MIDWEST BANC HOLDINGS INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 2002

Commission File Number: 0-29598

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

DELAWARE 36-3252484
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)

501 W. NORTH AVE.
MELROSE PARK, ILLINOIS 60160
(Address of principal executive offices) (ZIP code)

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

Indicate by checkmark 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

CLASS OUTSTANDING AT NOVEMBER 1, 2002
Common, par value $.01 16,154,030

MIDWEST BANC HOLDINGS, INC.

Form 10-Q

Table of Contents

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

See accompanying notes to unaudited consolidated financial statements.

Page 1

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended September 30, 2002 and 2001
(In Thousands, Except Per Share Data)

See accompanying notes to unaudited consolidated financial statements.

Page 2

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended September 30, 2002 and 2001
(In Thousands, Except Per Share Data)

See accompanying notes to unaudited consolidated financial statements.

Page 3

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine Months Ended September 30, 2002 and 2001
(In Thousands, Except Per Share Data)

See accompanying notes to unaudited consolidated financial statements.

Page 4

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Nine Months Ended September 30, 2002 and 2001
(In Thousands, Except Per Share Data)

See accompanying notes to unaudited consolidated financial statements.

Page 5

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Nine Months Ended September 30, 2002 and 2001
(In Thousands, Except Per Share Data)

See accompanying notes to unaudited consolidated financial statements.

Page 6

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 2002 and 2001
(In Thousands)

See accompanying notes to unaudited consolidated financial statements.

Page 7

NOTE 1 - BASIS OF PRESENTATION

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

The annualized results of operations for the three months and nine
months ended September 30, 2002 are not necessarily indicative of the results
expected for the full year ending December 31, 2002.

NOTE 2 - STOCK DIVIDEND

On July 9, 2002, the Company effected a three-for-two stock split
payable in the form of a stock dividend. All references to number of shares
issued, outstanding (basic and diluted) and held in treasury, earnings per
share, and book value per share, for all periods presented have been restated as
if the three-for-two stock split had actually occurred on January 1, 2001.

NOTE 3 - EARNINGS PER SHARE

For purposes of per share calculations, the Company had 16,164,000 and
16,110,000 shares of common stock outstanding at September 30, 2002 and 2001,
respectively. Basic earnings per share for the three months and nine months
ended September 30, 2002 and 2001 were computed by dividing net income by the
weighted average number of shares outstanding. Diluted earnings per share for
the three and nine months ended September 30, 2002 and 2001 were computed by
dividing net income by the weighted average number of shares outstanding,
adjusted for the dilutive effect of the outstanding stock options. Computations
for basic and diluted earnings per share as of these dates are provided below.

All outstanding options were included in the computation of diluted
earnings per share for the three months and nine months ended September 30, 2002
and 2001.

Page 8

NOTE 4 - STOCK OPTIONS

During the first nine months of 2002, 235,500 stock options were
granted at an exercise price of $14.90 per share. In addition, during the first
nine months of 2002, there were 126,330 outstanding options exercised. Total
stock options outstanding were 1,122,447 at September 30, 2002 with exercise
prices ranging between $5.42 and $14.90 and expiration dates between 2006 and
2012.

NOTE 5 - ISSUANCE OF TRUST PREFERRED SECURITIES

In May 2000, the Company formed MBHI Capital Trust I (the "Trust"). The
Trust is a statutory business trust formed under the laws of the State of
Delaware and is wholly-owned by the Company. In June 2000, the Trust issued 10%
preferred securities with an aggregate liquidation amount of $20 million ($25
per preferred security) to third-party investors. The Company then issued 10%
junior subordinated debentures aggregating $20 million to the Trust. The junior
subordinated debentures are the sole assets of the Trust. The junior
subordinated debentures and the preferred securities pay distributions and
dividends, respectively, on a quarterly basis, which are included in interest
expense. The junior subordinated debentures will mature on June 7, 2030, at
which time the preferred securities must be redeemed. The junior subordinated
debentures and preferred securities can be redeemed contemporaneously, in whole
or in part, beginning June 7, 2005 at a redemption price of $25 per preferred
security. The Company has provided a full, irrevocable and unconditional
guarantee on a subordinated basis of the obligations of the Trust under the
preferred securities in the event of the occurrence of an event of default, as
defined in such guarantee. Debt issuance costs totaling $270,000 and
underwriting fees of $700,000 were capitalized related to the offering and are
being amortized over the estimated life of the junior subordinated debentures.

NOTE 6 - HEDGING ACTIVITIES

The Company is involved in certain derivative transactions that are
intended to protect the fair value of certain assets or liabilities and to
improve the predictability of certain future transactions. The Company's Board
of Directors has implemented policy guidelines and parameters for these types of
transactions. All derivative instruments are recorded at their fair values and
the change in the fair value of a derivative is included in other income. If
derivative instruments are designated as hedges of fair values, both the change
in the fair value of the hedge and the hedged item are included in current
earnings. Fair value adjustments related to cash flow hedges are recorded in
other comprehensive income and reclassified to earnings when the hedged
transaction is reflected in earnings. Ineffective portions of hedges are
reflected in earnings as they occur.

In January 2002, the Company entered into a plain vanilla interest rate
swap with a counterparty in order to convert its $20 million of outstanding
trust preferred securities and related junior subordinated debentures from a 10%
fixed rate instrument into floating rate debt. The plain vanilla interest rate
swap has a notional amount of $20 million and was written to the call date on
the trust preferred securities, which is June 7, 2005. The Company will pay the
interest on the swap quarterly at a rate equal to the 3-month LIBOR. The
counterparty will pay a fixed rate of 4.59% for the term of the agreement. The
Company has documented this to be a fair value hedge of the junior subordinated
debentures and reflects the change in the fair value of the swap as an
adjustment to income, which, to the extent of its effectiveness, offsets the
change in the fair value of the debentures.

During July of 2002, the Company terminated the fair value hedge in
exchange for $718,000. Approximately $294,000 of this amount was determined to
be due to hedge ineffectiveness and recognized into income in the third quarter.
The remaining amount is being accreted into income, as a reduction of interest
expense, over the estimated life of the junior subordinated debentures.

In August of 2002, the Company entered into a stand-alone derivative
transaction with a notional amount of $20 million for a term of five years,
maturing August 30, 2007. This transaction is a floating rate interest swap. The
underlying instrument has a credit rating of Aa2/AA and is priced at 3-Month
LIBOR plus 125 basis points. Since the swap is not a hedge it is viewed as a
stand-alone derivative. Changes in the market value of stand-alone derivatives
are charged to earnings on a quarterly basis. As of September 30, 2002, there
was no impact on earnings.

