SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission file number 001-13735

Midwest Banc Holdings, Inc.

(Exact name of Registrant as specified in its charter)

501 West North Avenue, Melrose Park, Illinois 60160

(Address of principal executive offices including ZIP Code)

(708) 865-1053

(Registrant’s telephone number including Area Code)

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

10.0% Cumulative Trust Preferred Securities, American Stock Exchange

(And Guarantee with Respect Thereto)

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

Common Stock, $0.01 par value, Nasdaq National Market

(Title of Class)

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

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

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

      The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of the registrant on June 30, 2004, based on the last sales price quoted on the Nasdaq National Market System on that date, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $399.1 million.

      As of March 9, 2005, the number of shares outstanding of the registrant’s common stock, par value $0.01 per share, was 18,241,151.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Company’s Proxy Statement for the 2005 Annual Meeting of Stockholders are incorporated by reference into Part III.

MIDWEST BANC HOLDINGS, INC.

FORM 10-K

INDEX

PART I

The Company

      Midwest Banc Holdings, Inc. (the “Company”) is a community-based bank holding company headquartered in Melrose Park, Illinois. The Company, through its wholly owned banking subsidiaries, provides a wide range of services, including traditional banking services, personal and corporate trust services, residential mortgage services, insurance brokerage and retail securities brokerage services. The Company’s principal operating subsidiaries are two Illinois community banks: Midwest Bank and Trust Company and Midwest Bank of Western Illinois (collectively, the “Banks”), each of which is chartered as an Illinois state bank. The Company operates in one business segment, community banking, providing a full range of services to individual and corporate customers; the nature of the Banks’ products and production processes, type or class of customer, methods to distribute their products, and regulatory environment are similar.

      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 23 locations, with 17 banking centers in the greater Chicago metropolitan area and six banking centers in Western Illinois.

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

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

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

      Certain information with respect to the Banks and the Company’s nonbank subsidiaries as of December 31, 2004, is set forth below:

History

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

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

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

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

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

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

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

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

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

      In 2004, Midwest Bank and Trust Company opened two additional banking centers in Addison and Glenview, Illinois.

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

      Porter Insurance Agency, Inc. was acquired by Midwest Bank of Western Illinois in 1998 to provide insurance services to customers of the bank. This subsidiary also maintains an independent customer base that represents approximately 80% of its current premiums and commissions.

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

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

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

      In May 2000, the Company formed MBHI Capital Trust I (“Trust I”). Trust I is a statutory business trust formed under the laws of the State of Delaware and is wholly owned by the Company. In June 2000, Trust I issued 10.0% preferred securities with an aggregate liquidation amount of $20,000,000 ($25 per preferred security) to third-party investors in an underwritten public offering. The Company has given notice to the trustee that these securities will be redeemed on June 7, 2005.

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

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

The Banks

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

Markets

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

      The Company considers its primary market areas to be those areas immediately surrounding its offices for retail customers and generally within a 10-20 mile radius of each Bank for commercial relationships. The Banks operate out of 17 full-service locations in the Chicago metropolitan area and six offices in West Central Illinois. Accordingly, the Company’s business extends throughout the Chicago metropolitan area and Western Illinois, but is highly concentrated in the areas in which the Banks’ offices are located. The communities in which the Banks’ offices are located have a broad spectrum of demographic characteristics. These communities include a number of densely populated areas as well as rural areas, and some extremely high-income areas as well as many middle-income and some low-to-moderate income areas.

Strategy

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

      The Company believes that its continued success is dependent on its ability to provide its customers value-added retail and commercial banking programs and other financial products and services which are delivered by experienced, committed banking professionals operating under the highest standards of customer service and ethics. The growth strategy of the Company is to increase its core banking business, develop its insurance and retail brokerage activities, and expand into new markets as well as diversify the financial services it offers. The Company’s strategy includes the following objectives:

      The Company plans to continue to implement its growth strategy through selected acquisitions and by adding de novo banking centers in nearby communities where management believes customers would be attracted to a community-banking alternative. Any acquisition the Company pursues will ideally be accretive to net income and diluted earnings per share within the first full year following consolidation, with cost savings targeted to be realized in the first phase of integration post closing. The Company’s growth strategy of establishing de novo banking centers and selected acquisitions are dependent on many factors, including regulatory approval that may limit or prohibit such expansion plans.

