.6 million in 1997. Other income as a
percentage of average assets was 0.68% for the year ended 1998 compared to 0.66%
for the year ended 1997. The $1.2 million increase in total other income in 1998
from 1997 was primarily due to a $269,000 increase in service charges on deposit
accounts resulting from increased volume and pricing, a $247,000 increase in
gains from all securities transactions, a $494,000 increase in mortgage
origination fees, and a $96,000 increase in trust service fees.

Other Expenses. The Company's total other expenses increased $1.8
million or 8.6% to $22.9 million in 1998 from $21.1 million in 1997. Other
expenses as a percentage of average assets were 2.28% for the year ended 1998
compared to 2.50% for the year ended 1997. Net overhead expenses were 1.61% and
1.84% as a percentage of average assets in 1998 and 1997, respectively. The
increase in total other expenses in 1998 was primarily due to the following
factors. Salaries increased $1.1 million in 1998 compared to 1997 because of
additional staffing and commissions at Midwest One Mortgage Services, Inc. due
to an increase in volume, additional staffing to support a new Midwest Bank of
McHenry County banking center, growth in existing banking centers, and annual
merit increases. Occupancy expenses increased $473,000 due to the construction
of the new banking center for Midwest Bank of McHenry County, renovation of the
flagship banking center of Midwest Bank and Trust Company, and hardware and
software systems upgrades at the Banks and First Midwest Data Corp. Other
expenses rose $258,000 as a result of increases in legal costs and other real
estate costs related to loan collection and workout activities, increased
marketing expenses, acquisition costs related to the purchase of the Porter
Insurance Agency, Inc. and general increases in other categories.

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 $6.0
in 1998 compared to $5.5 million in 1997 due to changes in income.

1997 COMPARED TO 1996

Net Interest Income. Net interest income on a tax-equivalent basis
increased $3.7 million or 12.8% to $32.6 million in 1997 from $28.9 million in
1996. Interest income on total earning assets increased $10.1 million in 1997
from 1996. Interest income on loans increased $7.4 million in 1997 from 1996 due
to a $79.3 million increase in average loans outstanding, offsetting a slight
decrease in average loan rates from 9.60% to 9.56%. Interest expense on
interest-bearing liabilities increased $6.4 million in 1997 from 1996, as a
result of a $5.8 million increase in interest expense on deposits and a $572,000
increase in interest expense on other borrowings. The increase in interest
expense was due primarily to a combination of a $92.7 million increase in
average deposits and an increase in the average rate paid on deposits to 4.92%
from 4.70%. The increase in interest expense on other borrowings was due
primarily to a $15.4 million increase in average FHLB advances and a $1.1
million increase in average loans under existing lines of credit. The increase
was offset, in part, by a $7.1 million decrease in the average amount of
Federal funds and repurchase agreements, and a decrease in overall interest
rates on borrowings from 6.29% in 1996 to 6.24% in 1997. The net interest
margin on a tax equivalent basis decreased to 4.11% in 1997 from 4.27% for
1996.

Provision for Loan Losses. The provision for loan losses increased
$736,000 or 42.8% to $2.5 million in 1997 from $1.7 million in 1996. The
increase in the provision for loan losses was due to the overall growth in
loans. As of December 31, 1997, the allowance for loan losses totaled $6.1
million, or 1.26% of total loans, and was equal to 191% of nonperforming loans.
The amounts of the provision and allowance for loan losses are influenced by
current economic conditions, actual loss experience, industry trends and
management's assessment of current collection risks within its loan portfolio.

20
23

Other Income. The Company's total other income increased $1.2 million
or 26.1% to $5.6 million in 1997 from $4.4 million in 1996. Other income as a
percentage of average assets was 0.66% for the year ended 1997 compared to 0.61%
for the year ended 1996. The $1.2 million increase in total other income in 1997
from 1996 was primarily due to a $342,000 increase in service charges on deposit
accounts due to increased volume and pricing, a $533,000 increase in gains from
securities transactions, a $201,000 increase in mortgage origination fees, and a
$54,000 increase in trust service fees.

Other Expenses. The Company's total other expenses increased $2.0
million or 10.0% to $21.1 million in 1997 from $19.1 million in 1996. Other
expenses as a percentage of average assets were 2.50% for the year ended 1997
compared to 2.64% for the year ended 1996. Net overhead expenses were 1.84% and
2.03% as a percentage of average assets in 1997 and 1996, respectively. The
increase in total other expenses in 1997 was primarily due to the following
factors. Salaries increased $1.0 million in 1997 compared to 1996 due to
additional staffing to support new banking centers in Northwest Chicago, Downers
Grove and Galesburg. Other expenses also rose $876,000 as a result of increases
in legal costs related to loan collection and workout activities, occupancy and
equipment expense due to depreciation for new banking centers, telephone costs
to support new banking centers, employee training expenses and general increases
in other categories.

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 $5.5
million in 1997 compared to $4.6 million in 1996 due to changes in income.



21

24


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 34% tax rate.





FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------

AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:

Federal funds sold ..................... $ 8,964 $ 481 5.37% $ 8,014 $ 444 5.54% $ 3,242 $ 177 5.46%
Securities:
Taxable .............................. 410,459 25,267 6.16 300,684 21,792 7.25 271,878 19,575 7.2
Exempt from federal income
taxes(1) .. ......................... 27,498 2,050 7.46 22,496 1,579 7.02 20,078 1,423 7.09
-------- -------- -------- ------- -------- --------
Total securities ................... 437,957 27,317 6.24 323,180 23,371 7.23 291,956 20,998 7.19
-------- -------- -------- ------- -------- --------
Loans:
Commercial loans ..................... 143,911 13,216 9.18 129,678 12,125 9.35 109,907 10,331 9.4
Commercial real estate loans ......... 221,550 21,419 9.67 205,852 20,368 9.89 152,714 15,183 9.94
Agricultural loans ................... 30,023 2,652 8.83 19,292 1,739 9.01 18,695 1,712 9.16
Consumer real estate loans ........... 96,510 8,269 8.57 86,206 7,732 8.97 78,602 7,189 9.15
Consumer installment loans ........... 16,471 2,170 13.17 19,504 2,084 10.68 21,345 2,192 10.27
-------- -------- -------- ------- -------- --------
Total loans ........................ 508,465 47,726 9.39 460,532 44,048 9.56 381,263 36,607 9.6
-------- -------- -------- ------- -------- --------
Total interest-earning assets .... $955,386 $ 75,524 7.91 $791,726 $67,863 8.57 $676,461 $ 57,782 8.54
======== ======== ======== ======= ======== ========

INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing demand deposits ..... 84,591 2,614 3.09 $ 70,047 $ 2,108 3.01% $ 63,169 $ 1,720 2.72%
Money-market demand accounts/savings
accounts............................. 196,417 7,486 3.81 199,364 7,444 3.73 183,005 6,910 3.78
Time deposits of less
than $100,000 ....................... 370,718 21,418 5.78 315,763 18,589 5.89 269,538 15,162 5.63
Time deposits of $100,000 or more .... 56,614 3,132 5.53 47,714 2,857 5.99 35,454 2,009 5.67
Public funds ......................... 25,488 1,388 5.45 29,667 1,619 5.46 18,663 995 5.33
-------- -------- -------- ------- -------- --------
Total interest-bearing deposits .... 733,828 36,038 4.91 662,555 32,617 4.92 569,829 26,796 4.7
-------- -------- -------- ------- -------- --------
Borrowings:
Federal funds and repurchase
agreements .......................... 7,522 416 5.53 7,821 443 5.66 14,912 820 5.5
FHLB advances ........................ 76,424 4,031 5.27 18,836 1,085 5.76 3,378 211 6.25
Notes and mortgages .................. 7,108 529 7.44 16,514 1,166 7.06 15,439 1,091 7.07
-------- -------- -------- ------- -------- --------
Total borrowings ................... 91,054 4,976 5.46 43,171 2,694 6.24 33,729 2,122 6.29
-------- -------- -------- ------- -------- --------
Total interest-bearing
liabilities ..................... $824,882 $ 41,014 4.97 $705,726 $35,311 5.00 $603,558 $ 28,918 4.79
======== ======== ======= ======== ========
Net interest income (tax equivalent) ... $ 34,510 2.94 $32,552 3.57 $ 28,864 3.75
======== ======= ========
Net interest margin .................... 3.61 4.11 4.27



- ---------------------
(1) Adjusted for 34% tax rate.

CHANGES IN INTEREST INCOME AND EXPENSE

The changes in net interest income from period to period are reflective
of changes in the rate environment, changes in the composition of assets and
liabilities as to type and maturity (and the inherent rate differences related
thereto), and volume changes. Later sections of this discussion and analysis
address the changes in maturity composition


22

25

of loans and investments, and in the asset and liability repricing gaps
associated with interest rate risk, all of which contribute to changes in net
interest margin.

The following table sets forth an analysis of volume and rate changes
in interest income and interest expense of the Company's average
interest-earning assets and average interest-bearing liabilities for the
indicated periods on a tax-equivalent basis assuming a 34% tax rate. The table
distinguishes between the changes related to average outstanding balances
(changes in volume holding the initial interest rate constant) and the changes
related to average interest rates (changes in average rate holding the initial
outstanding balance constant). The change in interest due to both volume and
rate has been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each.




FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996
------------------------------------------------------------------
CHANGE DUE TO CHANGE DUE TO
NET VOLUME RATE NET VOLUME RATE
--------- ---------- --------- --------- -------- ---------
(IN THOUSANDS)
INTEREST-EARNING ASSETS:

Federal funds sold............................. $ 37 $ 51 $ (14) $ 267 $ 264 $ 3
Securities taxable............................. 3,475 7,108 (3,633) 2,217 1,905 312
Securities exempt from federal income taxes.... 471 368 103 156 170 (14)
Commercial loans............................... 1,091 1,310 (219) 1,794 1,849 (55)
Commercial real estate loans................... 1,051 1,526 (475) 5,185 5,258 (73)
Agricultural loans............................. 913 949 (36) 27 54 (27)
Consumer real estate loans..................... 537 894 (357) 543 684 (141)
Consumer installment loans..................... 86 (354) 440 (108) (194) 86
------ ------- ------- ------- ------ -----
Total interest-earning assets................. $7,661 $11,852 $(4,191) $10,081 $9,990 $ 91
====== ======= ======= ======= ====== =====
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits............... $ 506 $ 448 $ 58 $ 388 $ 197 $ 191
Money market demand accounts/savings accounts.. 42 (111) 153 534 612 (78)
Time deposits of less than $100,000............ 2,829 3,181 (352) 3,427 2,695 732
Time deposits of $100,000 or more.............. 275 504 (229) 848 729 119
Public funds................................... (231) (228) (3) 624 600 24
Federal funds and repurchase agreements........ (27) (17) (10) (377) (401) 24
FHLB advances.................................. 2,946 3,045 (99) 874 892 (18)
Notes and mortgages............................ (637) (697) 60 75 76 (1)
------ -------- ------- ------- ------ -----
Total interest-bearing liabilities............ $5,703 $ 6,125 $ (422) $ 6,393 $5,400 $ 993
====== ======= ======= ======= ====== =====

Net interest................................... $1,958 $ 5,727 $(3,769) $ 3,688 $4,590 $(902)
====== ======= ======= ======= ====== =====



23
26


FINANCIAL CONDITION

Loans

The Company's loan portfolio largely reflects the profile of the
communities in which it operates. The following table sets forth the composition
of the Company's loan portfolio as of the indicated dates.



DECEMBER 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---------- ----------- ----------- ----------- --------

(IN THOUSANDS)
Commercial............................................ $148,081 $140,815 $118,475 $107,590 $ 84,421
Commercial real estate................................ 229,489 212,184 180,519 144,346 127,117
Agricultural.......................................... 33,231 24,065 20,079 15,875 15,404
Consumer real estate.................................. 95,604 93,338 81,007 73,336 61,013
Consumer installment.................................. 16,128 18,811 21,542 20,051 17,441
---------- ---------- ---------- ---------- ----------
Total loans, gross................................... 522,533 489,213 421,622 361,198 305,396
Unearned discount..................................... (653) (1,114) (967) (1,559) (1,154)
---------- ---------- ---------- ---------- ----------
Total loans.......................................... 521,880 488,099 420,655 359,639 304,242
Allowance for loan losses............................. (6,576) (6,143) (5,342) (4,603) (3,979)
---------- ---------- ---------- ---------- ----------
Net loans............................................ $515,304 $481,956 $415,313 $355,036 $300,263
========== ========== ========== ========= =========
Loans held for sale:
Consumer real estate................................. $ 3,829 $ 6,627 $ 1,555 $ 1,137 $ 290



Total loans increased $33.8 million to $521.9 million as of December
31, 1998 from $488.1 million as of December 31, 1997. Total loans increased
$67.4 million to $488.1 million as of December 31, 1997 from $420.7 million as
of December 31, 1996. The increase in total loans in each year was principally
due to increased commercial, commercial real estate, agricultural and consumer
real estate loans.

Commercial loans increased $7.3 million to $148.1 million as of
December 31, 1998 from $140.8 million as of December 31, 1997. Commercial loans
increased $22.3 million to $140.8 million as of December 31, 1997 from $118.5
million as of December 31, 1996. The increases during these periods reflect
increased demand due to a strong economy, and increased working capital and
equipment requirements both by existing borrowers and new customer
relationships.

Commercial real estate loans increased $17.3 million to $229.5 million
as of December 31, 1998 from $212.2 million as of December 31, 1997. Commercial
real estate loans increased $31.7 million as of December 31, 1997 from $180.5
million as of December 31, 1996. These increases in commercial real estate loans
reflect the strong economy, continued growth in the commercial real estate
market, increased commitments with existing borrowers and market penetration and
market share growth of new banking centers.

Agricultural loans increased $9.2 million to $33.2 million as of
December 31, 1998 from $24.1 million as of December 31, 1997. Agricultural loans
increased $4.0 million as of December 31, 1997 from $20.1 million as of December
31, 1996. These increases in agricultural loans reflect increased market share
in West Central Illinois.

Consumer real estate loans increased $2.3 million to $95.6 million as
of December 31, 1998 from $93.3 million as of December 31, 1997. Consumer real
estate loans increased $12.3 million to $93.3 million as of December 31, 1997
from $81.0 million as of December 31, 1996. The Company originates medium-term
fixed-rate and adjustable rate residential loans for its own portfolio. Most
long-term, fixed-rate residential loan requests are referred to Midwest One
Mortgage Services, Inc. for sale into the secondary market with servicing rights
released. The Banks hold a small percentage of long-term, fixed-rate consumer
real estate loans. The increase in consumer real estate loans has been limited
since 1996 due to secondary market activities with Midwest One Mortgage
Services, Inc. and represents a decreasing percentage of total loans. Consumer
real estate loans were 18.3%, 19.1%, and 19.2% of total loans as of December 31,
1998, 1997 and 1996, respectively.