From time to time, the Company also buys and sells various covered put
and call options, with terms of less than 90 days, on mortgage-backed
securities. The Company had no covered put or call options outstanding at
September 30, 2002.

Page 9

NOTE 7 - RECENT REGULATORY DEVELOPMENTS

On July 30, 2002, President Bush signed the Sarbanes-Oxley Act of 2002
(the "Sarbanes-Oxley Act"). This legislation impacts corporate governance of
public companies, affecting their officers and directors, their audit
committees, their relationships with their accountants and the audit function
itself. Certain provisions of the Act became effective on July 30, 2002. Others
will become effective as the SEC adopts appropriate rules.

The Sarbanes-Oxley Act implements a broad range of corporate governance
and accounting measures for public companies designed to promote honesty and
transparency in corporate America and better protect investors from corporate
wrongdoing. The Sarbanes-Oxley Act's principal legislation includes:

the creation of an independent accounting oversight board to oversee
the audit of public companies and auditors who perform such audits;

auditor independence provisions which restrict non-audit services that
independent accountants may provide to their audit clients;

additional corporate governance and responsibility measures, including
(i) requiring the chief executive officer and chief financial officer
to certify financial statements; (ii) prohibiting trading of securities
by officers and directors during periods in which certain employee
benefit plans are prohibited from trading; (iii) requiring a company's
chief executive officer and chief financial officer to forfeit salary
and bonuses, including profits on the sale of company securities, in
certain situations; and (iv) protecting whistleblowers and informants;

expansion of the power of the audit committee, including the
requirements that the audit committee (i) have direct control of the
engagement of the outside auditor, (ii) be able to hire and fire the
auditor, and (iii) approve all non-audit services;

expanded disclosure requirements, including accelerated reporting of
stock transactions by insiders and the prohibition of most loans to
directors and executive officers of non-financial institutions;
mandatory disclosure by analysts of potential conflicts of interest;
and

a range of enhanced penalties for fraud and other violations.

NOTE 8 - NEW ACCOUNTING STANDARDS

In 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. The amortization of goodwill ceases upon
adoption of SFAS No. 142, which for most companies, was January 1, 2002. At
September 30, 2002, the Company had $4.5 million of goodwill. Approximately $1.5
million of the goodwill recorded by the Company is related to a branch
acquisition. The Company has adopted SFAS 147, "Acquisition of Certain Financial
Institutions," as of September 30, 2002 and has discontinued the amortization of
the $1.5 million of goodwill recorded for the branch acquisition. The after tax
impact of this was not material.

Page 10

During the second quarter of 2002, the Company completed the first step
of its impairment testing of its goodwill. The Company concluded that there is
no impairment. The impact of this standard on the three and nine-month periods
ended September 30, 2002 and 2001 is as follows:

NOTE 9 - ACQUISITION

On July 22, 2002, the Company jointly announced with Big Foot Financial
Corp. ("BFFC"), the execution of a definitive agreement providing for the
acquisition of BFFC by the Company in a stock merger. At closing, the Company
will issue 1.104 shares of its common stock for each share of BFFC common stock
outstanding on the effective date, resulting in a deal value of approximately
$33.4 million, based on closing prices of each of the Company's and BFFC's
common stock on July 19, 2002. The price is a 25.5% premium to BFFC's closing
price of $16.95 on that date. BFFC had 1,509,168 shares outstanding as of
September 30, 2002. The exchange ratio is fixed and BFFC has the right to
terminate the transaction if the Company's stock price falls below an average of
$17.12 during the 20 trading days prior to closing, subject to certain
provisions. The transaction, which is subject to approval by regulators and
BFFC's shareholders, is expected to close in the first quarter of 2003.

NOTE 10 - RECLASSIFICATION OF SECURITIES AVAILABLE-FOR-SALE

During the third quarter of 2002, the Company reclassified
approximately $100 million of mortgage-backed securities from the
available-for-sale category to the held-to-maturity category. This transfer was
required to be at fair value which resulted in an unrealized gain and
accumulated other comprehensive income at the time of transfer, of $1,396,000
and $842,000, respectively, which is being amortized/accreted to expense/income
over the life of the securities as a yield adjustment.

NOTE 11 - SUBSEQUENT EVENT

In October 2002, the Company formed MBHI Capital Trust II (the
"Trust"), a statutory trust formed under the laws of the State of Delaware and a
wholly-owned financing subsidiary of the Company. In October 2002, the Trust
issued $15 million in aggregate liquidation amount of trust preferred securities
in a private placement offering. Simultaneously with the issuance of the trust
preferred securities by the Trust, the Company issued an equivalent amount of
junior subordinated debentures to the Trust. The junior subordinated debentures
are the sole assets of the Trust. The junior subordinated debentures and the
trust preferred securities pay distributions and dividends, respectively, on a
quarterly basis, which are included in interest expense. The interest rate
payable on the debentures and the trust preferred securities resets quarterly,
and is equal to LIBOR plus 3.45%, provided that this rate cannot exceed 12.5%
through the interest payment date in November 2007. The junior subordinated
debentures will mature on November 7, 2032, at which time the preferred
securities must be redeemed. The Company has provided a full, irrevocable, and
unconditional guarantee on a subordinated basis of the obligations of the Trust
under the preferred securities as set forth in such guarantee agreement. Debt
issuance costs and fees of the placement agent in connection with the offering
will be capitalized and will be amortized over the estimated life of the junior
subordinated debentures.

Page 11

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations - Three Months and Nine Months Ended
September 30, 2002 and 2001

Consolidated net income for the third quarter of 2002 was $6.4 million,
or $0.39 and $0.38 per basic and diluted share, respectively, a 33.3% increase
compared to $4.8 million, or $0.30 and $0.29 per basic and diluted share,
respectively, for the third quarter of 2001. Basic and diluted earnings per
share for the three months ended September 30, 2002 were 30.0% and 31.0%,
respectively, higher than for the comparable period in 2001. Consolidated net
income for the nine months ended September 30, 2002 was $19.1 million, or $1.18
and $1.16 per basic and diluted share, respectively, a 48.1% increase compared
to $12.9 million or $0.80 and $0.79 per basic and diluted share, respectively,
for the similar period in 2001. Basic and diluted earnings per share for the
nine months ended September 30, 2002 were 47.5% and 46.8%, respectively, higher
than for the comparable period in 2001. The return on average assets for the
three months ended September 30, 2002 was 1.33% compared to 1.17% for the
similar period in 2001. For the nine months ended September 30, 2002, the return
on average assets was 1.37% compared to 1.11% for the similar period in 2001.
The return on average equity for the three months ended September 30, 2002 was
22.11% compared to 20.46% for the similar period in 2001. For the nine months
ended September 30, 2002, the return on average equity was 23.87% compared to
19.36% for the similar period in 2001.