Products and Services

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

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

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

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

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

      Commercial Loans. Commercial and individual loans are made to small- to medium-sized businesses that are sole proprietorships, partnerships and corporations. Generally, these loans are secured with collateral

including accounts receivable, inventory and equipment; the personal guarantees of the principals are also required. Frequently, these loans are further secured with real estate collateral.

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

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

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

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

      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. The Bank’s loan policies establish lending authority and limits on an individual and committee basis. The loan approval process has been re-designed to facilitate timely decisions while enhance adherence to policy parameters and risk management targets.

      The Banks maintain a network of 31 ATM sites generally located within the Banks’ local markets. All except two off-site ATMs are owned by the Banks. Twenty-three of the ATM sites are located at various banking centers and eight are maintained off-site at hotels, supermarkets, and schools.

      Midwest Bank and Trust Company and Midwest Bank of Western Illinois offer land trusts, personal trusts, custody accounts, retirement plan services, and corporate trust services. As of December 31, 2004, the Trust Department of Midwest Bank and Trust Company maintained trust relationships representing an aggregate market value of $10.4 million in assets with an aggregate book value of $8.8 million. In addition, the Trust Department of Midwest Bank and Trust Company administered 1,723 land trust accounts as of December 31, 2004. Midwest Bank of Western Illinois also provides trust services to its customers and maintained trust accounts with an aggregate market value of $45.9 million and an aggregate book value of $32.2 million as of December 31, 2004.

      Porter Insurance Agency, Inc. (“Porter”) is a full line independent insurance agency. Concentrating in agricultural-related insurance products, Porter is one of the largest writers of crop insurance in Illinois. Porter represents many regional and national carriers offering programs for individual and group life and health

insurance, as well as property and casualty lines. Porter maintains a strong portfolio of products for homeowners, automobile, and business insurance, in addition to workers compensation.

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

      In March 2002, the Company’s subsidiary, Midwest Financial and Investment Services, Inc., purchased certain assets of Service 1st Financial Corp. and commenced brokerage activities through the Banks’ investment centers. Licensed brokers are located at 15 banking centers and provide investment-related services, including securities trading, financial planning, mutual funds sales, fixed and variable rate annuities, and tax-exempt and conventional unit trusts. This line of business is furthering one of the Company’s strategic goals of increasing revenues from nontraditional sources and to enhance the Company’s net income.

Competition

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

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

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

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

Employees

      As of December 31, 2004, the Company and its subsidiaries had 459 full-time equivalent employees. Management considers its relationship with its employees to be good.

Recent Regulatory Developments

      On March 15, 2004 the Company and Midwest Bank and Trust Company entered into a written agreement with the Federal Reserve Bank of Chicago and the Illinois Department of Financial and Professional Regulation (“IDFPR”). The written agreement outlines a series of steps to address and strengthen the Company’s risk management practices. These steps include third-party reviews and the submission of written plans in a number of areas. These areas include: the Company’s and Midwest Bank and Trust Company’s board of directors and management; corporate governance; internal controls; risk manage-

ment; lending and credit, including allowance for loan and lease losses and loan review; and loan policies and procedures. The agreement requires submission of written plans, programs, policies, and procedures to the regulators for review and approval within specified time frames. The agreement does not relate to the financial condition, capital, earnings, or liquidity of the Company and Midwest Bank and Trust Company.

      The Company and Midwest Bank and Trust Company have submitted all documentation and information currently required by the written agreement, including all independent third party reviews. The Company and Midwest Bank and Trust Company are continuing to work in cooperation with the Federal Reserve Bank of Chicago and IDFPR. Reference is made to the text of the written agreement (filed as Exhibit 99.2 to the Company’s Form 8-K filed on March  16, 2004) for additional information regarding the terms of the written agreement.

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

Available Information

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

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

SUPERVISION AND REGULATION

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

Bank Holding Company Regulation

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

Capital Trust IV, Midwest Financial and Investment Services, Inc., MBTC Investment Company, and Midwest Bank Insurance Services, L.L.C.