24

27


Consumer installment loans decreased $2.7 million to $16.1 million as
of December 31, 1991 from $18.8 million as of December 31, 1997. Consumer
installment loans decreased $2.7 million to $18.8 million as of December 31,
1997 from $21.5 million as of December 31, 1996. The decreases in 1997 and 1998
were due to the runoff of other installment loans, including indirect auto loans
by Midwest Bank of Western Illinois. Management discontinued most indirect auto
loan programs beginning in 1993, and the Company presently only considers auto
loans originated by a dealer if the borrower is a customer of one of the Banks.
As of December 31, 1998 and 1997, the Company's consumer loan portfolio included
$2.5 million and $4.4 million, respectively, of indirect auto loans.

Although the risk of nonpayment for any reason exists with respect to
all loans, certain other more specific risks are associated with each type of
loan. The primary risks associated with commercial loans are quality of the
borrower's management and the impact of local economic factors. Risks associated
with real estate loans include concentrations of loans in a loan type such as
commercial or residential and fluctuating land values. Consumer loans also have
risks associated with concentrations of loans in a single type of loan. Consumer
loans additionally face the risk of a borrower's unemployment as a result of
deteriorating economic conditions.

The Company attempts to balance the types of loans in its portfolio
with the objective of reducing risk. While the Company has a sizable portion of
its loan portfolio secured by real estate in one form or another, a significant
portion of those loans have fixed or adjustable or floating interest rates. The
Company believes that most credits should have both a primary and a secondary
source of repayment, and that the primary source should generally be supported
by operating cash flows, while the secondary source should generally be
disposition of collateral. The Company engages in very little unsecured lending,
and generally requires personal guarantees of principals for business
obligations. The Company practices a system of concurrence in the approval of
commercial credit whereby the documented concurrence of an officer's credit
committee (or approval by the board or a board committee, where applicable) is
obtained in addition to that of the recommending officer. This system is
intended to assure that commercial credit is subjected to an independent
objective review on at least two different levels.

Loan Maturities

The following table sets forth the remaining maturities, based upon
contractual dates, for selected loan categories as of December 31, 1998.





ONE YEAR 1-5 YEARS OVER 5 YEARS
------------ ---------------
OR LESS FIXED VARIABLE FIXED VARIABLE TOTAL
--------- --------- --------- --------- -------- ----------
(IN THOUSANDS)


Commercial........................... $96,570 $20,945 $25,998 $2,272 $2,296 $148,081
Commercial real estate............... 87,974 86,719 37,654 5,049 12,093 229,489
Agricultural......................... 13,057 2,833 2,084 5,611 9,646 33,231
Consumer real estate................. 19,522 31,024 14,716 21,865 8,477 95,604
Consumer installment................. 3,519 12,451 - 158 - 16,128
--------- --------- --------- --------- --------- ---------
Total loans, gross.................. 220,642 153,972 80,452 34,955 32,512 522,533
Unearned discount.................... (653) - - - - (653)
--------- --------- --------- --------- --------- ---------
Total loans......................... $219,989 $153,972 $80,452 $34,955 $32,512 $521,880
========= ========= ========= ========= ========= =========



25
28
Nonperforming Loans

The Company discontinues the accrual of interest income on all loan
types when, in the opinion of management, there is reasonable doubt as to the
timely collectibility of interest or principal. On a case-by-case basis, the
Company discontinues the accrual of interest on a loan once it becomes 90 days
past due. All accrued and uncollected interest is charged against income at the
time a loan is placed on nonaccrual status. Nonaccrual loans are returned to an
accrual status when, in the opinion of management, the financial position of the
borrower indicates that there is no longer any reasonable doubt as to the timely
payment of principal and interest. There are no potential problem loans as to
which management has serious doubts as to collectibility that are not included
in the following table.

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





DECEMBER 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ---------- ----------- --------
(DOLLARS IN THOUSANDS)


Nonaccrual and impaired loans not accruing............. $ 2,190 $ 1,400 $ 2,375 $ 1,138 $ 2,441
Impaired and other loans 90 days past due and accruing. 2,528 1,823 1,972 1,015 835
-------- -------- -------- -------- -------
Total nonperforming loans............................. $ 4,718 3,223 4,347 2,153 3,276
Other real estate...................................... 1,245 789 925 937 807
-------- -------- -------- -------- -------
Total nonperforming assets............................ $ 5,963 $ 4,012 $ 5,272 $ 3,090 $ 4,083
======== ======== ======== ======== =======
Total nonperforming loans to total loans............... 0.90% 0.66% 1.03% 0.60% 1.08%

Total nonperforming assets to total loans and other
real estate........................................... 1.14 0.82 1.25 0.86 1.34

Total nonperforming assets to total assets............. 0.56 0.44 0.67 0.47 0.77



For 1998, gross interest income that would have been recorded if the
nonaccrual loans had been current and outstanding throughout the period was
approximately $108,000. During 1998, the Company recognized interest income on
such nonaccrual loans of $148,000.

Nonperforming assets were 0.56% of total assets as of December 31, 1998
compared to 0.44% of total assets as of December 31, 1997. The increase in
nonperforming loans in 1998 was primarily due to one transaction, which was
settled without a loss in January 1999. Adjusting for this transaction, 1998
nonperforming assets would have been $4.9 million, or 0.46% of total assets.

Analysis of Allowance for Loan Losses

An allowance for loan losses has been established to provide for those
loans that may not be repaid in their entirety. The allowance for loan losses is
maintained at a level considered by management to be adequate to provide for
potential loan losses. The allowance is increased by provisions charged to
earnings and is reduced by charge-offs, net of recoveries. The provision for
loan losses is based on past loan loss experience and management's evaluation of
the loan portfolio under current economic conditions. Loans are charged to the
allowance for loan losses when, and to the extent, they are deemed by management
to be uncollectible. The allowance for loan losses is composed of allocations
for specific loans and an unallocated portion for all other loans.



26


29


The following table sets forth loans charged off and recovered by type
of loan and an analysis of the allowance for loan losses for the indicated




periods.

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ---------- ----------- --------
(DOLLARS IN THOUSANDS)


Average total loans................................. $508,465 $460,532 $381,263 $329,032 $284,658
======== ======== ======== ======== ========
Total loans at end of period........................ $521,880 $488,099 $420,655 $359,639 $304,242
======== ======== ======== ======== ========
Total nonperforming and impaired loans.............. $ 4,718 $ 3,223 $ 4,347 $ 2,153 $ 3,276
======== ======== ======== ======== ========
Allowance at beginning of year...................... $ 6,143 $ 5,342 $ 4,603 $ 3,979 $ 3,309
Charge-offs:
Commercial loans................................... 883 1,547 950 633 1,235
Consumer real estate loans......................... 49 53 19 15 71
Commercial real estate............................. 126 51 169 271 40
Agricultural loans................................. - - - 11 -
Consumer installment loans......................... 110 207 160 145 215
-------- -------- -------- -------- --------
Total charge-offs............................... 1,168 1,858 1,298 1,075 1,561
Recoveries:
Commercial loans................................... 197 100 95 64 188
Consumer real estate loans......................... 1 2 33 31 6
Commercial real estate loans....................... 6 10 107 8 20
Agricultural loans ................................ 20 30 32 11 C
Consumer installment loans......................... 51 63 52 43 51
-------- -------- -------- -------- --------
Total recoveries................................ 275 205 319 157 265
-------- -------- -------- -------- --------
Net charge-offs .................................... 893 1,653 979 918 1,296
Provision for loan losses........................... 1,326 2,454 1,718 1,542 1,966
-------- -------- -------- -------- --------

Allowance at ending of the period................... $ 6,576 $ 6,143 $ 5,342 $ 4,603 $ 3,979
======== ======== ======== ======== ========
Net charge-off to average total loans............... 0.18% 0.36% 0.26% 0.28% 0.46%
Allowance to total loans at end of period........... 1.26 1.26 1.27 1.28 1.31
Allowance to nonperforming loans.................... 1.39x 1.91x 1.23x 2.14x 1.21x



On a quarterly basis, management of each of the Banks, and the board of
directors of the Company on a consolidated basis, meet to review the adequacy of
the allowance for loan losses. The Company maintains an internal loan review
function, which reviews commercial and consumer credits with the individual loan
officers and assigns a risk rating grade. In the event loan review downgrades a
loan, it is included in the allowance analysis at the lower grade. The grading
system is in compliance with the regulatory classifications, and the allowance
allocated to the loans is based upon regulatory grading, except in instances
where there are known differences (i.e. collateral value is minimal, etc.). Once
the specific portion of the allowance is calculated, management then calculates
a percentage of each loan category based upon the past five years of loan loss
history. The unallocated portion of the allowance is determined based upon
current economic conditions, trends in the portfolio, including delinquencies
and impairments, as well as changes in the composition of the portfolio.

The allowance for loan losses was $6.6 million at December 31, 1998,
$6.1 million at December 31, 1997 and $5.3 million at December 31, 1996. Total
recoveries on loans previously charged off were $275,000 for the year ended
December 31, 1998, $205,000 for the year ended December 31, 1997 and $319,000
for the year ended December 31, 1996. These recoveries were due primarily to
payments from customers' bankruptcy proceedings or payment plans on charged off
loans, which were negotiated subsequently with customers.

Net charge-offs decreased $760,000 to $893,000 or 0.18% of average
loans in 1998 compared to $1.7 million or 0.36% of average loans in 1997. The
decrease in net charge-offs was due primarily to an improvement in overall
credit quality. Net charge-offs increased $674,000 to $1.7 million or 0.36% of
average loans in 1997 from $979,000 or 0.26% of average loans in 1996.
Management considers the allowance for loan losses to be adequate to cover
potential losses in the loan portfolio as of December 31, 1998. See
"-Nonperforming Loans."



27


30


During 1998, there were no significant changes in the composition of
the loan portfolio. The overall growth in the loan portfolio was consistent in
all categories with prior periods, except for consumer installment loans. The
methodology used to determine the adequacy of the allowance for loan losses is
consistent with prior years and there were no reallocations.

The provisions for loan losses decreased $1.2 million or 46.0% to $1.3
million for the year ended December 31, 1998. The decrease in the provision for
loan losses was due to a reduction in net charge-offs in 1998 compared to 1997
and management expectations that the overall level of nonperforming loans will
improve in the future. While the provision for loan losses decreased in 1998,
the allowance for loan losses as a percentage of total loans remains consistent
with 1997.

Allocation of Allowance for Loan Loss

The following table sets forth the Company's allocation of the
allowance for loan losses by types of loans as of the indicated dates.




DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------------------------
LOAN LOAN LOAN LOAN LOAN
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO GROSS TO GROSS TO GROSS TO GROSS TO GROSS
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)

Allocated:

Commercial loans ........ $3,294 28.34% $2,972 28.78% $3,339 28.10% $2,896 29.79% $1,843 27.64%
Commercial real estate
loans................. 1,222 43.92 1,026 43.37 247 42.81 226 39.96 702 41.62
Agriculture loans........ 418 6.36 331 4.92 35 4.76 35 4.40 35 5.04
Consumer real estate
loans................. 177 18.30 56 19.08 67 19.21 55 20.30 110 19.98
Consumer installment
loans................. 169 3.08 223 3.85 319 5.12 241 5.55 294 5.72
Unallocated.............. 1,296 - 1,535 - 1,335 - 1,150 - 995 -
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses.......... $6,576 100.00% $6,143 100.00% $5,342 100.00% $4,603 100.00% $3,979 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======


A significant portion of the Company's allowance for loan losses has
been allocated to commercial and commercial real estate loans, which is
consistent with the Company's experience.

Securities

The Company manages its investment portfolio to provide a source of
both liquidity and earnings. Each of the Banks has its own asset/liability
committee which develops current investment policies based upon its operating
needs and market circumstances. The investment policy is reviewed by senior
financial management of the Company in terms of its objectives, investment
guidelines and consistency with overall Company performance and risk management
goals. Each of the Banks' investment policy is formally reviewed and approved
annually by its board of directors. The asset/liability committee of each Bank
are responsible for monthly reporting and monitoring compliance with the
investment policy. Monthly reports are provided to each Bank's board of
directors and the Board of Directors of the Company.

The investment portfolio represented approximately 45.0% and 40.1% of
the Company's assets as of December 31, 1998 and 1997, respectively. During the
past three years, the investment portfolio ranged between 30-50% of each of the
Bank's assets, depending upon liquidity requirements, deposit growth and loan
demand in each market.

The total fair value of the securities portfolio was $482.4 million as
of December 31, 1998 or 99.9% of stated book value. The fair value of the
securities portfolio was $364.6 million and $307.2 million as of December 31,
1997 and December 31, 1996 respectively.



28


31


The following tables set forth the composition of the Company's
investment portfolio by major category as of the indicated dates. The investment
securities portfolio as of December 31, 1998, 1997 and 1996 have been
categorized as either available-for-sale or held-to-maturity in accordance with
SFAS No. 115.