Net interest income increased $3.4 million, or 28.7%, to $15.2 million
in the third quarter of 2002 compared to $11.8 million in the third quarter of
2001. During the nine months ended September 30, 2002, net interest income
increased $11.0 million, or 31.9%, to $45.6 million compared to $34.6 million
for the comparable period in 2001. Excluding gains on securities and trading
account profits, other income increased 14.9% to $3.0 million and other expenses
increased 4.0% to $8.3 million in the second quarter of 2002. Other income,
excluding gains on securities and trading account profits, increased 26.5% to
$8.3 million for the nine months ended September 30, 2002 compared to the
similar period in 2001. Other expenses for the nine months ended September 30,
2002 increased by $1.8 million or 7.8% compared to the similar period in 2001.

Net Interest Income
- -------------------

Net interest income was $15.2 million during the quarter ended
September 30, 2002 compared to $11.8 million during the three months ended
September 30, 2001, an increase of $3.4 million or 28.7%. During the nine months
ended September 30, 2002, net interest income increased $11.0 million, or 31.9%,
to $45.6 million in 2002 compared to $34.6 million for the similar period in
2001. The Company's net interest margin (tax equivalent net interest income as a
percentage of earning assets) was 3.55% for the three months ended September 30,
2002 compared to 3.24% for the comparable period in 2001. During the nine months
ended September 30, 2002, the net interest margin was 3.59% compared to 3.31%
for the similar period in 2001. Net interest income increased because the
decrease in average rates paid on deposits and borrowings was greater than the
decrease in the yields on earning assets. This decrease in yields was a result
of the 11 rate reductions by the Federal Reserve during 2001. The lower interest
rate environment has resulted in lower yields on earning assets and
interest-bearing liabilities, especially certificates of deposit that have been
repriced at current market rates.

The average loan yield was 6.96% during the third quarter of 2002, a
decrease of 15.7% from 8.26% during the comparable period in 2001. For the nine
months ended September 30, 2002, the average loan yield was 6.98%, a decrease of
20.0% from 8.72% during the comparable period in 2001. Average loan balances
increased $180.3 million, or 19.3%, to $1.1 billion during the third quarter of
2002 from $935.6 million during the similar period in 2001. During the first
nine months of 2002, average loan balances increased $176.5 million, or 19.7%,
to $1.1 billion from $896.6 million during the similar period of 2001. The
Company's net interest income and net income is dependent in part on stable
interest rates. Interest rates were stable during the first three quarters of
2002.

Page 12

Yields on securities during the third quarter of 2002 were 5.80%, a
decrease of 10.5% from 6.48% during the comparable period in 2001. During the
nine months ended September 30, 2002, securities' yields decreased 9.4% to 6.08%
from 6.71% in the comparable period in 2001. A decrease in mortgage loan rates
has sparked an increase in mortgage loan refinancing which has accelerated the
prepayments speeds of the Company's mortgage-backed securities and increased
amortization expense on these securities.

Yields on earning assets decreased 13.5% to 6.52% during the third
quarter of 2002 compared to 7.54% for the third quarter of 2001. During the
first nine months of 2002, yields on earning assets decreased to 6.61%, or
16.5%, from 7.92% for the similar period in 2001. Average earning assets,
however, increased to $1.8 billion for both the three months and nine months
ended September 30, 2002 from $1.5 billion for the three months and nine months
ended September 30, 2001. The decrease in yields on earning assets was offset by
a decrease in rates paid on deposits and borrowings. Average rates paid on
deposits decreased 37.2% to 2.84% for the three months ended September 30, 2002
from 4.52% for the comparable period in 2001. For the first nine months of 2002,
average rates paid on deposits decreased 40.3% to 2.92% from 4.89% for the
similar period of 2001. Average rates paid on borrowings were 4.44% for the
third quarter of 2002 compared to 5.52% for the third quarter of 2001. During
the nine months ended September 30, 2002, average rates paid on borrowings were
4.38% compared to 5.73% for the similar period in 2001.

In January 2002, the Company entered into a plain vanilla interest rate
swap with a counterparty in order to convert its $20 million of outstanding
trust preferred securities and related junior subordinated debentures from a
10.00% fixed rate instrument into floating rate debt. The average yield on the
$20 million trust preferred securities and related junior subordinated
debentures was 5.80% for the first nine months of 2002. See Note 6 to the
unaudited consolidated financial statements. During July of 2002, the Company
terminated the fair value hedge in exchange for $718,000. Approximately $294,000
of this amount was determined to be due to hedge ineffectiveness and recognized
into income in the third quarter. The remaining amount is being accreted into
income, as a reduction of interest expense, over the estimated life of the
junior subordinated debentures.

The net interest margin calculation for the three months ended
September 30, 2002 and 2001 is shown below (interest income and average rate on
non-taxable securities and loans are reflected on a tax equivalent basis,
assuming a 35% federal income tax rate for 2002 and 2001):

Page 13

The net interest margin calculation for the nine months ended September
30, 2002 and 2001 is shown below (interest income and average rate on
non-taxable securities and loans are reflected on a tax equivalent basis,
assuming a 35% federal tax rate for 2002 and 2001):

Page 14

Other Income
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Other income, excluding securities gains and trading account profits,
was $3.0 million for the three months ended September 30, 2002, an increase of
$383,000, or 14.9% over the comparable period in 2001. For the nine months ended
September 30, 2002, other income, excluding securities gains and trading account
profits, was $8.3 million, an increase of $1.7 million, or 26.5% compared to
$6.5 million for the comparable period in 2001. The other income to average
assets ratio was 0.62% for the three months ended September 30, 2002 compared to
0.63% for the same period in 2001. For the nine months ended September 30, 2002,
the other income to average assets ratio was 0.59% compared to 0.56% for the
same period in 2001. The increase in other income for the three and nine month
periods is mainly due to increases in service charges on deposits, option
income, and insurance and brokerage commissions.

Service charges on deposits increased 9.2%, or $126,000, to $1.5
million in the third quarter of 2002 from $1.4 million in the third quarter of
2001. For the nine months ended September 30, 2002, service charges on deposits
increased 19.3%, or $679,000, to $4.2 million compared to $3.5 million for the
comparable period in 2001. This increase in service charges and fees, which
include service charges on deposit accounts, is mainly due to deposit growth.
Management expects service charges and fees to increase with future deposit
growth.