      The BHC Act requires prior Federal Reserve approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares or substantially all the assets of any bank, or for a merger or consolidation of a bank holding company with another bank holding company. With certain exceptions, the BHC Act prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or managing or controlling banks or performing services for its authorized subsidiaries. A bank holding company may, however, engage in or acquire an interest in a company that engages in activities which the Federal Reserve has determined, by regulation or order, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto, such as performing functions or activities that may be performed by a trust company, or acting as an investment or financial advisor. The Federal Reserve, however, expects bank holding companies to maintain strong capital positions while experiencing growth. In addition, the Federal Reserve, as a matter of policy, may require a bank holding company to be well-capitalized at the time of filing an acquisition application and upon consummation of the acquisition.

      Under the BHC Act, the Company and the Banks are prohibited from engaging in certain tie-in arrangements in connection with an extension of credit, lease, sale of property or furnishing of services. That means that, except with respect to traditional banking products, the Company may not condition a customer’s purchase of one of its services on the purchase of another service.

      The passage of the Gramm-Leach-Bliley Act allows bank holding companies to become financial holding companies. Financial holding companies do not face the same prohibitions on entering into certain business transactions that bank holding companies currently face.

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

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

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

      Under the Federal Reserve’s capital guidelines, bank holding companies are required to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8%, of which at least 4% must be in the form of Tier 1 Capital. The Federal Reserve also requires a minimum leverage ratio of Tier 1 Capital to total

assets of 3% for strong bank holding companies (those rated a composite “1” under the Federal Reserve’s rating system). For all other bank holding companies, the minimum ratio of Tier 1 capital to total assets is 4%. In addition, the Federal Reserve continues to consider the Tier 1 leverage ratio in evaluating proposals for expansion or new activities.

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

      As of December 31, 2004, the Company had regulatory capital in excess of the Federal Reserve’s minimum requirements. The Company had a total capital to risk-weighted assets ratio of 14.7%, a Tier 1 capital to risk-weighted assets ratio of 13.3%, and a leverage ratio of 8.5% as of December 31, 2004. See “Capital Resources.”

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

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

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

Bank Regulation

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

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

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

      As discussed above, under Illinois law, the Banks are subject to supervision and examination by IDFPR, and, as members of the Federal Reserve System, by the Federal Reverse. Each of these regulatory agencies conducts routine, periodic examinations of each of the Banks and the Company.

Financial Institution Regulation

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

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

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

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

      At December 31, 2004, each of the Banks has a Tier 1 capital to risk-weighted assets ratio and a total capital to risk-weighted assets ratio which meets the above requirements. Midwest Bank and Trust Company has a Tier 1 capital to risk-weighted assets ratio of 13.1% and a total capital to risk-weighted assets ratio of 14.3%. Midwest Bank of Western Illinois has a Tier 1 capital to risk-weighted assets ratio of 12.7% and a total capital to risk-weighted assets ratio of 13.7%. See “Capital Resources.”

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

order an institution that has been given notice by the Federal Reserve that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the Federal Reserve must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the “prompt corrective action” provisions of FDICIA. If an institution fails to comply with such an order, the Federal Reserve may seek to enforce such order in judicial proceedings and to impose civil money penalties. The Federal Reserve and the other federal bank regulatory agencies also adopted guidelines for asset quality and earnings standards.

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

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

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

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

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

      During 2004, the Banks were assessed deposit insurance in the aggregate amount of $434,000. Deposit insurance may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Such terminations can only occur, if contested, following judicial review through the federal courts. The management of each of the Banks does not know of any practice, condition or violation that might lead to termination of deposit insurance.

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

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

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

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

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

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

      The State of Illinois has adopted legislation “opting in” to interstate bank mergers, and allows out of state banks to enter the Illinois market through de novo branching or through branch-only acquisitions if Illinois state banks are afforded reciprocal treatment in the other state. It is anticipated that this interstate merger and branching ability will increase competition and further consolidate the financial institutions industry.

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

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

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

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

Monetary Policy and Economic Conditions

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

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

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES

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. Statement under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. The Company and its representatives may, from time to time, make written or oral statements that are “forward-looking” and provide information other than historical information, including statements contained in the

Form 10-K, the Company’s other filings with the Securities and Exchange Commission or in communications to its stockholders. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement. These factors include, among other things, the factors listed below.

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