DECEMBER 31, 1998
----------------------------------------------------------------------------------
HELD-TO-MATURITY AVAILABLE FOR SALE TOTAL
--------------------- --------------------- ----------------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED % OF
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE PORTFOLIO
--------- ---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)


U.S. Treasury................... $ - $ - $ - $ - $ - $ - 0.00%
U.S. government agencies........ - - 2,000 1,870 2,000 1,870 0.41%
Obligations of state and 23,598 24,034 6,911 7,004 30,509 31,038 6.32%
political subdivisions.........
Mortgage-backed securities:
Pass-through securities........ - - 432,940 432,301 432,940 432,301 89.68%
Collateralized mortgage
obligations................. - - 5,811 5,785 5,811 5,785 1.20%
Federal Reserve stock and other
securities..................... - - 11,523 11,371 11,523 11,371 2.39%
------- ------- -------- -------- -------- -------- ------
Total.......................... $23,598 $24,034 $459,185 $458,331 $482,783 $482,365 100.00%
======= ======= ======== ======== ======== ======== ======



DECEMBER 31, 1997
----------------------------------------------------------------------------------
HELD-TO-MATURITY AVAILABLE FOR SALE TOTAL
--------------------- --------------------- ----------------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED % OF
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE PORTFOLIO
--------- ---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)


U.S. Treasury................... $ - $ - $ 1,499 $ 1,493 $ 1,499 $ 1,493 0.42%
U.S. government agencies........ - - 5,000 4,761 5,000 4,761 1.40
Obligations of state and
political subdivisions......... 16,233 16,480 7,555 7,596 23,788 24,076 6.64
Mortgage-backed securities:
Pass-through securities........ - - 313,152 314,580 313,152 313,580 87.41
Collateralized mortgage
obligations................. - - 7,558 7,379 7,558 7,379 2.11
Federal Reserve stock and other
securities..................... - - 7,245 7,306 7,245 7,306 2.02
------- ------- -------- -------- -------- -------- ------
Total........................... $16,233 $16,480 $342,009 $343,115 $358,242 $359,595 100.00%
======= ======= ======== ======== ======== ======== ======




DECEMBER 31, 1996
----------------------------------------------------------------------------------
HELD-TO-MATURITY AVAILABLE FOR SALE TOTAL
--------------------- --------------------- ----------------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED AMORTIZED ESTIMATED % OF
COST FAIR VALUE COST FAIR VALUE COST FAIR VALUE PORTFOLIO
--------- ---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)



U.S. Treasury.................... $ - $ - $ 3,516 $ 3,483 $ 3,516 $ 3,483 1.14%
U.S. government agencies......... - - 7,500 7,081 7,500 7,081 2.42
Obligations of state and
political subdivisions.......... 13,741 13,939 7,184 7,175 20,925 21,114 6.67
Mortgage-backed securities:
Pass-through securities......... - - 258,537 257,184 258,537 257,184 83.58
Collateralized mortgage
obligations.................. - - 13,036 12,586 13,036 12,586 4.21
Federal Reserve stock and other
securities...................... - - 5,803 5,790 5,803 5,790 1.88
------- ------- -------- -------- -------- -------- -------
Total............................ $13,741 $13,939 $295,576 $293,299 $309,317 $307,238 100.00%
======= ======= ======== ======== ======== ======== =======







29


32


As of December 31, 1998, the Company did not hold any off-balance sheet
derivative financial instruments such as futures, forwards, or swaps. The total
amount of option contracts outstanding at any one time during 1998 and 1997 did
not exceed $15 million, and represented less than 2.0% of total assets of the
Company.

As of December 31, 1998, the Company held no securities with a book
value exceeding 10% of stockholders' equity of a single issuer other than the
U.S. Treasury or other U.S. government agencies.

The Company's securities portfolio increased $117.6 million or 32.3% in
1998 compared to 1997. The growth in the investment securities portfolio was
$48.9 million and $61.4 million for 1997 and 1996, respectively. The growth was
attributed to the generation of new deposits and additional borrowings in excess
of the loan funding and operational requirements of the Banks.

Most of the investment securities are agency-guaranteed,
mortgage-backed securities. Mortgage-backed securities represented 89.7%, 87.4%
and 83.6% of the total investment securities as of December 31, 1998, 1997 and
1996, respectively. Based upon the Company's evaluation, mortgage-backed
securities are a superior investment vehicle for the Banks. Mortgage-backed
securities also offer the best combination of yield and liquidity within the
Company's planning periods. Mortgage-backed securities offer attractive yields,
provide monthly cash flows, serve as acceptable collateral and have most of the
liquidity characteristics of U.S. Treasury notes and bonds.

The Banks' investment strategy during the past two years has been
focused on seasoned and new production mortgage-backed securities of moderate
average lives (5-8 years) which have been purchased at a premium to par.
Historically, management believes these securities are reasonably predictable in
terms of price volatility, prepayment speeds and monthly cash flows. The sharp
decrease in long term investment yields, and as a consequence lower mortgage
rates, led to a significant increase in prepayment speeds in 1998. As a result,
management repositioned the investment portfolio to reduce the overall impact on
yields and improve longer-term profitability. The investment portfolio is still
composed primarily of mortgage-backed securities, but a significant portion of
mortgage-backed securities held in 1997 were replaced in 1998.

Collateralized mortgage obligations have been a decreasing percentage
of the total investment securities portfolio during the past three years.
Collateralized mortgage-backed securities were $5.8 million or 1.2% of the total
investment securities portfolio as of December 31, 1998. Collateralized mortgage
obligations were $7.6 million and $13.0 million as of December 31, 1997 and
1996, respectively, and represented 2.1% and 4.2% of the total investment
portfolio as of December 31, 1997 and 1996, respectively. Management's decision
to reduce collateralized mortgage-backed obligations was consistent with overall
regulatory concerns regarding this type of investment for community banks.

All fixed and adjustable rate mortgage pools and collateralized
mortgage obligations contain a certain amount of risk related to the uncertainty
of prepayments of the underlying mortgages. Interest rate changes have a direct
impact upon prepayment rates. The Company uses computer simulation models to
test the average life and yield volatility of adjustable rate mortgage pools and
collateralized mortgage obligations under various interest rate assumptions to
monitor volatility. Stress tests are performed quarterly.



30


33


Investment Maturities and Yields

The following tables set forth the contractual or estimated maturities
of investment securities as of December 31, 1998, and the weighted average
yields of such securities on a tax-equivalent basis assuming a 34% tax rate. The
table assumes estimated fair values:




MATURING
-----------------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS TOTAL
--------------- ----------------- ---------------- --------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)

Available-for-Sale Securities:
U.S. Treasury................... $ - $ - $ - $ - $ -
U.S. government agencies........ - 1,870 2.72% - - 1,870 2.72%
Obligations of state and
political subdivisions......... 1,009 5.23% 5,327 4.49% 668 4.56% - 7,004 4.60%
Mortgage-backed securities:
Pass-through securities........ 8 11.97% 280,598 7.46% 121,825 7.48% 29,870 7.50% 432,301 7.47%
Collateralized mortgage
obligations................. - 5,785 6.74% - 5,785 6.74%
Federal Reserve stock and other
securities..................... - - - 11,371 5.34% 11,371 5.34%
------ -------- -------- ------- --------
Total........................... $1,017 5.28% $293,580 7.36% $122,493 7.46% $41,241 6.90% $458,331 7.34%
====== ===== ======== ==== ======== ==== ======= ==== ======== ====


MATURING
-----------------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS TOTAL
--------------- ----------------- ---------------- --------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)

Held-to-Maturity Securities:
Obligations of state and
political subdivisions ........ $4,275 5.74% $ 15,415 5.01% $ 4,344 4.68% $ 0 0% $ 24,034 5.08%
====== ===== ======== ==== ======== ==== ======= ==== ======== ====





Deposits

The Company has experienced significant growth in total deposits in
recent years. Total deposits were $869.2 million at December 31, 1998, $794.4
million at December 31, 1997 and $701.2 million at December 31, 1996. Average
total deposits were $834.6 million for the year ended December 31, 1998, $753.0
million for the year ended December 31, 1997 and $653.6 million for the year
ended December 31, 1996. These increases in deposits are the result of increased
marketing activity in the last three years in connection with the opening of new
banking centers in Algonquin, Northwest Chicago, Downers Grove, Galesburg and
Island Lake, as well as normal growth in the Banks' core market areas.


31



34


The following table sets forth the average amount of and the average
rate paid on deposits by category for the indicated periods.





FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT
AVERAGE OF AVERAGE OF AVERAGE OF
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
------- -------- ---- ------- -------- ---- ------- -------- ----

Noninterest-bearing demand
deposits....................... $100,757 12.07% - $ 90,455 12.01% - $ 83,74 3 12.81% -
Interest-bearing demand deposits. 84,591 10.14 3.09% 70,047 9.30 3.01% 63,169 9.67 2.72%
Savings and money market accounts. 196,417 23.54 3.81 199,364 26.48 3.73 183,005 28.00 3.78
Time Deposits:
Certificates of deposit, under
$100,000(1)................. 370,718 44.42 5.78 315,763 41.93 5.89 269,538 41.24 5.63
Certificates of deposit, over
$100,000(1)................. 56,614 6.78 5.53 47,714 6.34 5.99 35,454 5.4 2 5.67
Public funds................... 25,488 3.05 5.45 29,667 3.94 5.46 18,663 2.86 5.33
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total time deposits......... 452,820 54.26 5.72 393,144 52.21 5.87 323,655 49.52 5.61
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total deposits............ $834,585 100.00% 4.32% $753,010 100.00% 4.33% $653,572 100.00% 4.10%
======== ====== ==== ======== ====== ==== ======== ====== ====


- ------------------------------

(1) Certificates of deposit exclusive of public funds.

The following table summarizes the maturity distribution of
certificates of deposit in amounts of $100,000 or more as of December 31, 1998.
These deposits have been made by individuals, businesses and public and other
not-for-profit entities, most of which are located within the Company's market
area.




DECEMBER 31, 1998
(IN THOUSANDS)

Three months or less................................ $44,356
Over three months through twelve months............. 47,347
Over one year through three years................... 4,204
Over three years.................................... 799
-------
Total............................................ $96,706
=======


Borrowings

The following table summarizes the Company's borrowings by short- and
long-term debt.




YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)

Short-term borrowings:
Federal funds purchased and securities sold under $10,469 $12,992 $9,991
agreements to repurchase..........................
FHLB advances........................................ 2,000 5,000 6,300
Lines of credit...................................... 6,500 16,350 15,895
Total short-term borrowings....................... 18,969 34,342 32,186
Long-term borrowings:
Mortgage payable and other........................... 300 225 300
FHLB advances........................................ 99,000 21,000 5,000
Total long-term borrowings........................ 99,300 21,225 5,300
-------- ------- -------
Total................................................. $118,269 $55,567 $37,486
======== ======= =======






32


35
The Company uses short-term borrowings on a limited basis. These
borrowings include overnight funds purchased, securities sold under agreements
to repurchase, FHLB advances and commercial bank lines of credit. The following
table sets forth categories of short-term borrowings of the Company as of the
indicated dates or for the indicated periods.




YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------- ------- -------
(DOLLARS IN THOUSANDS)


Funds Purchased and Securities Sold Under
Repurchase Agreements:
Balance at end of period............................. $ 10,469 $12,992 $ 9,991
Weighted average interest rate at end of period...... 5.21% 6.14% 7.22%
Maximum amount outstanding (1)....................... $ 13,326 $24,524 $35,667
Average amount outstanding........................... $ 7,523 $ 7,821 $14,912
Weighted average interest rate during period......... 5.53% 5.66% 5.50%



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

The Banks have FHLB advances outstanding which come due at various
dates through 2008. These advances are used as a supplemental source of funds to
reduce interest expense and manage interest rate risks. The following table sets
forth categories of FHLB advances of the Company as of the indicated dates or
for the indicated periods.




DECEMBER 31,
-------------------------------
1998 1997 1996
-------- ------- -------
(DOLLARS IN THOUSANDS)

FHLB advances:
Balance at end of period............................. $101,000 $26,000 $11,300
Weighted average interest rate at end of period...... 5.03% 5.63% 5.67%
Maximum amount outstanding (1)....................... $101,000 $26,000 $11,300
Average amount outstanding........................... $76,424 $18,836 $ 3,378
Weighted average interest rate during period......... 5.27% 5.76% 6.25%


- -------------

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

The Banks became members of the FHLB of Chicago during 1996. Membership
requirements include common stock ownership in the FHLB.

The Company entered into a new credit agreement with a correspondent
bank on January 30, 1998 (the "Credit Agreement"), which provides for borrowings
both by the Company and Midwest One Mortgage Services, Inc. Under the Credit
Agreement, the Company has a revolving line of credit that provides for a
maximum outstanding principal amount of $25.0 million (subject to reduction to
the extent that Midwest One Mortgage Services, Inc., borrows under its $5.0
million line of credit described below). Amounts outstanding under the Company's
revolving line of credit represent borrowings incurred to provide capital
contributions to the Banks to support their growth. The Company makes interest
payments, at its option, at the 90- or 180-day London Inter-Bank Offered Rate
("LIBOR") plus 95 basis points or the prime rate less 25 basis points. The
principal balance under the line was approximately $4.0 million as of December
31, 1998, and is due and payable on January 30, 2000, unless the line is renewed
prior to that time.

Midwest One Mortgage Services, Inc. has a warehouse line of credit
under the Credit Agreement. The warehouse line provides for a maximum
outstanding principal amount of $5.0 million and is guaranteed by the Company.
The line is used for working capital. Midwest One Mortgage Services, Inc. makes
quarterly interest payments, at its option, at the 30, 60 or 90-day LIBOR plus
95 basis points or the prime rate less 25 basis points, under the warehouse
line. The principal balance was $2.5 million as of December 31, 1998, and is due
and payable on January 30, 2000, unless the line is renewed prior to that time.



33

36


The following table sets forth categories of short-term correspondent
bank borrowings of the Company as of the indicated dates or for the indicated
periods.




DECEMBER 31,
-------------------------------
1998 1997 1996
-------- ------- -------
(DOLLARS IN THOUSANDS)

Lines of Credit:
Balance at end of period............................. $ 6,500 $16,350 $15,895
Weighted average interest rate at end of period...... 5.97% 6.90% 6.51%
Maximum amount outstanding (1)....................... $ 16,350 $17,275 $17,042
Average amount outstanding........................... $ 6,877 $16,040 $15,061
Weighted average interest rate during period(2)...... 6.69% 6.90% 6.95%



- ---------------
(1) Based on amount outstanding at month-end during each period.
(2) Weighted average interest rate excludes 25 basis point availability fee.

The Company has a mortgage outstanding in the principal amount of
$150,000 as of December 31, 1998. Principal payments of $75,000 are due annually
through August 31, 2000.

The Company issued a noninterest-bearing note payable to acquire the
Porter Insurance Agency, Inc. Principal payments on such note are due in the
amount of $75,000 on October 31, 1999 and 2000.

CAPITAL RESOURCES

The Company monitors compliance with bank and bank-holding company
regulatory capital requirements, focusing primarily on risk-based capital
guidelines. Under the risk-based capital method of capital measurement, the
ratio computed is dependent upon the amount and composition of assets recorded
on the balance sheet, and the amount and composition of off-balance sheet items,
in addition to the level of capital. Included in the risk-based capital method
are two measures of capital adequacy, Tier 1, or core, capital, and Total
capital, which consists of Tier 1 plus Tier 2 capital. See "BusinessCSupervision
and RegulationCBank Holding Company Regulation" for definitions of Tier 1 and
Tier 2 capital.

The following tables set forth the Company's capital ratios as of the
indicated dates.