Insurance and brokerage commissions increased $179,000 to $385,000 for
the third quarter of 2002 from $206,000 in the third quarter of 2001. For the
nine months ended September 30, 2002, insurance and brokerage commissions
increased $502,000 to $988,000 compared to $486,000 for the first nine months of
2001. The Company anticipates that brokerage commissions will increase in the
future through its subsidiary, Midwest Financial and Investment Services, Inc.
This subsidiary provides securities brokerage services to both bank and non-bank
customers. Brokerage activities are expected to be expanded to many of the
Company's banking center locations in the near future.

Mortgage banking fees increased 55.2% to $208,000 during the third
quarter of 2002 compared to $134,000 for the similar period in 2001. As mortgage
rates have fallen, the Company has seen an increase in mortgage banking
activity. For the nine months ended September 30, 2002, mortgage banking fees
increased $33,000 to $440,000 from $407,000 in the comparable period in 2001.
The Company places most mortgages originated into the secondary market.

Trust income decreased by 14.7% or $23,000 to $134,000 for the third
quarter of 2002 compared to $157,000 for the similar period in 2001. For the
nine months ended September 30, 2002, trust income decreased by $93,000 compared
to the nine months ended September 30, 2001. The Company sold a portion of its
trust business in 1999, and the three-year payout period will expire through
2002. Trust income is derived from the market value of trust assets under
management. The market value of trust assets is subject to fluctuations in the
stock and bond markets. The value of these trust assets has been negatively
impacted during 2002 due to the overall weakness and deterioration in the U.S.
equity and fixed income markets. Trust assets under management approximated
$182.1 million as of September 30, 2002.

The Company purchased bank-owned life insurance ("BOLI") policies in
June 2000. The increase in cash surrender value of life insurance was $234,000
and $702,000 during the third quarter and first nine months of 2002,
respectively. The increase in cash surrender value of life insurance is not
included in interest income. Management currently intends to use the increase in
cash surrender value of life insurance to offset increased employee benefits
expense.

Page 15

The Company manages its securities available-for-sale portfolio and
trading account portfolio on a total return basis. In this respect, management
regularly reviews the performance of its securities and sells specific
securities to provide opportunities to enhance net interest income and net
interest margin, and when possible it will recognize gains on the sale of
securities. The Company has a long history of managing its securities in this
manner. Trading account profits result from trading strategies that are utilized
to supplement narrowing bond yields during periods of interest rate volatility.
There were no trading account profits during the three months ended September
30, 2002 compared to $318,000 during the three months ended September 30, 2001.
Year-to-date net trading account profits were $348,000 and $815,000 in 2002 and
2001, respectively. Sales of securities available-for-sale resulted in net gains
of $97,000 in the third quarter of 2002 compared to $714,000 for the comparable
period in 2001. For the nine months ended September 30, 2002, gains on sales of
securities available-for-sale were $1.4 million compared to $2.3 million for the
similar period in 2001. Securities available-for-sale are held in a manner which
allows for their sale in response to changes in interest rates, liquidity needs,
or significant prepayment risk. Market fluctuations may create opportunities to
either purchase or sell securities. The Company looks for opportunities to
enhance its revenues by purchasing and/or selling as deemed appropriate by
management. The Company reclassified approximately $100 million of its
mortgage-backed securities from available-for-sale to held-to-maturity under
permissible provisions of FASB 115 in order to enhance its interest rate risk
position by matching longer term assets with longer term funding sources. See
Note 10 to the unaudited financial statements.

Periodically, the Company has bought or sold various covered put and
call options, with terms less than 90 days, on mortgage-backed securities. These
covered options have either expired or have been exercised, and the associated
income or expense has been recognized in the corresponding period. Option income
increased $47,000 to $335,000 during the third quarter of 2002 compared to the
third quarter of 2001. For the nine months ended September 30, 2002, option
income increased $643,000 to $989,000 compared to the similar period in 2001.
The Company had no covered put or call options outstanding at September 30,
2002. See Note 6 to the unaudited consolidated financial statements.

Other Expenses
- --------------

Total other expenses increased 4.0%, or $320,000, to $8.3 million
during the third quarter of 2002 compared to $8.0 million for the comparable
period in 2001. For the nine months ended September 30, 2002, total other
expenses increased 7.8%, or $1.8 million, to $25.0 million from $23.2 million in
the first nine months of 2001. The other expenses to average assets ratio was
1.74% for the three months ended September 30, 2002 compared to 1.94% for the
same period in 2001. For the nine months ended September 30, 2002, the other
expense to average assets ratio was 1.80% compared to 2.00% for the similar
period in 2001. The net overhead expenses to average assets ratio was 1.12% for
the three months ended September 30, 2002 compared to 1.32% for the same period
in 2001. For the nine months ended September 30, 2002, the net overhead expenses
to average assets ratio was 1.21% compared to 1.44% for the similar period in
2001. The efficiency ratio was 44.08% for the three months ended September 30,
2002 compared to 51.93% for the same period in 2001. For the nine months ended
September 30, 2001 the efficiency ratio was 44.57% compared to 52.99% for the
same period in 2001.

Salary and benefit expenses increased 9.6% or $456,000 to $5.2 million
for the third quarter of 2002 compared to $4.8 million for the similar period in
2001. For the nine months ended September 30, 2002, salary and benefit expenses
increased $1.6 million or 11.9% to $15.5 million from $13.8 million for the
comparable period in 2001. The number of full-time equivalent employees was 388
as of September 30, 2002 compared to 359 as of September 30, 2001. Increased
full-time staff positions, including investment brokerage staff, enhanced
benefit programs, and increased health insurance costs have resulted in the
increase in salaries and employee benefits.

Page 16

Occupancy expenses decreased $110,000 or 8.8% to $1.1 million during
the third quarter of 2002 compared to $1.2 million for the similar period in
2001. For the nine months ended September 30, 2002, occupancy expenses decreased
$180,000 or 4.8% to $3.6 million from $3.8 million in the nine months of 2001.
This decrease was due to the decrease in furniture and equipment depreciation
during the first nine months of 2002 compared to the similar period in 2001.

Expenses, other than salary and employee benefits and occupancy,
decreased $26,000 or 1.3% to $2.0 million in the third quarter compared to the
similar period in 2001. Other expenses increased $350,000 or 6.2% to $6.0
million for the nine months ended September 30, 2002 compared to $5.6 million
for the similar period in 2001. The increase in expenses was due primarily to
outsourcing arrangements, other loan related expenses, and general operating
costs.