RISK-BASED CAPITAL RATIOS




DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996
--------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)

Tier 1 capital to risk-weighted assets... $ 75,997 13.47% $ 49,842 9.60% $ 41,691 9.57%
Tier 1 capital minimum requirement....... 22,565 4.00 20,781 4.00 17,426 4.00
Total capital to risk-weighted assets.... 82,573 14.64 55,980 10.78 47,033 10.76
Total capital minimum requirements....... 45,129 8.00 41,562 8.00 34,840 8.00
Total risk-weighted assets............... 564,113 519,187 435,642




LIQUIDITY


The Company manages its liquidity position with the objective of
maintaining sufficient funds to respond to the needs of depositors and borrowers
and to take advantage of earnings enhancement opportunities. In addition to the
normal inflow of funds from core-deposit growth, together with repayments and
maturities of loans and investments, the Company utilizes other short-term
funding sources such as securities sold under agreements to repurchase,
overnight funds purchased from correspondent banks and the acceptance of
short-term deposits from public entities. In the third



34

37





quarter of 1996, the Banks received approval for membership in the Federal Home
Loan Bank ("FHLB"), which provides an additional source of liquidity. The Banks
have used the FHLB extensively during 1997 and 1998 to lower interest costs and
reduce interest rate risk exposure by funding with medium term (3 to 10 years)
maturities. The Banks also have various funding arrangements with commercial and
investment banks providing up to $239.8 million of available funding sources in
the form of Federal funds lines, repurchase agreements and brokered certificate
of deposit programs. The Banks maintain these funding arrangements to achieve
favorable costs of funds, manage interest rate risk and to enhance liquidity in
the event of deposit withdrawals.

The Company monitors and manages its position on several bases, which
vary depending upon the time period. As the time period is expanded, other data
is factored in, including estimated loan funding requirements, estimated loan
payoffs, investment portfolio maturities or calls, and anticipated depository
buildups or runoffs.

The Company classifies the majority of its investment securities as
available-for-sale, thereby maintaining significant liquidity. The Company's
liquidity position is further enhanced by structuring the majority of its loan
portfolio interest payments as monthly, and also by the significant
representation of retail credit and residential mortgage loans in the Company's
loan portfolio.

The Company's cash flows are composed of three classifications: cash
flows from operating activities, cash flows from investing activities, and cash
flows from financing activities. Net cash provided by operating activities,
consisting primarily of earnings, was $21.4 million, $3.9 million and $9.5
million for the years ended December 31, 1998, 1997 and 1996, respectively. A
significant component in the fluctuation of net cash provided by or used in
operating activities is the timing of the proceeds from real estate loans held
for sale to permanent investors. Net cash used in investing activities,
consisting primarily of loan and investment funding, was $168.6 million, $115.4
million and $129.8 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Net cash provided by financing activities, consisting principally
of deposit growth and net bank borrowings, was $153.0 million, $110.7 million
and $119.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively.

ASSET/LIABILITY MANAGEMENT

The business of the Company and the composition of its balance sheet
consists of investment in interest-earning assets (primarily loans,
mortgage-backed securities and other securities) which are primarily funded by
interest-bearing liabilities (deposits and borrowings). All of the financial
instruments of the Company as of December 31, 1998 were for other than trading
purposes. Such financial instruments have varying levels of sensitivity to
changes in market rates of interest. The Company's net interest income is
dependent on the amounts and yields of its interest-earning assets as compared
to the amounts of and rates on its interest bearing liabilities. Net interest
income is therefore sensitive to changes in market rates of interest.

The Company's asset/liability management strategy is to maximize net
interest income while limiting exposure to risks associated with a volatile
interest rate environment. This strategy is implemented by the Company's ongoing
analysis and management of its interest rate risk. A principal function of
asset/liability management is to coordinate the levels of interest-sensitive
assets and liabilities to minimize net interest income fluctuations in times of
fluctuating market interest rates.


Interest rate risk results when the maturity or repricing intervals and
interest rate indices of the interest-earning assets, interest-bearing
liabilities and off-balance sheet financial instruments are different, thus
creating a risk that will result in disproportionate changes in the value of,
and the net earnings generated from, the Company's interest-earning assets,
interest-bearing liabilities and off-balance sheet financial instruments. The
Company's exposure to interest rate risk is managed primarily through the
Company's strategy of selecting the types and terms of interest-earning assets
and interest-bearing liabilities which generate favorable earnings, while
limiting the potential negative effects of changes in market interest rates.
Because the Company's primary source of interest-bearing liabilities is customer
deposits, the Company's ability to manage the types and terms of such deposits
may be somewhat limited by customer maturity preferences in the market areas in
which the Company operates. Borrowings, which include FHLB advances, short-term
borrowings and long-term borrowings, are generally structured with specific
terms which, in management's judgment, when aggregated with the terms for
outstanding deposits and matched with interest-earning assets, reduce the
Company's exposure to interest rate risk. The rates, terms and interest rate
indices of the Company's interest-earning assets result primarily from the
Company's strategy of investing in securities and loans (a substantial portion
of which

35
38





have adjustable rate terms). This permits the Company to limit its exposure to
interest rate risk, together with credit risk, while at the same time achieving
a positive interest rate spread from the difference between the income earned on
interest-earning assets and the cost of interest-bearing liabilities.

Management uses a duration model for each Bank's internal
asset/liability management. The model uses cash flows and repricing information
from each individual loan and certificate of deposit, plus repricing assumptions
on products without specific repricing dates (e.g., savings and interest-bearing
demand deposits), to calculate the durations of each Bank's assets and
liabilities. Investment securities are stress tested, and the theoretical
changes in cash flow are key elements of the Company's model. The model also
projects the effect on the Company's earnings and theoretical value for a change
in interest rates. The model computes the duration of each Bank's rate sensitive
assets and liabilities, a theoretical market value of each Bank and the effects
of rate changes on each Bank's earnings and market value. The Banks' exposure to
interest rates is reviewed on a monthly basis by senior management and the Board
of Directors.

Each Bank also maintains specific interest rate risk management policy
limits. Based upon simulation modeling, these guidelines include: (i) a +/- 20%
change in net income upon an immediate 200 basis point change in interest rates;
and (ii) a +/- 10% change in net income upon a gradual 200 basis point change in
interest rates during a twelve-month period.

EFFECTS OF INFLATION

Inflation can have a significant effect on the operating results of all
industries. However, management believes that inflationary factors are not as
critical to the banking industry as they are to other industries, due to the
high concentration of relatively short-duration monetary assets in the banking
industry. Inflation does, however, have some impact on the Company's growth,
earnings and total assets and on its need to closely monitor its equity capital
levels. Management does not expect inflation to be a significant factor in 1999.

Interest rates are significantly affected by inflation, but it is
difficult to assess the impact, since neither the timing nor the magnitude of
the changes in the various inflation indices coincide with changes in interest
rates. Inflation does impact the economic value of longer term, interest-bearing
assets and liabilities, but the Company attempts to limit its long-term assets
and liabilities, as indicated in the tables set forth under ACFinancial
Condition" and ACAsset/Liability Management."

IMPACT OF NEW ACCOUNTING STANDARDS

Statement of Financial Accounting Standards No. 133 on derivatives
will, in the year 2000, require all derivatives to be recorded at fair value in
the balance sheet, with changes in fair value run through income. If derivatives
are documented and effective as hedges, the change in the derivative fair value
will be offset by an equal change in the fair value of the hedged item. Under
the new standard, securities held-to-maturity can no longer be hedged, except
for changes in the issuer's creditworthiness. Therefore, upon adoption of the
Statement, companies will have another one-time window of opportunity to
reclassify held-to-maturity securities to either trading or available-for-sale,
provided certain criteria are met. The Statement may be adopted early at the
start of the calendar quarter. The Company does not plan to adopt the Statement
early and adoption is not expected to have a material impact since the Company
does not have significant derivative instruments or hedging activity.

Statement of Financial Accounting Standards No. 134 on mortgage banking
will, in 1999, allow mortgage loans that are securitized to be classified as
trading, available for sale, or in certain circumstances, held to maturity.
Currently, these must be classified as trading. Since the Company has not
securitized loans, this Statement is not expected to impact the Company.

Statement of Position 98-1, effective in 1999, sets the accounting
requirement to capitalize costs incurred to develop or obtain software that is
to be used solely to meet internal needs. Costs to capitalize are those direct
costs incurred after the preliminary project stage, up to the date when all
testing has been completed and the software is substantially ready for use. All
training costs, research and development costs, costs incurred to convert data,
and all other general and administrative costs are to be expensed as incurred.
The capitalized costs of internal-use software is amortized over its useful life
and reviewed for impairment using the criteria in Statement of Financial
Accounting Standards No. 121. The Company does not believe this will have a
material impact.

36


39


AICPA-Statement of Position 98-5, effective in 1999, requires all
start-up, pre-opening, and organization costs to be expensed as incurred. Any
such costs previously capitalized for financial reporting purposes must be
charged to income in the first quarter of 1999. The Company does not believe
this will have a material impact.

The FASB continues to study several issues, including recording all
financial instruments at fair value and abolishing pooling-of-interests
accounting. Also, it is likely that APB 25's measurement for stock option plans
will be limited to employees and not to non-employees such as directors, thereby
causing compensation expense to be required for 1999 awards of stock options to
outside directors.

YEAR 2000 COMPLIANCE

Company's State of Readiness

The Company has conducted a comprehensive review of its computer
systems for AYear 2000" issues, and has developed an implementation plan to
identify and resolve potential problems in compliance with Federal Reserve Bank
guidelines. The Company estimates its testing and implementation plan was 80%
complete at December 31, 1998. Management expects to complete Year 2000 testing
by June 30, 1999.

A Project Coordinator, who is a Vice President of the Company, has been
assigned the responsibility of coordinating the Year 2000 effort throughout the
Company. The Project Coordinator is a Director of First Midwest Data Corp. and
therefore familiar with issues of system, vendor and customer risks relating to
Year 2000 compatibility. The Company's Information Services Officer assists the
Project Coordinator and is responsible for all network and personal computer
connections and software use within the Company.

In addition, the Company has formed a Year 2000 Committee consisting of
senior Bank officers and other knowledgeable Bank personnel. The President of
First Midwest Data Corp. is a member of the Committee and lends significant data
processing experience to the project. The Project Coordinator is designated the
Year 2000 Committee Coordinator.

The Company's implementation plan involves procedures and tests to
reduce Year 2000 risks to and by customers, equipment, vendors, and the
providers of computer hardware and software services. The Company has identified
mission critical vendors who have provided the Company with the results of their
own tests for Year 2000 compliance and the Company is satisfied with the results
to date. The Company has performed an analysis of all inventory purchased and
has made visual inspections of buildings, contents and equipment. Testing plans
have been developed to measure the compatibility of all Year 2000 related
equipment and software. In addition, all contracts for the purchase of new chip
related or date related equipment or software are reviewed by the Information
Services Officer, and all purchases are required to bear Year 2000 compatibility
confirmations.

The Company owns two in-house computer systems. One of these systems
uses an IBM AS/400 with software provided by Jack Henry and Associates. The Jack
Henry software product provides seventeen of the most critical software
applications used to service the customers of the Banks. A proxy test was
performed by a thirteen financial institution consortium C each organization
being a Jack Henry software client C which was completed prior to year-end 1998.
The test results indicated there were no significant Year 2000 related problems.
Further verification of test results will continue into the first quarter of
1999 and a final report of the success of the test will be issued at that time.

In addition, the Company uses personal computers at thirteen offices,
connected through Networks, to maintain critical systems. Each of the banking
centers therefore is considered mission critical. The computers use stand-alone
vendor products or service providers to provide information and customer service
software.

The second in-house system is a Unisys computer system used to support
four banking centers in Western Illinois. This system has been recently upgraded
and testing is now taking place on all mission critical applications. This
system software is written by ITI, and no Year 2000 compatibility issues have
been found to date. The Company expects the tests to conclude and result in
implementation by the end of the first quarter.

The Company has determined that it relies on seventy-eight mission
critical applications or systems. This also includes the Company's reliance on
vendors or products produced by others. The Company has control over
thirty-three

37

40


of these systems and third parties provide forty-five. All thirty-three of the
controlled mission critical systems have been tested with successful Year 2000
results. The Company is in regular contact with providers, and each is providing
the Company with status updates and new information as it becomes available.

The Company has been examined by the Federal Reserve Bank and the
Illinois Office of Banks and Real Estate through Phase I and Phase II
examinations. The Company's efforts were considered adequate in those
examinations.

Risks Posed by Year 2000 Issues

Based upon responses from vendors, the Company's own testing and
independent appraisals conducted on behalf of the Company and selected equipment
and software suppliers, the Company believes systems are, or will be, fully
compliant before the end of 1999. The Company maintains continuing contact with
its equipment and software vendors on Year 2000 issues and does not anticipate
significant problems at this time.

Nevertheless, the Company recognizes the potential risks posed by Year
2000 issues, and there can be no assurance that the Company will not be
significantly affected by Year 2000 issues. These risks include, without
limitation, disruption to customer service caused by computer and system
interruptions, failure to comply with federal and state regulations, and an
inability to collect and service outstanding loans due to any customers' failure
to address Year 2000 issues. The Company remains alert to any potential Year
2000 problems created by customers and has been obtaining information and data
from customers to assess potential exposures. To date, responses from customers
have not indicated significant Year 2000 issues to be resolved. Potential losses
created by cash flow problems of existing borrowers due to Year 2000 issues
cannot be quantified at this time with any meaningful degree of accuracy. As a
result, the Banks have not provided any additional amounts to assess the
Allowance for Loan Losses to cover Year 2000 related repayment risks at this
time.

Events over which the Company has no control, such as sources of
electrical and gas power, or loss of telephone communications, may result in a
disruption of service to customers. These potential events have been reviewed,
and short-term contingency plans have been developed to address situations in
which there is a widespread loss of these vital utility services. In such
circumstances, the Bank's plans provide for limited business services until such
vital utility services resume and are fully restored.

The impact of Year 2000 problems could be significant, although the
risks have not yet been fully quantified by the Banks at this time. The
inability to process, reconcile and report customer account information could
create concern for the safety and security of customer deposits. However,
customer funds eligible for FDIC insurance will continue to be insured against
loss regardless of any Year 2000 disruption.

Contingency Plans and Costs

The Company has created and distributed contingency plans for
situations where customer service may be inhibited by sources beyond its
control. These contingency plans provide alternatives for processing customer
transactions, liquidity, and business continuation in case of a major disruption
caused by Year 2000 issues. The plans provide all Company subsidiaries with
information that will be necessary to maintain service of customers during such
circumstances. Updates and responses to additional situations will be covered in
these plans as appropriate and consistent with regulatory guidelines.

The current contingency plans provide instructions for the operation of
bank offices with manual record keeping and transaction processing in the event
of power loss or interruption of telecommunications. Liquidity planning and
funds management is also included in the contingency plans. Each Bank has
approved a disaster recovery plan in the event of significant events which may
inhibit normal banking operations.

The Company has incurred internal and external expenditures of
approximately $190,000 in addressing Year 2000 issues through December 31, 1998.
This cost does not include internal salary and employee benefit costs for
individuals that have responsibilities or are involved with the Year 2000
project. The Company is considering additional expenditures, including the
purchase of generators, which, if made, would increase Year 2000 expenditures to
approximately $400,000. Management does not believe these expenditures are or
will be material in nature or will have a material impact on the Company's
operations.


38

41


The estimated costs are based upon management's best estimates and
include assumptions of future events, availability of specific resources, third
party, vendor or customer modification plans, and other factors. However, there
can be no guarantee that current estimates will be realized, and actual results
may differ significantly from these estimates.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's overall interest rate sensitivity is demonstrated by net
interest income analysis and "Gap" analysis. Net interest income analysis
measures the change in net interest income in the event of hypothetical changes
in interest rates. This analysis assesses the risk of change in net interest
income in the event of sudden and sustained 1.0% to 2.0% increases and decreases
in market interest rates. The tables below present the Company's projected
changes in net interest income for the various rate shock levels at December 31,
1998 and 1997, respectively.





1998 NET INTEREST INCOME
--------------------------------
AMOUNT CHANGE CHANGE
------ ------ ------
(DOLLARS IN THOUSANDS)


+200 bp.............. $34,204 $(501) (1.44)%
+100 bp.............. 34,737 32 0.09
Base ................ 34,705 - -
- -100 bp.............. 34,855 150 0.43
- -200 bp.............. 35,027 322 0.93





1997 NET INTEREST INCOME
--------------------------------
AMOUNT CHANGE CHANGE
------ ------ ------
(DOLLARS IN THOUSANDS)

+200 bp.............. $33,586 $524 1.59%
+100 bp.............. 33,517 453 1.37
Base ................ 33,061 - -
- -100 bp.............. 31,423 (1,638) (4.59)
- -200 bp.............. 29,886 (3,175) (9.60)



As shown above, at December 31, 1998, the effect of an immediate 200
basis point increase in interest rates would decrease the Company's net interest
income by 1.44% or approximately $501,000. The effect of an immediate 200 basis
point decrease in rates would increase the Company's net interest income by .93%
or approximately $322,000.

The interest rate sensitivity has shifted from an exposure in a
declining rate environment at the end of 1997 to a modest exposure in
substantially higher rate market C 200 basis points on an immediate basis C at
the end of 1998. Overall net interest income sensitivity has decreased from 1997
to 1998.

39


42
"Gap" analysis is used to determine the repricing characteristics of
the Company's assets and liabilities. The following table sets forth the
interest rate sensitivity of the Company's assets and liabilities as of December
31, 1998, and provides the repricing dates of the Company's interest-earning
assets and interest-bearing liabilities as of that date, as well as the
Company's interest rate sensitivity gap percentages for the periods presented.




0-3 4-12 1-5 OVER 5
MONTHS MONTHS YEARS YEARS TOTAL
------ ------ ----- ------ -----
(DOLLARS IN THOUSANDS)

INTEREST-EARNING ASSETS:
Funds sold................................... $ 9,250 $ -- $ -- $ -- $ 9,250
Interest-bearing due from banks.............. 1,631 -- -- -- 1,631
Securities................................... 4,418 33,165 28,043 416,303 481,929
Loans........................................ 298,755 24,300 173,494 25,330 521,879
--------- ---------- ---------- -------- ----------
Total interest-earning assets.......... $ 314,054 $ 57,465 $ 201,537 $441,633 $1,014,689
========= ========== ========== ======== ==========

INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits............. $ 91,323 $ -- $ -- $ -- $ 91,323
Money markets................................ 133,841 -- -- -- 133,841
Savings deposits............................. 72,280 -- -- -- 72,280
Time deposits................................ 134,487 269,173 50,529 2,953 457,142
--------- ---------- ---------- -------- ----------
Total interest-bearing deposits........ $ 431,931 $ 269,173 $ 50,529 $ 2,953 $ 754,586
========= ========== ========== ======== ==========

SHORT-TERM BORROWINGS:
Securities sold under agreements to
repurchase, funds purchased, and treasury
tax deposits.............................. $ 10,469 $ -- $ -- $ -- $ 10,469
Note payable, mortgage payable............... -- 6,725 75 -- 6,800
FHLB advances................................ -- 2,000 9,000 90,000 101,000
--------- ---------- ---------- -------- ----------
Total borrowings....................... 10,469 8,725 9,075 90,000 118,269
--------- ---------- ---------- -------- ----------
Total interest-bearing liabilities... $ 442,400 $ 277,898 $ 59,604 $ 92,953 $ 872,855
========= ========== ========== ======== ==========

Interest sensitivity gap..................... $(128,346) $(220,433) $ 141,933 $348,680 $ 141,834

Cumulative gap............................... $(128,346) $(348,779) $(206,846) $141,834
Interest sensitivity gap to total assets..... (11.98)% (20.58)% 13.25% 32.55%
Cumulative sensitivity gap to total assets... (11.98)% (32.56)% (19.31)% 13.24%




Mortgage-backed securities, including adjustable rate mortgage pools
and collateralized mortgage obligations, are included in the above table based
on their estimated weighted average lives obtained from outside analytical
sources. Loans are included in the above table based on contractual maturity or
contractual repricing dates. Interest-bearing demand and savings deposits are
included in the above table based on the proposed policy statement issued by
bank regulators on August 4, 1995. The table uses short-term repricing (one to
three months) assumptions for all interest-bearing core deposits. Management
believes this is a very conservative approach, which is not consistent with the
Company's actual historical experience.

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



40

43
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See "Index to Consolidated Financial Statements" on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding directors of the Registrant is included in the
Registrant's Proxy Statement under the heading "Election of Directors" and the
information included therein is incorporated herein by reference. Information
regarding the executive officers of the Registrant is included in "Part I.
Business".

ITEM 11. EXECUTIVE COMPENSATION

Information regarding compensation of executive officers and directors
is included in the Registrant's Proxy Statement under the headings "Directors'
Compensation," "Executive Compensation," "Employment Agreements," "1996 Stock
Option Plan," "401(k) Plan" and "Compensation Committee Interlocks and Insider
Participation" and the information included therein is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners
and management is included in the Registrant's Proxy Statement under the
headings "Voting Securities" and "Security Ownership of Certain Beneficial
Owners" and the information included therein is incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions is
included in the Registrant's Proxy Statement under the heading "Transactions
with Certain Related Persons" and the information included therein is
incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) INDEX TO FINANCIAL STATEMENTS

The consolidated financial statements of the Registrant and its
subsidiaries as required by Item 8 are filed as a part of this document. See
"Index to Consolidated Financial Statements" on Page F-1.

(a)(2) FINANCIAL STATEMENT SCHEDULES

All financial statement schedules as required by Item 8 and Item 14 of
Form 10-K have been omitted because the information requested is either not
applicable or has been included in the consolidated financial statements or
notes thereto.


41

44



(a)(3) EXHIBITS

The following exhibits are either filed as part of this report or are
incorporated herein by reference:

3.1 Restated Certificate of Incorporation, as amended
(incorporated by reference to Registrant's Registration
Statement on Form S-1, Registration No. 333-42827).
3.2 Restated By-laws, as amended (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, File No. 0-29652).
4.1 Specimen Common Stock Certificate (incorporated by reference
to Registrant's Registration Statement on Form S-1,
Registration No. 333-42827).
10.1 $18.0 million Revolving Loan Agreement dated as of May 1,
1995, between the Company and LaSalle National Bank, as
amended (incorporated by reference to Registrant's
Registration Statement on Form S-1, Registration No.
333-42827).
10.2 $4.0 million Revolving Loan Agreement dated as of May 1, 1995,
between Midwest One Mortgage Services, Inc. and LaSalle
National Bank (incorporated by reference to Registrant's
Registration Statement on Form S-1, Registration No.
333-42827).
*10.3 Midwest Banc Holdings, Inc. 1996 Stock Option Plan
(incorporated by reference to Registrant's Registration
Statement on Form S-1, Registration No. 333-42827).
*10.4 Amendment to the Midwest Banc Holdings, Inc. 1996
Stock Option Plan.
*10.5 Form of Transitional Employment Agreements
(incorporated by reference to Registrant's Registration
Statement on Form S-1, Registration No. 333-42827).
10.6 Lease dated as of December 24, 1958, between Western National
Bank of Cicero and Midwest Bank and Trust Company, as amended
(incorporated by reference to Registrant's Registration
Statement on Form S-1, Registration No.
333-42827).
10.7 Britannica Centre Lease dated as of May 1, 1994, between
Chicago Title and Trust Company, as Trustee under Trust
Agreement dated November 2, 1977, and known as Trust No.
1070932, and Midwest Bank & Trust Company (incorporated by
reference to Registrant's Registration Statement on Form S-1,
Registration No. 333-42827).
10.8 Lease dated as of March 20, 1996, between Grove Lodge No. 824
Ancient Free and Accepted Masons and Midwest Bank of Hinsdale
(incorporated by reference to Registrant's Registration
Statement on Form S-1, Registration No.
333-42827).
10.9 Office Lease undated between Grove Lodge No. 824 Ancient Free
and Accepted masons and Midwest Bank of Hinsdale (incorporated
by reference to Registrant's Registration Statement on Form
S-1, Registration No. 333-42827).
10.10 Credit Agreement as of January 30,1998, between the Company,
Midwest One Mortgage Services, Inc. and Harris Trust & Savings
Bank (incorporated by reference to Registrant's Registration
Statement on Form S-1, Registration No. 333-42827).
21.1 Subsidiaries (incorporated by reference to Registrant's
Registration Statement on Form S-1, Registration No.
333-42827).
23.1 Consent of Crowe, Chizek and Company LLP.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule

(B) REPORTS ON FORM 8-K

None.

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

42


45


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

MIDWEST BANC HOLDINGS, INC.

Date: March 24, 1999 BY: /s/ Robert L. Woods
------------------------------
Robert L. Woods
President and Chief Executive Officer

Each person whose signature appears below constitutes and appoints
Robert L. Woods and Edward H. Sibbald his true and law attorneys-in-fact and
agents, each acting alone, with full powers of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report on Form 10-K, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in order to effectuate
such registration process, as fully for all intents and purposes as he might or
could do in person, thereby ratifying and confirming all that said
attorneys-in-fact and agents, and each of them, or his substitutes, may lawfully
do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1933,
this report has been signed below by the following persons on behalf in the
capacities and on the dates indicated:





SIGNATURE TITLE DATE
--------- ----- ----

/s/ E.V. Silveri
- -------------------------------------------- Chairman of the Board, March 24, 1999
E.V. Silveri Director

/s/ Robert L. Woods
- -------------------------------------------- President, Chief Executive Officer March 24, 1999
Robert L. Woods and Director

/s/ Angelo A. DiPaolo
- -------------------------------------------- Director March 24, 1999
Angelo A. DiPaolo

/s/ Daniel Nagle
- -------------------------------------------- Director March 24, 1999
Daniel Nagle

/s/ Joseph Rizza
- -------------------------------------------- Director March 24, 1999
Joseph Rizza

/s/ LeRoy Rosasco
- -------------------------------------------- Director March 24, 1999
LeRoy Rosasco

/s/ Robert D. Small
- -------------------------------------------- Director March 24, 1999
Robert D. Small

/s/ Leon Wolin
- -------------------------------------------- Director March 24, 1999
Leon Wolin

/s/ Edward H. Sibbald
- -------------------------------------------- Executive Vice President March 24, 1999
Edward H. Sibbald and Chief Financial Officer

/s/ Daniel R. Kadolph
- -------------------------------------------- Vice President, Comptroller March 24, 1999
Daniel R. Kadolph and Treasurer




43

46


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

MIDWEST HOLDINGS, INC.






PAGE


Report of Crowe, Chizek and Company LLP, Independent Auditors...................................................F-2

Consolidated Balance Sheets as of December 31, 1998 and 1997....................................................F-3

Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996..........................F-4

Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998,
1997 and 1996...............................................................................................F-5

Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996......................F-6

Notes to Consolidated Financial Statements......................................................................F-7





F-1

47
[CROWE CHIZEK LOGO]


REPORT OF INDEPENDENT AUDITORS



To the Shareholders and Board of Directors
Midwest Banc Holdings, Inc.


We have audited the accompanying consolidated balance sheets of Midwest Banc
Holdings, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Midwest Banc
Holdings, Inc. and Subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.


/s/ Crowe, Chizek and Company LLP



Oak Brook, Illinois
January 15, 1999



F-2
48










CONSOLIDATED BALANCE SHEETS


December 31, (In thousands, except share and per share data) 1998 1997
- ----------------------------------------------------------------------------------------------

ASSETS
Cash and cash equivalents ................................... $ 40,253 $ 34,471
Securities available-for-sale ............................... 458,331 343,115
Trading account securities .................................. -- 5,008
Securities held-to-maturity (fair value: 1998 - $24,034;
1997 - $16,480) ........................................... 23,598 16,233
Loans ....................................................... 521,880 488,099
Allowance for loan losses ................................... (6,576) (6,143)
----------- -----------
Net loans ............................................... 515,304 481,956
Bank premises and equipment, net ............................ 17,597 14,863
Goodwill .................................................... 2,610 2,424
Other assets ................................................ 13,621 10,572
----------- -----------

Total assets ............................................ $ 1,071,314 $ 908,642
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing .................................. $ 114,566 $ 102,080
Interest-bearing ..................................... 754,586 692,282
----------- -----------
Total deposits .................................... 869,152 794,362
Securities sold under agreements to repurchase
and federal funds purchased ........................... 10,469 12,992
Advances from the Federal Home Loan Bank ................ 101,000 26,000
Notes payable and other borrowings ...................... 6,800 16,575
Other liabilities ....................................... 6,264 5,753
----------- -----------
Total liabilities .................................... 993,685 855,682

Stockholders' equity
Preferred stock; par value $.01 per share; authorized
1,000,000 shares; none issued ......................... -- --
Common stock ............................................ 114 101
Surplus ................................................. 29,704 12,620
Retained earnings ....................................... 48,795 40,026
Accumulated other comprehensive income .................. (522) 675
Treasury stock, at cost (100,000 shares in 1998 and 1997) (462) (462)
----------- -----------
Total stockholders' equity ........................... 77,629 52,960
----------- -----------

Total liabilities and stockholders' equity ........... $ 1,071,314 $ 908,642
=========== ===========





See accompanying notes to consolidated financial statements.