Income Taxes
- ------------

The Company recorded income tax expense of $2.5 million, or 28.1% of
net income, and $2.3 million, or 32.7% of net income, for the quarters ended
September 30, 2002 and 2001, respectively. For the nine months ended September
30, 2002, the provision for income taxes increased 36.5% to $8.9 million, or
31.7% of net income. The increase in income tax expense was due to the growth in
pre-tax income for the nine months ended September 30, 2002. The Company's
effective income tax rate declined to 28.1% from 32.7% and to 31.7% from 33.5%
for the three and nine months ended September 30, 2002, respectively. These
declines are a result of a new regulation issued by the Illinois Department of
Revenue related to apportionment of business income of financial organizations.
The Company adjusted its 2002 state income tax expense for the nine months ended
September 30, 2002. The Company expects to have further reductions in its state
income tax expense for the remainder of 2002 and potentially for prior tax
reporting periods.

Internal Reorganization
- -----------------------

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

FINANCIAL CONDITION

Loans
- -----

Total loans increased $129.9 million, or 13.0%, to $1.1 billion as of
September 30, 2002 from $1.0 billion as of December 31, 2001. This increase is
partly due to an overall increase in draws on commercial and commercial real
estate lines of credit. Commercial loans increased $11.9 million, or 5.4%, to
$232.7 million as of September 30, 2002 compared to $220.7 million at December
31, 2001. Commercial real estate loans increased 16.9%, or $103.6 million, to
$715.1 million as of September 30, 2002 from $611.6 million as of December 31,
2001. Agricultural loans increased 19.1%, or $9.3 million, to $58.1 million as
of September 30, 2002 from $48.8 million as of December 31, 2001.

Page 17

Consumer real estate loans increased $2.0 million, or 1.8%, to $111.3
million as of September 30, 2002 from $109.3 million as of December 31, 2001.
Consumer loans increased 23.8% to $16.1 million as of September 30, 2002
compared to $13.0 million as of December 31, 2001.

Most mortgage loans the Company originates are sold in the secondary
market. At any point in time, loans will be at various stages of the mortgage
banking process. Included as part of consumer real estate loans are loans held
for sale, which were $3.4 million as of December 31, 2001 and $3.9 million at
September 30, 2002. The carrying value of these loans approximated their market
value at that time.

Allowance for Loan Losses
- -------------------------

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

Following is a summary of changes in the allowance for loan losses for
the nine months ended September 30:

2002 2001
---- ----
(dollars in thousands)

Balance, January 1 $ 10,135 $ 8,593
Provision charged to operations 2,592 1,550
Loans charged-off (1,770) (552)
Recoveries 193 142
---------- -----------
Balance, September 30 $ 11,150 $ 9,733
========== ===========

The Company recognizes that credit losses will be experienced and the
risk of loss will vary with, among other things, general economic conditions;
the type of loan being made; the creditworthiness of the borrower over the term
of the loan and in the case of a collateralized loan, the quality of the
collateral for such loan. The allowance for loan losses represents the Company's
estimate of the allowance necessary to provide for probable incurred losses in
the portfolio. In making this determination, the Company analyzes the ultimate
collectibility of the loans in its portfolio by incorporating feedback provided
by internal loan staff, an independent loan review function, and information
provided by examinations performed by regulatory agencies. The Company makes
quarterly evaluations as to the adequacy of the allowance for loan losses.

On a quarterly basis, management of each of the Banks meets to review
the adequacy of the allowance for loan losses. Each bank loan officer grades
these individual credits, and the Company's independent loan review function
validates the officers' grades. In the event that loan review downgrades a loan,
it is included in the allowance analysis at the lower grade. The grading system
is in compliance with applicable regulatory classifications, and the allowance
is allocated to the loans based on the regulatory grading, except in instances
where there are known differences (e.g. collateral value is nominal).

Page 18

The analysis of the allowance for loan losses is comprised of three
components: specific credit allocation; general portfolio allocation; and
subjectively by determined allocation. The specific credit allocation includes a
detailed review of the credit in accordance with SFAS Nos. 114 and 118, and an
allocation is made based on this analysis. The general portfolio allocation
consists of an assigned reserve percentage based on the credit rating of the
loan. The subjective portion is determined based on loan history and the
Company's evaluation of various factors including current economic conditions
and trends in the portfolio including delinquencies and impairments, as well as
changes in the composition of the portfolio.

The allowance for loan losses is based on estimates, and ultimate
losses will vary from current estimates. These estimates are reviewed quarterly,
and as adjustments, either positive or negative, become necessary, a
corresponding increase or decrease is made in the provision for loan losses. The
methodology used to determine the adequacy of the allowance for loan losses for
the second quarter of 2002 is consistent with prior periods.

The Company's provision for loan losses was $1.1 million for the third
quarter of 2002 compared to $346,000 for the similar period in 2001. For the
nine months ended September 30, 2002, the provision for losses was $2.6 million
compared to $1.6 million for the comparable period in 2001. This increase is due
to probable incurred losses on problem loans. Net charge-offs for the nine
months ended September 30, 2002 were $1.6 million compared to $410,000 for the
nine months ended September 30, 2001. The Company charged-off $1.2 million in
loans during the three months ended September 30, 2002. These charge-offs were
loans previously identified as workouts during the second and third quarters of
2002. Commercial loans and commercial real estate loans represented $679,000 and
$375,000, respectively, of the $1.2 million charged-off during the quarter.
Charge-offs totaling $700,000 were related to one loan relationship in West
Central Illinois. The net charge-off percentage to average loans was 0.15% and
0.05% at September 30, 2002 and September 30, 2001, respectively.

The allowance for loan losses was $11.2 million, or 0.98% of total
loans, as of September 30, 2002 and $10.1 million, or 1.01% of total loans, at
December 31, 2001. In management's judgment, an adequate allowance for loan
losses has been established.

Nonaccrual and Nonperforming Loans
- ----------------------------------

Nonaccrual loans increased to $4.3 million as of September 30, 2002
from $1.8 million as of December 31, 2001. Most of the nonaccrual loans are
related to several commercial loans which are being addressed by specific
workout plans at this time.

Nonperforming loans include nonaccrual loans and accruing loans which
are 90 days or more delinquent. Typically, these loans have adequate collateral
protection and/or personal guaranties to provide a source of repayment to the
Bank. Nonperforming loans were $8.4 million as of September 30, 2002 compared to
$5.7 million at June 30, 2002, $2.4 million at December 31, 2001, and $3.4
million at September 30, 2001. Nonperforming loans were 0.74%, 0.53%, 0.24%, and
0.36% of total loans as of September 30, 2002, June 30, 2002, December 31, 2001,
and September 30, 2001, respectively. Nonperforming loans were 0.44%, 0.30%,
0.13%, and 0.20% of total assets as of September 30, 2002, June 30, 2002,
December 31, 2001, and September 30, 2001, respectively. Allowance for loan
losses to nonperforming loans ratio was 1.33x, 1.96x, 4.28x, and 2.86x at
September 30, 2002, June 30, 2002, December 31, 2001, and September 30, 2001,
respectively.

Other real estate owned was $225,000 at September 30, 2002 and $355,000
at December 31, 2001 and September 30, 2001. Nonperforming assets were 0.45%,
0.15%, and 0.22% of total assets at September 30, 2002, December 31, 2001, and
September 30, 2001, respectively.

Page 19

Securities
- ----------

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

Securities available-for-sale are carried at fair value, with related
unrealized net gains or losses, net of deferred income taxes, recorded as an
adjustment to equity capital. As of September 30, 2002, net unrealized losses on
securities available-for-sale decreased $7.8 million from an unrealized loss of
$1.1 million at December 31, 2001 to an unrealized gain of $6.7 million. This
change resulted in a $7.8 million increase in book equity, exclusive of the
impact of the transfer of securities available-for-sale to held-to-maturity,
discussed in the following paragraphs.

Securities available-for-sale decreased to $537.3 million as of
September 30, 2002 from $683.5 million as of December 31, 2001. U.S. government
agency mortgage-backed securities decreased 31.4% or $187.5 million from $596.1
million as of December 31, 2001 to $408.7 million as of September 30, 2002. The
Company reclassified $100 million of its mortgage-backed securities from
available-for-sale to held-to-maturity under permissible provisions of FASB 115
in order to enhance its interest rate risk position. Equity securities decreased
$22.6 from $72.2 million at December 31, 2001 to $49.6 million as of September
30, 2002. Equity securities at September 30, 2002 included capital securities of
United States agencies, bond-rated or credit equivalent community banks, and
Federal Home Loan Bank and Federal Reserve Bank stock. Obligations of state and
political subdivisions increased $44.0 million to $57.0 million at September 30,
2002 from $13.0 million at December 31, 2001. U.S. treasury and government
agency securities increased $10.7 million to $11.2 million at September 30, 2002
from $516,000 at December 31, 2001.

All fixed and adjustable rate mortgage pools 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, duration and yield
volatility of adjustable rate mortgage pools under various interest rate
assumptions to monitor volatility. Stress tests are performed quarterly.

During the third quarter of 2002, the Company reclassified
approximately $100 million of mortgage-backed securities from the
available-for-sale category to the held-to-maturity category. This transfer was
required to be at fair value which results in an unrealized gain and accumulated
other comprehensive income at the time of transfer, $1,396,000 and $842,000,
respectively, which is being amortized/accreted to expense/income over the life
of the securities as a yield adjustment. This was the primary reason securities
held-to-maturity increased $94.4 million to $115.8 million as of September 30,
2002 from $21.4 million as of December 31, 2001. This transfer was completed in
order to enhance the Company's interest rate risk by matching longer term assets
with longer term funding sources.

There were no trading account securities held at September 30, 2002 or
December 31, 2001. The Company holds trading account securities on a short-term
basis based on market and liquidity conditions.

Page 20

Other Assets
- ------------

The Company's investment in Bank-Owned Life Insurance ("BOLI")
increased by $702,000 as the cash surrender value of the insurance increased
from December 31, 2001 to September 30, 2002. Management currently intends to
use the BOLI to fund future employee benefit expense.

Pending Acquisition
- -------------------

On July 22, 2002, the Company jointly announced with Big Foot Financial
Corp (NASDAQ: BFFC), the execution of a definitive agreement providing for the
acquisition of BFFC by the Company in a stock merger transaction.

At closing, the Company will issue 1.104 shares of its common stock for
each share of BFFC common stock outstanding on the effective date of the merger,
resulting in a deal value of approximately $33.4 million, based on closing
prices of the Company's and BFFC's common stock on July 19, 2002. The price is a
25.5% premium to BFFC's closing price of $16.95 on that date. BFFC had 1,509,168
shares outstanding as of September 30, 2002. The exchange ratio is fixed, and
BFFC has the right to terminate the transaction if the Company's stock price
falls below an average of $17.12 during the 20 trading days prior to closing,
subject to certain provisions.

It is currently anticipated that Fairfield Savings Bank F.S.B., BFFC's
thrift subsidiary, will merge into Midwest Bank and Trust Company, and current
plans call for the retention of all Fairfield Savings Bank branches. The
transaction is expected to be accretive to the Company's earnings per share and
capital ratios. The transaction, which is subject to approval by regulators and
BFFC's shareholders, is expected to close in the first quarter of 2003.

None of the senior management of BFFC are expected to continue in their
positions after completion of the transaction. Identified cost savings as a
result of the merger are anticipated to be approximately $2.0 million annually,
which represents 42.7% of BFFC's other expenses. The Company anticipates total
merger related expenses of $6.1 million, or $4.3 million after-tax.

Deposits and Borrowed Funds
- ---------------------------

Total deposits of $1.4 billion as of September 30, 2002 represented an
increase of $142.5 million or 11.8% from $1.2 billion as of December 31, 2001.
Non-interest-bearing deposits were $131.5 million at September 30, 2002, $3.2
million lower than the $134.7 million level as of December 31, 2001. Over the
same period, interest-bearing deposits increased 13.5% or $145.7 million.
Certificates of deposit under $100,000 increased $140.6 million from December
31, 2001 to September 30, 2002. Certificates of deposit over $100,000 and public
funds increased $15.8 million from December 31, 2001 to September 30, 2002.

The Company's membership in the Federal Home Loan Bank System gives it
the ability to borrow funds from the Federal Home Loan Bank of Chicago for
short- or long-term purposes under a variety of programs. The loans are used to
fund growth and permit the Banks to extend term maturities, reduce funding costs
and manage interest rate risk exposures more effectively.

Federal Home Loan Bank advances were $237.5 million at September 30,
2002 and $244.5 million at December 31, 2001. The weighted average rate for
Federal Home Loan Bank advances was 5.48% during the nine months ended September
30, 2002 with a range of maturities between one and ten years.