F-3

49


CONSOLIDATED STATEMENTS OF INCOME





Year Ended December 31, (In thousands, except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------

Interest income
Loans ............................................. $47,725 $44,048 $36,607
Securities
Taxable ........................................ 25,098 21,719 19,554
Exempt from federal income taxes ............... 1,353 1,042 939
Trading account securities ........................ 170 73 21
Federal funds sold and other short-term investments 481 444 177
------- ------- -------
Total interest income .......................... 74,827 67,326 57,298

Interest expense
Deposits .......................................... 36,038 32,617 26,796
Advances from the Federal Home Loan Bank .......... 4,031 1,085 211
Notes payable and other borrowings .................... 945 1,609 1,911
------- ------- -------
Total interest expense ...................... 41,014 35,311 28,918
------- ------- -------


NET INTEREST INCOME ................................... 33,813 32,015 28,380

Provision for loan losses ............................. 1,326 2,454 1,718
------- ------- -------


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ... 32,487 29,561 26,662

Other income
Service charges on deposit accounts ............... 3,051 2,782 2,440
Gains on securities transactions .................. 1,111 729 181
Net trading account profits ....................... 24 159 174
Mortgage loan origination fees .................... 1,058 564 363
Trust income ...................................... 675 579 525
Other income ...................................... 868 750 727
------- ------- -------
Total other income ............................. 6,787 5,563 4,410

Other expenses
Salaries and employee benefits .................... 13,301 12,213 11,180
Occupancy and equipment expense ................... 3,761 3,288 3,236
Professional services ............................. 1,220 1,124 866
Marketing ......................................... 791 721 713
Other expenses .................................... 3,822 3,730 3,172
------- ------- -------
Total other expenses ........................... 22,895 21,076 19,167
------- ------- -------


INCOME BEFORE INCOME TAXES ............................ 16,379 14,048 11,905

Provision for income taxes ............................ 5,974 5,537 4,597
------- ------- -------


NET INCOME ............................................ $10,405 $ 8,511 $ 7,308
======= ======= =======

Earnings per share .................................... $ .94 $ .85 $ .73
======= ======= =======




See accompanying notes to consolidated financial statements.

F-4
50


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY







Accumulated Total
Other Stock-
Common Retained Comprehensive Treasury holders'
(In thousands, except share and per share data) Stock Surplus Earnings Income Stock Equity
- ----------------------------------------------------------------------------------------------------------------------------------



Balance, January 1, 1996 ..................... $ 3,437 $ 10,423 $ 28,174 $ 807 $ (4,454) $ 38,387

Cash dividends declared ($0.055 per share) ... -- -- (550) -- -- (550)
Purchase 151,880 shares of treasury stock .... -- -- -- -- (1,117) (1,117)
Sale of 150,308 shares of treasury stock ..... -- 66 -- -- 1,052 1,118

Comprehensive income
Net income ............................... -- -- 7,308 -- -- 7,308
Net decrease in fair value of securities
classified as available-for-sale, net of
income taxes and reclassification
adjustments ............................ -- -- -- (2,184) -- (2,184)
--------
Total comprehensive income ............ 5,124
-------- -------- -------- -------- -------- --------

Balance, December 31, 1996 ................... 3,437 10,489 34,932 (1,377) (4,519) 42,962

Cash dividends declared ($0.055 per share) ... -- -- (551) -- --
(551)
Recapitalization ............................. (3,327) 3,327 -- -- -- --
Purchase 226,212 shares of treasury stock .... -- -- -- -- (2,062) (2,062)
Sale of 224,740 shares of treasury stock ..... -- 18 -- -- 2,030 2,048
Retirement of 885,608 shares of common
stock held in treasury ..................... (9) (1,214) (2,866) -- 4,089 --

Comprehensive income
Net income ............................... -- -- 8,511 -- -- 8,511
Net increase in fair value of securities
classified as available-for-sale, net of
income taxes and reclassification
adjustments ............................ -- -- -- 2,052 -- 2,052
--------
Total comprehensive income ............ 10,563
-------- -------- -------- -------- -------- --------

Balance, December 31, 1997 ................... 101 12,620 40,026 675 (462) 52,960

Cash dividends declared ($.145 per share) .... -- -- (1,636) -- -- (1,636)
Issuance of common stock ..................... 13 17,084 -- -- -- 17,097

Comprehensive income
Net income ............................... -- -- 10,405 -- -- 10,405
Net decrease in fair value of securities
classified as available-for-sale, net of
income taxes and reclassification
adjustments ............................ -- -- -- (1,197) -- (1,197)
--------
Total comprehensive income ............ 9,208
-------- -------- -------- -------- -------- --------

Balance, December 31, 1998 ................... $ 114 $ 29,704 $ 48,795 $ (522) $ (462) $ 77,629
======== ======== ======== ======== ======== ========


See accompanying notes to consolidated financial statements.


F-5


51


CONSOLIDATED STATEMENTS OF CASH FLOWS







Year Ended December 31, (In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................ $ 10,405 $ 8,511 $ 7,308
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation ................................................... 1,964 1,645 1,692
Provision for loan losses ...................................... 1,326 2,454 1,718
Proceeds from sales of trading account securities, net ......... 5,032 (4,917) 175
Net gain on sales of securities ................................ (1,111) (729) (181)
Net gain on sales of trading account securities ................ (24) (159) (174)
Net real estate loans originated for sale ...................... 5,781 (2,448) (418)
Deferred income taxes .......................................... (98) (474) 35
Increase in other assets ....................................... (2,374) (1,368) (2,062)
Increase in other liabilities .................................. 511 1,336 1,400
--------- --------- ---------
Net cash provided by operating activities ................... 21,412 3,851 9,493

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of securities available-for-sale 285,131 98,928 68,079
Principal payments on securities .................................. 140,959 41,028 40,172
Purchase of securities available-for-sale ......................... (541,842) (185,595) (171,086)
Purchase of securities held-to-maturity ........................... (9,023) (3,631) (3,114)
Maturities of securities held-to-maturity ......................... 1,345 1,052 1,172
Net increase in loans ............................................. (40,455) (64,996) (61,717)
Property and equipment expenditures ............................... (4,698) (2,136) (3,323)
--------- --------- ---------
Net cash used in investing activities .......................... (168,583) (115,350) (129,817)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits .......................................... 74,790 93,157 110,534
Bank borrowings ................................................... 117,120 65,704 20,608
Payments on bank borrowings ....................................... (51,895) (50,624) (9,190)
Issuance of common stock .......................................... 17,097 -- --
Dividends paid .................................................... (1,636) (551) (550)
Change in securities sold under agreements to repurchase
and federal funds purchased ..................................... (2,523) 3,001 (2,174)
Treasury stock sales (purchases), net ............................. -- (14) 1
--------- --------- ---------
Net cash provided by financing activities ...................... 152,953 110,673 119,229
--------- --------- ---------

Increase (decrease) in cash and cash equivalents ...................... 5,782 (826) (1,095)

Cash and cash equivalents at beginning of year ........................ 34,471 35,297 36,392
--------- --------- ---------

CASH AND CASH EQUIVALENTS AT END OF YEAR .............................. $ 40,253 $ 34,471 $ 35,297
========= ========= =========

Supplemental disclosures of cash flow information
Cash paid during the period for
Interest ....................................................... $ 40,692 $ 35,126 $ 28,291
Income taxes ................................................... 6,347 4,516 4,352




See accompanying notes to consolidated financial statements.


F-6

52



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998 and 1997

NOTE 1 - NATURE OF OPERATIONS

Midwest Banc Holdings, Inc. (Midwest Banc or the Corporation) is a bank holding
company organized under the laws of the State of Delaware. Through its
commercial bank and nonbank subsidiaries, the Corporation provides a full line
of financial services to corporate and individual customers in the greater
Chicago metropolitan area and in Warren, Knox, and Henderson Counties in western
Illinois. These services include demand, time, and savings deposits; lending;
mortgage banking; insurance products; and trust services. While the
Corporation's management monitors the revenue streams of the various products
and services, operations are managed and financial performance is evaluated on a
Corporation-wide basis. Accordingly, all of the Corporation's banking operations
are considered by management to be aggregated in one reportable operating
segment.


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The consolidated financial statements of Midwest Banc
include the accounts of Midwest Banc and its wholly-owned subsidiaries, Midwest
Bank and Trust Company, Midwest Bank, Midwest Bank of McHenry County, Midwest
Bank of Western Illinois (formerly The National Bank of Monmouth), and First
Midwest Data Corp.
Significant intercompany balances and transactions have been eliminated.

The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles and with general practices in the
banking industry. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Securities: Securities are classified as held-to-maturity when the Corporation
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 Corporation 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. 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
amount of the securities sold, using the specific identification method. Trading
account securities are carried at fair value. Realized and unrealized gains and
losses on trading account securities are recognized in the statement of income
as they occur.

Loans: Loans are stated net of the allowance for loan losses and unearned
discount. Impaired loans are carried at the present value of expected future
cash flows or the fair value of the related collateral, if the loan is
considered to be collateral dependent. Interest on loans is included in interest
income over the term of the loan based upon the principal balance outstanding.
Where serious doubt exists as to the collectibility of a loan, the accrual of
interest is discontinued. Loan fees and direct loan origination costs are
deferred and amortized over the term of the loan as a yield adjustment.

Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost, net of deferred loan fees, or estimated fair value
in the aggregate.

Allowance for Loan Losses: An allowance for loan losses has been established to
provide for the probability that some loans may not be repaid in their entirety.
The allowance is increased by provisions for loan losses charged to expense and
decreased by charge-offs, net of recoveries. Although a loan is charged off by
management when deemed uncollectible, collection efforts may continue and future
recoveries may occur.

The allowance is maintained by management at a level considered adequate to
cover losses that are currently anticipated based on past loss experience,
general economic conditions, information about specific borrower situations
(including their financial position and collateral values), and other factors
and estimates which are subject to change over time. Estimating the risk of loss
and the amount of loss on any loan is necessarily subjective and ultimate losses
may vary from current estimates. These estimates are reviewed periodically and
as adjustments become necessary, they are reported in earnings in the periods in
which they become known.


continued


F-7
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998 and 1997

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued

Loans are considered impaired if it is probable that full principal or interest
payments will not be collected as scheduled in the loan agreement. Each impaired
loan is carried at the present value of expected cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the
loan is collateral dependent. A portion of the allowance for loan losses is
allocated to an impaired loan if the present value of cash flows or collateral
value indicate the need for an allowance.

Smaller balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four-family
residences; residential construction loans; and automobile, home equity, and
second mortgage loans. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment.

Bank Premises and Equipment: Bank premises and equipment are stated at cost,
less accumulated depreciation and amortization. Provisions for depreciation and
amortization, included in operating expenses, are computed on the straight-line
method over the estimated useful lives of the assets. The cost of maintenance
and repairs is charged to income as incurred; significant repairs are
capitalized.

Goodwill and Core Deposit Intangibles: Goodwill and core deposit intangibles,
included in other assets, result from the application of purchase accounting
principles to the acquisition of subsidiaries. Goodwill represents the excess of
acquisition cost over the fair value of net assets of subsidiary banks and is
amortized over periods ranging from 10 to 25 years using the straight-line
method.

Income Taxes: Deferred tax assets and liabilities are recognized for temporary
differences between the financial reporting basis and the tax basis of the
Corporation's assets and liabilities and expected benefits of operating loss
carryforwards and credit carryforwards. Deferred taxes are recognized for the
estimated taxes ultimately payable or recoverable based on enacted tax laws.
Changes in enacted tax rates and laws will be reflected in the financial
statements in the periods they occur.

Comprehensive Income: Effective January 1, 1998 the Corporation retroactively
adopted the provisions of Statement of Financial Accounting Standards No. 130
which requires comprehensive income to be reported for all periods.
Comprehensive income includes both net income and other comprehensive income
elements, including the change in unrealized gains and losses on securities
available-for-sale, net of tax.

New Accounting Pronouncements: Beginning January 1, 2000, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect but will depend on derivative holdings when this standard
is first adopted.

Mortgage loans originated in mortgage banking are converted into securities on
occasion. A new accounting standard for 1999 will allow classifying these
securities as available-for-sale, trading, or held-to-maturity, instead of the
current requirement to classify as trading. This is not expected to have a
material effect but the effect will vary depending on the level and designation
of securitizations as well as on market price movements.

Earnings Per Share: Earnings per share (EPS) is computed under the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which
was adopted retroactively by the Corporation at December 31, 1997. Amounts
reported as EPS for each of the three years in the period ended December 31,
1998 reflect the earnings available to common stockholders for the year divided
by the weighted average number of common shares outstanding during the year. The
weighted average number of common shares outstanding for the years ended
December 31, 1998, 1997, and 1996 was 11,091,716; 10,017,025; and 10,006,438,
respectively. Stock options granted during 1998, 1997, and 1996 had no effect on
earnings per share.

Statement of Cash Flows: Amounts due from banks, federal funds sold, and all
highly liquid debt instruments purchased with a maturity of three months or less
are considered to be cash equivalents. Loan disbursements and collections,
repurchase agreements and transactions in deposit accounts are reported net.


continued


F-8
54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998 and 1997


NOTE 3 - SECURITIES

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






Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1998 (In thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------

Securities available-for-sale
U.S. Treasury securities and obligations of U.S.
government agencies .......................... $ 2,000 $ -- $ (130) $ 1,870
Obligations of states and political subdivisions 6,911 93 -- 7,004
Mortgage-backed securities ..................... 432,940 587 (1,226) 432,301
Collateralized mortgage obligations ............ 5,811 -- (26) 5,785
Equity securities .............................. 11,523 101 (253) 11,371
-------- -------- -------- --------

Total securities available-for-sale ........ $459,185 $ 781 $ (1,635) $458,331
======== ======== ======== ========

Securities held-to-maturity
Obligations of states and political subdivisions $ 23,598 $ 447 $ (11) $ 24,034
======== ======== ======== ========





Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 (In thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------


Securities available-for-sale
U.S. Treasury securities and obligations of U.S.
government agencies .......................... $ 6,499 $ -- $ (245) $ 6,254
Obligations of states and political subdivisions 7,555 47 (6) 7,596
Mortgage-backed securities ..................... 313,152 2,273 (845) 314,580
Collateralized mortgage obligations ............ 7,558 -- (179) 7,379
Equity securities .............................. 7,245 61 -- 7,306
-------- -------- -------- --------

Total securities available-for-sale ........ $342,009 $ 2,381 $ (1,275) $343,115
======== ======== ======== ========

Securities held-to-maturity
Obligations of states and political subdivisions $ 16,233 $ 258 $ (11) $ 16,480
======== ======== ======== ========



continued

F-9

55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998 and 1997

NOTE 3 SECURITIES continued

The amortized cost and fair value of debt securities by contractual maturity at
December 31, 1998 are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.





Amortized Fair
(In thousands) Cost Value
- ---------------------------------------------------------------------------------

Securities available-for-sale
Due in one year or less ..................... $ 1,005 $ 1,009
Due after one year through five years ....... 7,243 7,197
Due after five years through ten years ...... 663 668
-------- --------
8,911 8,874
Mortgage-backed securities and collateralized
mortgage obligations ...................... 438,751 438,086
-------- --------
Total debt securities ................... 447,662 446,960
Equity securities ........................... 11,523 11,371
-------- --------

Total securities available-for-sale ..... $459,185 $458,331
======== ========

Securities held-to-maturity
Due in one year or less ..................... $ 4,241 $ 4,275
Due after one year through five years ....... 15,061 15,415
Due after five years through ten years ...... 4,296 4,344
-------- --------

Total securities held-to-maturity ....... $ 23,598 $ 24,034
======== ========


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




Year Ended December 31, (In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------



Proceeds from sales................... $ 283,011 $ 98,383 $ 68,079
Gross realized gains.................. 1,593 1,010 536
Gross realized losses................. (482) (281) (355)



Securities with an approximate carrying value of $150,783,000 and $94,209,000 at
December 31, 1998 and 1997, respectively, were pledged to secure public
deposits, borrowings, and for other purposes as required or permitted by law.
Included in securities pledged at December 31, 1998 and 1997 are $89,809,000 and
$29,705,000, respectively, which have been pledged for FHLB borrowings.


continued

F-10
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998 and 1997


NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS

Corporations are required to disclose fair value information about their
financial instruments. The fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. The methods and assumptions
used to determine fair values for each class of financial instruments are
presented below.

Cash and Cash Equivalents: Cash and cash equivalents are reported in the
balance sheet at amounts which approximate their fair value.

Securities: Fair values for securities are determined from quoted market
prices if available. For unquoted securities, the reported fair value is
estimated on the basis of financial and other information.

Loans: Fair values of loans have been determined by calculating the
present value of future cash flows at current rates for similar loans
which would be made to borrowers with similar credit ratings and the same
remaining maturities. Loan prepayments are assumed to occur at the same
rate as in previous periods in which interest rates were at levels similar
to current levels.

Deposit Liabilities: Fair value of deposit liabilities with stated
maturities have been calculated at the present value of future cash flows
using rates which approximate current market rates for similar
instruments. Fair values of demand deposits are equal to the respective
amounts due on demand. The carrying amount for variable rate instruments
approximates fair value.

Securities Sold Under Agreements to Repurchase, Federal Funds Purchased,
Other Borrowings, and Long-Term and Short-Term Debt: Liabilities with
stated maturities have been calculated at present values of future cash
flows using rates which approximate market rates for similar instruments.
The carrying amount for liabilities with no stated maturities approximates
estimated fair value.

Accrued Interest Receivable and Payable: Fair value for accrued interest
receivable and payable approximates the carrying amount.

Commitments to Extend Credit and Standby Letters of Credit: The fair value
of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreement and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
value of letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle
the obligations with the counterparties at the reporting date. The fair
value of these commitments is not material.



continued
F-11
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998 and 1997

The estimated fair values of the Corporation's financial instruments were as
follows:






1998 1997
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
December 31, (In thousands) Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------------------

Financial assets
Cash and cash equivalents ... $ 40,253 $ 40,253 $ 34,471 $ 34,471
Securities available-for-sale 458,331 458,331 343,115 343,115
Trading account securities .. -- -- 5,008 5,008
Securities held-to-maturity . 23,598 24,034 16,233 16,480
Loans, net of allowance for
loan losses ............... 515,304 516,676 481,956 480,035
Accrued interest receivable . 7,377 7,377 6,018 6,018

Financial liabilities
Deposits
Noninterest-bearing ..... $(114,566) $(114,566) $(102,080) $(102,080)
Interest-bearing ........ (754,586) (756,990) (692,282) (692,698)
Securities sold under
agreements to repurchase
and federal funds purchased (10,469) (10,469) (12,992) (12,992)
Borrowings .................. (107,800) (109,763) (42,575) (42,470)
Accrued interest payable .... (2,518) (2,518) (2,196) (2,196)



Other assets and liabilities of the Corporation not defined as financial
instruments, such as property and equipment, are not included in the above
disclosures. Also not included are nonfinancial instruments typically not
recognized in financial statements such as the value of core deposits, loan
servicing rights, customer goodwill, and similar items.

There is no ready market for a significant portion of the Corporation's
financial instruments. Accordingly, fair values are based on various factors
relative to expected loss experience, current economic conditions, risk
characteristics, and other factors. The assumptions and estimates used in the
fair value determination process are subjective in nature and involve
uncertainties and significant judgment, and therefore, fair values cannot be
determined with precision. Changes in assumptions could significantly affect
these estimated values.


F-12

continued
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998 and 1997


NOTE 5 - LOANS

Major classifications of loans are summarized as follows:






December 31, (In thousands) 1998 1997
---- ----


Commercial.................. $ 148,081 $ 140,815
Commercial real estate...... 229,489 212,184
Agricultural................ 33,231 24,065
Consumer real estate........ 95,604 93,338
Consumer installment........ 16,128 18,811
--------- ---------
Total loans, gross...... 522,533 489,213
Unearned discount........... (653) (1,114)
--------- ---------

Total loans............. $ 521,880 $ 488,099
========= =========



Included in consumer real estate are $3,829,000 and $6,627,000 of loans held for
sale at December 31, 1998 and 1997, respectively.


NOTE 6 - ALLOWANCE FOR LOAN LOSSES

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




Year Ended December 31, (In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------

Balance at beginning of period ............................................ $ 6,143 $ 5,342 $ 4,603
Provision for loan losses ................................................. 1,326 2,454 1,718
Loans charged off ......................................................... (1,168) (1,858) (1,298)
Recoveries on loans previously charged off ................................ 275 205 319
------- ------- -------


Balance at end of period .............................................. $ 6,576 $ 6,143 $ 5,342
======= ======= =======



A portion of the allowance for loan losses is allocated to impaired loans.
Information with respect to impaired loans and the related allowance for loan
losses is as follows:






December 31 (In thousands) 1998 1997
- ------------------------------------------------------------------------------------


Impaired loans for which no allowance for loan losses
is allocated ....................................... $ 950 $1,346
Impaired loans with an allocation of the allowance for
loan losses ........................................ 1,906 775
------ ------

Total impaired loans ............................. $2,856 $2,121
====== ======

Allowance for loan losses allocated to impaired loans $ 849 $ 642
====== ======






Year Ended December 31,(In thousands) 1998 1997 1996
-----------------------------------------------------------------------------------------

Average impaired loans ..................... $2,479 $3,172 $3,988
Interest income recognized on impaired loans 148 208 391
Interest income recognized on impaired loans
on a cash basis .......................... 92 206 380


Interest payments on impaired loans are generally applied to principal, unless
loan principal is considered to be fully collectible, in which case interest
is recognized on the cash basis.



F-13
continued


59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998 and 1997

NOTE 7 - BANK PREMISES AND EQUIPMENT

Bank premises and equipment are summarized as follows:




December 31, (In thousands) 1998 1997
---- ----


Land and improvements................................................. $ 4,388 $ 4,035
Building and improvements............................................. 16,739 13,978
Furniture and equipment............................................... 11,926 10,325
----------- -----------
Total cost........................................................ 33,053 28,338
Accumulated depreciation.......................................... (15,456) (13,475)
----------- -----------

Bank premises and equipment, net............................. $ 17,597 $ 14,863
=========== ===========



Depreciation and amortization charged to expense for the years ended December
31, 1998, 1997, and 1996 approximated $1,964,000, $1,645,000, and $1,692,000,
respectively. Occupancy expense has been reduced by approximately $693,000,
$731,000, and $723,000, for the years ended December 31, 1998, 1997, and 1996,
respectively, for rental income from leased premises.


NOTE 8 - INCOME TAXES

The provision for income taxes, included in the statements of income, consists
of the following:





Year Ended December 31, (In thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------
Current

Federal.............................. $ 4,934 $ 4,941 $ 3,700
State................................ 1,138 1,070 862
Deferred................................. (98) (474) 35
------- ------- -------

Total provision for income taxes..... $ 5,974 $ 5,537 $ 4,597
======= ======= =======


The difference between the provision for income taxes in the financial
statements and amounts computed by applying the current federal income tax rate
of 34% to income before income taxes is reconciled as follows:





Year Ended December 31, (In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------



Income taxes computed at the statutory rate........ $ 5,569 $ 4,793 $ 4,048
Tax-exempt interest income on securities
and loans........................................ (446) (377) (375)
Non-deductible purchase accounting adjustments..... 81 81 68
State income taxes, net of federal tax benefit..... 724 1,035 833
Other.............................................. 46 5 23
------- ------- -------

Total provision for income taxes............... $ 5,974 $ 5,537 $ 4,597
======= ======= =======




F-14

continued

60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998 and 1997

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





December 31, (In thousands) 1998 1997
- --------------------------------------------------------------------------------------

Gross deferred tax assets
Unrealized loss on securities available-for-sale ... $ 332 $ --
Allowance for loan losses .......................... 2,547 2,380
State operating loss carryforwards ................. 95 125
Other real estate .................................. 23 35
------- -------
Total gross deferred tax assets ................ 2,997 2,540
Gross deferred tax liabilities
Depreciation ....................................... (164) (120)
Unrealized gain on securities available-for-sale ... -- (431)
Purchase accounting adjustments .................... -- (2)
Deferred loan fees ................................. (133) (148)
------- -------
Total gross deferred tax liabilities ........... (297) (701)
------- -------

Net deferred tax asset .................... $ 2,700 $ 1,839
======= =======



NOTE 9 - ADVANCES FROM THE FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan Bank are summarized as follows:





1998 1997
----------------------------------------------------
Weighted Weighted
Average Average
December 31, (in thousands) Rate Amount Rate Amount
- -----------------------------------------------------------------------------------------------------------
Short-Term Borrowings
Advances from the Federal Home Loan Bank due

1998 ............................................... -% $ -- 6.21% $5,000
1999 ............................................... 5.73 2,000 -- --
- ---- ---- ----- ---- -----


5.73 2,000 6.21% 5,000
---- ----- ---- -----

Long-Term Borrowings
Advances from the Federal Home Loan Bank due
1999 ........................................... -% $ -- 5.73% $2,000
2000 ........................................... 5.48 7,000 5.48 7,000
2001 ........................................... 4.85 3,000 -- --
2002 ........................................... 5.39 12,000 5.39 12,000
2008 ........................................... 4.92 77,000 -- --
---- ------ ---- ------

5.01 99,000 5.45 21,000
---- ------ ---- ------

Total ............................................... 5.03 $101,000 5.60 $ 26,000
==== ======== ==== ========




Where required, the FHLB advances are secured by mortgage-backed securities and
unspecified mortgage loans.

F-15

continued
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998 and 1997

NOTE 10 - NOTES PAYABLE

Notes payable consisted of the following:




December 31, (Table amounts in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------

Revolving line of credit ($20,000,000); maturing on January 30, 2000;
interest payments due quarterly plus interest at the 6 month LIBOR plus 95
basis points or prime rate (6.0% at December 31, 1998); secured by all
common stock of the subsidiary banks ...................................... $ 4,000 $12,350

Revolving warehouse line of credit ($5,000,000); maturing on January 30,
2000; interest payable monthly at the 30, 60, or 90 day LIBOR plus 95 basis
points or prime rate (5.92% at December 31, 1998); secured by common stock
of all subsidiary banks ................................................... $ 2,500 $ 4,000

Noninterest-bearing note payable issued to acquire Porter Insurance
Company; principal due in the amount of $75,000 on October 31, 1999
and 2000 .................................................................. 150 --

Note payable issued to purchase property for Midwest Bank; recorded at an
imputed interest rate of 11.61%; principal payments of $75,000 due
August 31 of each year through the year 2000 .............................. 150 225
------- -------


$ 6,800 $16,575
======= =======



The revolving lines of credit include the following covenants: (1) the banks
must not have nonperforming assets in excess of 25% of Tier 1 capital plus loan
loss reserves and (2) the Corporation and each subsidiary bank must be
considered well capitalized, maintain consolidated tangible net worth of not
less than $65 million, and earn a minimum consolidated net income of $5.5
million for the previous four fiscal quarters. The Corporation had complied with
these covenants at December 31, 1998.


NOTE 11 - EMPLOYEE BENEFIT PLANS

The Corporation maintains a 401(k) salary reduction plan covering substantially
all employees. Eligible employees may elect to make tax deferred contributions
within a specified range of their compensation as defined in the plan. The Bank
contributes 1% more than the employee's contribution up to a 5% contribution.
Contributions to the plan are expensed currently and approximated $354,000,
$301,000, and $288,000 for the years ended December 31, 1998, 1997, and 1996,
respectively.

NOTE 12 - TIME DEPOSITS

Interest-bearing deposits in denominations of $100,000 and over approximated
$96,706,000 as of December 31, 1998 and $90,509,000 as of December 31, 1997.
Interest expense related to deposits in denominations of $100,000 and over
approximated $4,495,000 for 1998, $4,476,000 for 1997, and $3,004,000 for 1996.

Certificates of deposit have scheduled maturities for the years 1999 through
2003 and thereafter as follows:



(In thousands)
- ------------------------------------------------------------

1999 ...................................... $ 393,721
2000 ...................................... 34,351
2001 ...................................... 21,072
2002 ...................................... 1,025
2003 ...................................... 1,953
Thereafter ................................ 12
------------

$ 452,134
============


F-16
continued
62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998 and 1997

NOTE 13 - LEASES

The subsidiary banks lease a portion of their banking premises and equipment.
The leases expire in various years through the year 2009. Future rental
commitments under these noncancelable operating leases for the years 1999
through 2003 and thereafter are as follows:



(In thousands)
- -------------------------------------------------------------


1999 ......................................... $ 338
2000 ......................................... 338
2001 ......................................... 291
2002 ......................................... 291
2003 ......................................... 291
Thereafter ................................... 1,665
-----------

$ 3,214
===========



Rental expense included in occupancy and equipment expense was $320,000,
$295,000, and $277,000 for the years ended December 31, 1998, 1997, and 1996,
respectively.