Page 21

Borrowed funds at September 30, 2002 and December 31, 2001 are listed
below:

2002 2001
---- ----
(dollars in thousands)
Federal Home Loan Bank (FHLB) advances
to bank subsidiaries $237,500 $244,500
Revolving line of credit ($25,000,000 available) 11,300 6,500
-------- --------
Total notes payable $248,800 $251,000
======== ========

The Company has a credit agreement with a correspondent bank (the
"Credit Agreement"), which provides the Company with a revolving line of credit
with a maximum availability of $25.0 million. This revolving line of credit
matures on January 30, 2004.

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
30-, 60-, 90-, or 180-day London Inter-Bank Offered Rate ("LIBOR") plus 95 basis
points, or the prime rate less 25 basis points.

The Company also utilizes securities sold under repurchase agreements
as a source of funds. Most local municipalities and some other organizations
must have funds insured or collateralized pursuant to their own policies.
Repurchase agreements provide a source of funds and do not increase the
Company's reserve requirement. Although the balance of repurchase agreements is
subject to variation, particularly seasonal variation, the account relationships
represented by these balances are principally local and have been maintained for
relatively long periods of time. The Company had $138.2 million in securities
sold under repurchase agreements at September 30, 2002 compared to $146.8
million at December 31, 2001. The Company had no federal funds purchased at
September 30, 2002 compared to $24.4 million at December 31, 2001.

In addition, in June 2000, the Company issued 10% junior subordinated
debentures aggregating $20 million to MBHI Capital Trust I, a wholly-owned
subsidiary of the Company. The junior subordinated debentures pay interest on a
quarterly basis and will mature on June 7, 2030. The junior subordinated
debentures can be redeemed, in whole or in part, beginning June 7, 2005. In
January 2002, the Company entered into a plain vanilla interest rate swap
converting the junior subordinated debentures from a fixed rate instrument to
floating rate debt. See Note 6 to unaudited consolidated financial statements.
During July of 2002, the Company terminated the fair value hedge.

In August 2002, the Company entered into a stand-alone derivative
transaction with a notional amount of $20 million for a term of five years,
maturing August 30, 2007. This transaction is a floating rate interest swap. The
underlying instrument has a credit rating of Aa2/AA and is priced at 3-Month
LIBOR plus 125 basis points. Since the swap is not a hedge it is viewed as a
stand-alone derivative. Changes in the market value of stand-alone derivatives
are charged to earnings on a quarterly basis. As of September 30, 2002, there
was no impact on earnings.

Capital Resources
- -----------------

Stockholders' equity increased $23.7 million, or 24.6%, from $96.2
million at December 31, 2001 to $119.9 million at September 30, 2002. The
increase was due to 2002 cumulative earnings exceeding dividends declared as
well as an $8.6 million increase in the fair value of securities
available-for-sale, net of tax.

The Company and its two subsidiary banks are subject to regulatory
capital requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items calculated
under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk
weightings and other factors, and the regulators can lower classifications in
certain areas. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the financial
statements.

Page 22

The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.

The Company and each of the Banks were categorized as well capitalized
as of September 30, 2002. Management is not aware of any conditions or events
since the most recent regulatory notification that would change the Company's or
the Banks' categories.

Capital levels and minimum required levels (dollars in thousands):

In October 2002, the Company formed MBHI Capital Trust II (the
"Trust"), a statutory trust formed under the laws of the State of Delaware and a
wholly-owned financing subsidiary of the Company. In October 2002, the Trust
issued $15 million in aggregate liquidation amount of trust preferred securities
in a private placement offering. Simultaneously with the issuance of the trust
preferred securities by the Trust, the Company issued an equivalent amount of
junior subordinated debentures to the Trust. The junior subordinated debentures
are the sole assets of the Trust. The junior subordinated debentures and the
trust preferred securities pay distributions and dividends, respectively, on a
quarterly basis, which are included in interest expense. The interest rate
payable on the debentures and the trust preferred securities resets quarterly,

Page 23

and is equal to LIBOR plus 3.45%, provided that this rate cannot exceed 12.5%
through the interest payment date in November 2007. The junior subordinated
debentures will mature on November 7, 2032, at which time the preferred
securities must be redeemed. The Company has provided a full, irrevocable, and
unconditional guarantee on a subordinated basis of the obligations of the Trust
under the preferred securities as set forth in such guarantee agreement. Debt
issuance costs and fees of the placement agent in connection with the offering
will be capitalized and will be amortized over the estimated life of the junior
subordinated debentures.

Liquidity
- ---------

Liquidity measures the ability of the Company to meet maturing
obligations and its existing commitments, to withstand fluctuations in deposit
levels, to fund its operations and to provide for customers' credit needs. The
liquidity of the Company principally depends on cash flows from operating
activities, investment in and maturity of assets, changes in balances of
deposits and borrowings and its ability to borrow funds in the money or capital
markets.

Net cash inflows provided by operations were $20.2 million for the nine
months ended September 30, 2002 compared to $17.8 million a year earlier. Net
cash outflows from investing activities were $100.8 million in the first nine
months of 2002 compared to a net cash outflow of $210.5 million a year earlier.
Cash inflows from financing activities for the nine months ended September 30,
2002 were $102.9 million compared to a net inflow of $190.8 million in 2001.

In the event of short-term liquidity needs, the Banks may purchase
federal funds from correspondent banks. In addition, the Company has established
repurchase agreements and brokered certificates of deposit arrangements with
various financial sources. The Company's membership in the Federal Home Loan
Bank System gives it the ability to borrow funds from the Federal Home Loan Bank
of Chicago for short- or long-term purposes under a variety of programs. The
Company also has a $25.0 million revolving line of credit of which $13.7 million
is available.

The Banks also have various funding arrangements with commercial and
investment banks providing up to $1.8 billion of available funding sources in
the form of Federal funds lines, repurchase agreements, and brokered certificate
of deposit programs. Unused capacity under these lines was $1.6 billion at
September 30, 2002. The Banks maintain these funding arrangements to achieve
favorable costs of funds, manage interest rate risk, and enhance liquidity in
the event of deposit withdrawals.

Interest received net of interest paid was a principal source of
operating cash inflows for the three and nine months ended September 30, 2002
and September 30, 2001, respectively. Management of investing and financing
activities and market conditions determine the level and the stability of net
interest cash flows. Management's policy is to mitigate the impact of changes in
market interest rates to the extent possible so that balance sheet growth is the
principal determinant of growth in net interest cash flows.