NOTE 14 - RELATED PARTY TRANSACTIONS

Certain executive officers, directors, and their related interests are loan
customers of the Corporation's subsidiary banks. A summary of loans made by the
subsidiary banks in the ordinary course of business to or for the benefit of
directors and executive officers is as follows:



(In thousands)
- -------------------------------------------------------------------------------


Balance at December 31, 1997 ............................... $ 10,272
New loans .................................................. 4,364
Repayments ................................................. (4,771)
------------

Balance at December 31, 1998 ............................... $ 9,865
============


NOTE 15 - CAPITAL MATTERS

The Corporation and its subsidiary banks are subject to regulatory capital
requirements administered by the federal banking agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
banks must meet specific capital guidelines that involve quantitative measures
of assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices.

Quantitative measures established by regulation to ensure capital adequacy
require banks and bank holding companies to maintain minimum amounts and ratios
of total and Tier 1 capital to risk-weighted assets and Tier 1 capital to
average assets. If banks do not meet these minimum capital requirements, as
defined, bank regulators can initiate certain actions that could have a direct
material effect on a bank's financial statements. Management believes, as of
December 31, 1998 and December 31, 1997, that the Corporation and its subsidiary
banks meet all capital adequacy requirements to which they are subject.

As of December 31, 1998 and 1997, the most recent Federal Deposit Insurance
Corporation notification categorized the subsidiary banks as well capitalized
under the regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management believes have
changed the institutions' categories. To be categorized as well capitalized,
banks must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios. The actual capital amounts and ratios for the Corporation and
Midwest Bank and Trust Company, its largest subsidiary, are presented in the
following table.


F-17

continued
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998 and 1997

NOTE 15 - CAPITAL MATTERS (Continued)




To Be Well Capitalized
To Be Adequately Under Prompt Corrective
Actual Capitalized Action Provisions
---------------------------- -------------------------- --------------------------
As of December 31, 1998 (In thousands) Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------------


Total Capital
(to risk-weighted assets)
Corporation ........... $82,573 14.6% $45,129 8.0% $56,411 10.0%
Midwest Bank and
Trust Company ........ 38,448 14.7 20,968 8.0 26,210 10.0

Tier 1 Capital
(to risk-weighted assets)
Corporation ........... 75,997 13.5 22,565 4.0 33,846 6.0
Midwest Bank and
Trust Company ........ 35,322 13.5 10,484 4.0 15,726 6.0

Tier 1 Capital
(to average assets)
Corporation ........... 75,997 7.1 42,686 4.0 53,358 5.0
Midwest Bank and
Trust Company ........ 35,322 7.1 19,924 4.0 24,906 5.0

To Be Well Capitalized
To Be Adequately Under Prompt Corrective
Actual Capitalized Action Provisions
---------------------------- -------------------------- --------------------------
As of December 31, 1997 (In thousands) Amount Ratio Amount Ratio Amount Ratio

- ----------------------------------------------------------------------------------------------------------------------------------

Total Capital
(to risk-weighted assets)
Corporation ........... $55,980 10.8% $41,562 8.0% $51,953 10.0%
Midwest Bank and
Trust Company ........ 32,438 12.6 20,607 8.0 25,758 10.0

Tier 1 Capital
(to risk-weighted assets)
Corporation ........... 49,842 9.6 20,781 4.0 31,172 6.0
Midwest Bank and
Trust Company ........ 29,422 11.4 10,303 4.0 15,455 6.0

Tier 1 Capital
(to average assets)
Corporation ........... 49,842 6.2 32,418 4.0 40,522 5.0
Midwest Bank and
Trust Company ........ 29,422 7.1 16,506 4.0 20,633 5.0



NOTE 16 - RECAPITALIZATION

Effective December 17, 1997, the Corporation's Board of Directors increased the
number of authorized common shares by 11,000,000 shares, changed the par value
to $.01 per share and approved a two-for-one stock split effected in the form of
a 100% stock dividend. All share and per share amounts included in the financial
statements have been restated to reflect the stock split. In 1998 the
Corporation issued an additional 1,265,000 shares at $15 per share as part of an
initial public offering less offering expenses of $1,878,000.

A summary of common stock at December 31, 1998 and 1997 is as follows:




1998 1997
- ----------------------------------------------------------------------------------------------------


Authorized shares........................................ 17,000,000 17,000,000
Par value................................................ $ .01 $ .01
Shares issued............................................ 11,379,392 10,114,392




F-18

continued


64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998 and 1997

NOTE 17 - OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

The Corporation 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 commitments to extend credit, standby letters of credit, and
unused lines of credit and are summarized as follows:





(In thousands) 1998 1997
--------------------------------------------------------------------------------------------------------


Financial instruments whose contract amounts
represent credit risk
Unused lines of credit................................... $ 145,191 $ 117,295
Commitments to extend credit............................. 46,089 24,547
Standby letters of credit................................ 11,390 7,210



At December 31, 1998 and 1997, commitments to extend credit consisted of
$21,192,000 and $6,242,000 of fixed rate loan commitments. These commitments are
due to expire within 30 to 90 days of issuance and have rates ranging from 7.00%
to 9.50%. Substantially all of the unused lines of credit are at adjustable
rates of interest.

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

The Corporation also had outstanding firm commitments to originate mortgage
loans and sell these loans to the secondary market approximating $3,784,000 at
December 31, 1998 and $1,358,000 at December 31, 1997.


NOTE 18 - STOCK OPTION PLAN

The 1996 Stock Option Plan (the Plan) became effective on November 19, 1996.
Under the Plan, officers, directors, and key employees may be granted incentive
stock options to purchase the Corporation's common stock at no less than 100% of
the market price on the date the option is granted. Options generally become
excercisable in installments of 25% a year on each of the first through the
fourth anniversaries of the grant date and have a maximum term of ten years. The
Plan also permits non qualified stock options to be issued. The Corporation has
authorized 500,000 shares for issuance under the Plan.

The Corporation accounts for its stock option plan under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
no compensation expense has been recognized for the stock option plan in the
financial statements. Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock Based Compensation," prescribes new methods for
determining compensation expense under stock option plans, but allows
corporations to use APB No. 25 if they provide pro forma information computed
under the new standard. The following pro forma information presents net income
and earnings per share under the fair value method prescribed by SFAS No. 123:





1998 1997 1996
---- ---- ----


Net income.............................................. $ 10,188 $ 8,448 $ 7,280

Basic earnings per share................................ .92 .85 .73



continued


F-19
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998 and 1997

NOTE 18 - STOCK OPTION PLAN (Continued)

Information about option grants follows:



Number Weighted
of Average
Options Exercise Price
- --------------------------------------------------------------------


Granted during 1996 ......... 62,000 $ 8.13
------- ---------
Outstanding December 31, 1996 62,000 8.13
Granted during 1997 ......... 49,000 12.75
------- ---------
Outstanding December 31, 1997 111,000 10.17
Granted during 1998 ......... 141,500 17.88
------- ---------

Outstanding December 31, 1998 252,500 $ 14.49
======= =========



Options excercisable at year end are as follows:



Number Weighted
of Average
Options Exercise Price
- ------------------------------------------------------------------------------------------------------------

1996....................................................... - $ -
1997....................................................... 15,500 8.13
1998....................................................... 43,250 9.44



The fair value of the options granted during 1998, 1997, and 1996 is estimated
at $4.35, $2.92, and $2.22 on the date of grant using the Black-Scholes options
value model with the following assumptions: dividend yield of 1.0%, 1.0%, and
1.6%, respectively; a risk-free interest rate of 5.5%, 6.5%, and 6.5%
respectively; an assumed forfeiture rate of 0 for all years; and an average life
of 5 years for all years. The weighted average remaining life of the stock
options was 8.3 years and 8.4 years at December 31, 1998 and 1997.

NOTE 19 - PARENT COMPANY FINANCIAL STATEMENTS

The following are condensed balance sheets and statements of income and cash
flows for Midwest Banc Holdings, Inc., without subsidiaries:


CONDENSED BALANCE SHEETS




December 31, (In thousands) 1998 1997
- -------------------------------------------------------------------------------------------

ASSETS
Cash ............................................. $ 237 $ 328
Investment in subsidiaries ....................... 76,719 63,582
Other assets ..................................... 6,125 2,253
------- -------

Total assets ................................. $83,081 $66,163
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings ....................................... $ 4,150 $12,575
Other liabilities ................................ 1,302 628
Stockholders' equity ............................. 77,629 52,960
------- -------

Total liabilities and stockholders' equity ... $83,081 $66,163
======= =======




continued



F-20

66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998 and 1997

NOTE 19 PARENT COMPANY FINANCIAL STATEMENTS continued


CONDENSED STATEMENTS OF INCOME




Year Ended December 31(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------

Operating income
Dividends from subsidiary banks ......... $ 7,137 $ 6,387 $ 5,585
Fees from subsidiaries .................. 1,209 1,077 1,005
Other income ............................ 144 3 2
Interest expense ........................ 332 975 1,048
Other expense ........................... 3,685 3,232 2,769
-------- -------- --------


INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARIES ....... 4,473 3,260 2,775

Income tax benefit ........................... (965) (1,219) (760)

Equity in undistributed income of subsidiaries 4,967 4,032 3,773
-------- -------- --------


NET INCOME ................................... $ 10,405 $ 8,511 $ 7,308
======== ======== ========





CONDENSED STATEMENTS OF CASH FLOWS





Year Ended December 31 (In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income ....................................... $ 10,405 $ 8,511 $ 7,308
Adjustments to reconcile net income to
net cash provided by operating activities
Equity in undistributed income of
subsidiaries ............................... (4,967) (4,032) (3,773)
Depreciation ................................. 112 75 81
Decrease (increase) in other assets .......... (3,950) (873) 169
Increase in other liabilities ................ 674 44 195
-------- -------- --------
Net cash provided by operating activities 2,274 3,725 3,980

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries ....................... (9,289) (1,350) (2,000)
Property and equipment expenditures .............. (112) (143) (82)
-------- -------- --------
Net cash used in investing activities ........ (9,401) (1,493) (2,082)

CASH FLOWS FROM FINANCING ACTIVITIES
Bank borrowings .................................. 15,350 -- 250
Payments on bank borrowings ...................... (23,775) (2,075) (1,325)
Issuance of common stock ......................... 17,097 -- --
Dividends paid ................................... (1,636) (551) (550)
Treasury stock sales (purchases), net ............ -- (14) 1
-------- -------- --------
Net cash provided by (used in) financing
activities ................................. 7,036 (2,640) (1,624)
-------- -------- --------

Increase (decrease) in cash and cash equivalents ...... (91) (408) 274

Cash and cash equivalents at beginning of year ........ 328 736 462
-------- -------- --------

CASH AND CASH EQUIVALENTS AT END OF YEAR .............. $ 237 $ 328 $ 736
======== ======== ========




continued


F-21
67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998 and 1997

NOTE 20 - OTHER COMPREHENSIVE INCOME

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





Years Ended December 31 (In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------


Change in unrealized gains (losses)
on securities available-for-sale .. $ (849) $ 3,805 $(3,461)
Reclassification adjustment for gains
recognized in income .............. 1,111 729 181
------- ------- -------
Net unrealized gains (losses) ... (1,960) 3,076 (3,642)
Tax expense (benefit) .............. (763) 1,024 (1,458)
------- ------- -------

Other comprehensive income .......... $(1,197) $ 2,052 $(2,184)
======= ======= =======




F-22

68
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------

3.1 Restated Certificate of Incorporation, as amended
(incorporated by reference to Registrant's Registration
Statement on Form S-1, Registration No. 333-42827).
3.2 Restated By-laws, as amended (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, File No. 0-29652).
4.1 Specimen Common Stock Certificate (incorporated by reference
to Registrant's Registration Statement on Form S-1,
Registration No. 333-42827).
10.1 $18.0 million Revolving Loan Agreement dated as of May 1,
1995, between the Company and LaSalle National Bank, as
amended (incorporated by reference to Registrant's
Registration Statement on Form S-1, Registration No.
333-42827).
10.2 $4.0 million Revolving Loan Agreement dated as of May 1, 1995,
between Midwest One Mortgage Services, Inc. and LaSalle
National Bank (incorporated by reference to Registrant's
Registration Statement on Form S-1, Registration No.
333-42827).
*10.3 Midwest Banc Holdings, Inc. 1996 Stock Option Plan
(incorporated by reference to Registrant's Registration
Statement on Form S-1, Registration No. 333-42827).
*10.4 Amendment to the Midwest Banc Holdings, Inc. 1996 Stock
Option Plan.
*10.5 Form of Transitional Employment Agreements
(incorporated by reference to Registrant's Registration
Statement on Form S-1, Registration No. 333-42827).
10.6 Lease dated as of December 24, 1958, between Western National
Bank of Cicero and Midwest Bank and Trust Company, as amended
(incorporated by reference to Registrant's Registration
Statement on Form S-1, Registration No.
333-42827).
10.7 Britannica Centre Lease dated as of May 1, 1994, between
Chicago Title and Trust Company, as Trustee under Trust
Agreement dated November 2, 1977, and known as Trust No.
1070932, and Midwest Bank & Trust Company (incorporated by
reference to Registrant's Registration Statement on Form S-1,
Registration No. 333-42827).
10.8 Lease dated as of March 20, 1996, between Grove Lodge No. 824
Ancient Free and Accepted Masons and Midwest Bank of Hinsdale
(incorporated by reference to Registrant's Registration
Statement on Form S-1, Registration No.
333-42827).
10.9 Office Lease undated between Grove Lodge No. 824 Ancient Free
and Accepted masons and Midwest Bank of Hinsdale (incorporated
by reference to Registrant's Registration Statement on Form
S-1, Registration No. 333-42827).
10.10 Credit Agreement as of January 30,1998, between the Company,
Midwest One Mortgage Services, Inc. and Harris Trust & Savings
Bank (incorporated by reference to Registrant's Registration
Statement on Form S-1, Registration No. 333-42827).
21.1 Subsidiaries (incorporated by reference to Registrant's
Registration Statement on Form S-1, Registration No.
333-42827).
23.1 Consent of Crowe, Chizek and Company LLP.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule

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


i