Page 24

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

Interest Rate Sensitivity Analysis
- ----------------------------------

The Company's overall interest rate sensitivity is demonstrated by net
interest income 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 table below presents the Company's projected changes in net interest
income for the various rate shock levels at September 30, 2002.

Net Interest Income
------------------------------------------------------
Amount $ Change % Change
------ -------- --------
(dollars in thousands)

-200 bp $ 60,154 $ (1,259) (2.05)%
-100 bp 62,071 658 1.07
Base 61,413 - -
+100 bp 59,635 (1,778) (2.90)
+200 bp 61,441 28 0.05

As shown above, at September 30, 2002, the effect of an immediate 200
basis point increase in interest rates would decrease the Company's net interest
income by 0.05% or $28,000. The effect of an immediate 200 basis point reduction
in rates would decrease the Company's net interest income by 2.05% or $1.3
million.

The projected changes in the Company's net interest income for the
various rate shock levels at December 31, 2001 were the following:

Net Interest Income
-----------------------------------------------------
Amount $ Change % Change
------ -------- --------
(dollars in thousands)

-200 bp $ 69,191 $ 1,565 2.31%
-100 bp 69,487 1,861 2.75
Base 67,626 - -
+100 bp 64,550 (3,076) (4.36)
+200 bp 64,675 (2,951) (4.55)

Computations of the prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit decay rates, and should not be
relied upon as indicative of actual results. Actual values may differ from those
projections set forth above, should market conditions vary from assumptions used
in preparing the analyses. Further, the computations do not contemplate any
actions the Company may undertake in response to changes in interest rates.

Page 25

ITEM 4. - CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, the Company's
Chief Executive Officer and Chief Financial Officer carried out an evaluation,
with the participation of other members of management as they deemed
appropriate, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as contemplated by Exchange Act Rule 13a-14.
Based upon, and as of the date of that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective, in all material respects, in timely alerting them to
material information relating to the Company (and its consolidated subsidiaries)
required to be included in the periodic reports the Company is required to file
and submit to the SEC under the Exchange Act.

There have been no significant changes to the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date that the internal controls were most recently evaluated.
There were no significant deficiencies or material weaknesses identified in that
evaluation and, therefore, no corrective actions were taken.

Page 26

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

This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995 and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies, and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Important factors which could cause actual events to
differ from the Company's expectations include, but are not limited to,
fluctuations in interest rates and loan and deposit pricing, which could reduce
the Company's net interest margins, asset valuations and expense expectations; a
deterioration in the economy or business conditions, either nationally or in the
Company's market areas, that could increase credit-related losses and expenses;
increases in defaults by borrowers and other loan delinquencies resulting in
increases in the Company's provision for loan losses and related expenses;
higher than anticipated costs related to the Company's new banking centers or
slower than expected earning assets growth which could extend anticipated
breakeven periods at these locations; unanticipated delays or problems relating
to the Company's pending acquisition of Big Foot Financial Corp.; the potential
dilutive effect of future acquisitions, if any; significant increases in
competition; legislative or regulatory changes applicable to bank holding
companies or the Company's banking or other subsidiaries; and possible changes
in tax rates, tax laws, or tax law interpretation.

Page 27

PART II

Item 1. Legal Proceedings

There are no material pending legal proceedings to which the Company or
its subsidiaries are a party other than ordinary routine litigation incidental
to their respective businesses.

Item 2. Changes in Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

A special meeting of stockholders of the Company was held on July 1,
2002. One proposal was submitted to a vote of the stockholders as described in
the Company's proxy statement dated June 3, 2002. The following is a brief
description of the matter voted upon, as well as the outcome of the vote:

To amend the Company's Restated Certificate of Incorporation to
increase the number of authorized shares of the Company's common stock from
17,000,000 to 24,000,000:

Votes For: 9,876,957
Against: 97,469
Abstain: 5,613

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

(a) 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).

3.3 Amendment of Restated By-laws (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, File No. 0-29598).

3.4 Amendment of Restated By-laws.

Page 28

4.1 Specimen Common Stock Certificate (incorporated by reference
to Registrant's Registration Statement on Form S-1,
Registration No. 333-42827).

4.2 Certain instruments defining the rights of the holders of
long-term debt of the Company and certain of its subsidiaries,
none of which authorize a total amount of indebtedness in
excess of 10% of the assets of the Company and its
subsidiaries on a consolidated basis, have not been filed as
Exhibits. The Company hereby agrees to furnish a copy of any
of these agreements to the SEC upon request.

99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
from the Company's Chief Executive Officer.

99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
from the Company's Chief Financial Officer.

(b) Reports on Form 8-K

Current Report on Form 8-K dated July 17, 2002, filed with the
SEC on July 17, 2002.

Current Report on Form 8-K dated July 19, 2002, filed with the
SEC on July 22, 2002.

Page 29

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date: November 1, 2002

MIDWEST BANC HOLDINGS, INC.
(Registrant)

By: /s/ Brad A. Luecke
----------------------------------
Brad A. Luecke,
President and Chief Executive Officer

By: /s/ Daniel R. Kadolph
----------------------------------
Daniel R. Kadolph,
Senior Vice President and
Chief Financial Officer

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
--------------------------------------------

I, Brad A. Luecke, President and Chief Executive Officer, certify that:

1) I have reviewed this quarterly report on Form 10-Q of Midwest Banc
Holdings, Inc.;

2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: November 1, 2002
----------------

/s/ Brad A. Luecke
- -------------------------------------
Brad A. Luecke
President and Chief Executive Officer

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
--------------------------------------------

I, Daniel R. Kadolph, Senior Vice President and Chief Financial Officer,
certify that:

1) I have reviewed this quarterly report on Form 10-Q of Midwest Banc
Holdings, Inc.;

2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;

3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: November 1, 2002
--------------------

/s/ Daniel R. Kadolph
- -------------------------------------------------
Daniel R. Kadolph
Senior Vice President and Chief Financial Officer

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).

3.3 Amendment of Restated By-laws (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2000, File No. 0-29598).

3.4 Amendment of Restated By-laws.

4.1 Specimen Common Stock Certificate (incorporated by reference to
Registrant's Registration Statement on Form S-1, Registration No.
333-42827).

4.2 Certain instruments defining the rights of the holders of long-term
debt of the Company and certain of its subsidiaries, none of which
authorize a total amount of indebtedness in excess of 10% of the assets
of the Company and its subsidiaries on a consolidated basis, have not
been filed as Exhibits. The Company hereby agrees to furnish a copy of
any of these agreements to the SEC upon request.

99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 from the Company's
Chief Executive Officer.

99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 from the Company's
Chief Financial Officer.