UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF HE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-13735

MIDWEST BANC HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		36-3252484 (I.R.S. Employer Identification No.)

501 W. North Ave. Melrose Park, Illinois (Address of principal executive offices)		60160 (Zip code)

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

N/A
(Former name, former address and former fiscal year, if changed since last report)

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

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     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 May 12, 2010
	Common, par value $0.01				38,176,225

 

 

MIDWEST BANC HOLDINGS, INC.

Form 10-Q

Table of Contents

			Page Number
PART I
Item 1. Financial Statements			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			53
Item 4. Controls and Procedures			54
PART II
Item 1. Legal Proceedings			58
Item 1A. Risk Factors			58
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds			60
Item 3. Defaults upon Senior Securities			60
Item 4. (Removed and Reserved)			60
Item 5. Other Information			60
Item 6. Exhibits			60
Signature Page			62
EX-3.1
EX-31.1
EX-31.2
EX-32.1

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except for share data)

		March 31,				December 31,
		2010				2009
ASSETS
Cash and due from banks		$	24,040			$	27,644
Federal funds sold and other short-term investments			356,345				414,466
Total cash and cash equivalents			380,385				442,110
Securities available-for-sale (securities pledged to creditors: $487,446 at March 31, 2010 and $481,241 at December 31, 2009)			567,619				581,474
Federal Reserve Bank and Federal Home Loan Bank stock, at cost			27,652				27,652
Loans			2,184,440				2,320,319
Allowance for loan losses			(142,284	)			(128,800	)
Net loans			2,042,156				2,191,519
Premises and equipment, net			38,962				39,769
Foreclosed properties			26,715				26,917
Core deposit intangibles, net			11,836				12,391
Goodwill			43,862				64,862
Other assets			43,276				48,851
Total assets		$	3,182,463			$	3,435,545
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Liabilities
Deposits
Noninterest-bearing		$	347,483			$	349,796
Interest-bearing			2,072,709				2,220,315
Total deposits			2,420,192				2,570,111
Revolving note payable			8,600				8,600
Securities sold under agreements to repurchase			297,650				297,650
Advances from the Federal Home Loan Bank			340,000				340,000
Junior subordinated debentures			60,828				60,828
Subordinated debt			15,000				15,000
Term note payable			55,000				55,000
Total borrowings			777,078				777,078
Other liabilities			34,678				31,880
Total liabilities			3,231,948				3,379,069
Commitments and contingencies (see note 10)
Stockholders’ (Deficit) Equity
Preferred stock, $0.01 par value, 1,000,000 shares authorized; Series A, $2,500 liquidation preference, 3,101 and 17,250 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively, Series G, $1,000 liquidation preference, 89,388 shares issued and outstanding at March 31, 2010, Series T, $1,000 liquidation preference, 84,784 shares issued and outstanding at December 31, 2009			1				1
Common stock, $0.01 par value, 64,000,000 shares authorized; 39,885,303 shares issued and 38,176,225 outstanding at March 31, 2010 and 29,847,921 shares issued and 28,121,279 outstanding at December 31, 2009			401				301
Additional paid-in capital			315,672				385,616
Warrant			295				5,229
Accumulated deficit			(347,257	)			(311,620	)
Accumulated other comprehensive loss			(3,844	)			(8,298	)
Treasury stock, at cost (1,709,078 and 1,726,642 shares at March 31, 2010 and December 31, 2009, respectively)			(14,753	)			(14,753	)
Total stockholders’ (deficit) equity			(49,485	)			56,476
Total liabilities and stockholders’ (deficit) equity		$	3,182,463			$	3,435,545

See accompanying notes to unaudited consolidated financial statements.

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the three months ended March 31, 2010 and 2009

(In thousands, except per share data)

		2010				2009
Interest Income
Loans		$	27,928			$	34,549
Securities
Taxable			2,361				6,940
Exempt from federal income taxes			—				550
Dividend income from Federal Reserve Bank and Federal Home Loan Bank stock			160				190
Federal funds sold and other short-term investments			228				37
Total interest income			30,677				42,266
Interest Expense
Deposits			8,604				13,685
Federal funds purchased and FRB discount window advances			—				29
Revolving note payable			156				43
Securities sold under agreements to repurchase			3,193				3,205
Advances from the Federal Home Loan Bank			2,999				3,029
Junior subordinated debentures			423				739
Subordinated debt			140				152
Term note payable			657				282
Total interest expense			16,172				21,164
Net interest income			14,505				21,102
Provision for credit losses			77,050				13,253
Net interest income after provision for credit losses			(62,545	)			7,849
Noninterest Income
Service charges on deposit accounts			1,639				1,894
Insurance and brokerage commissions			233				320
Trust fees			295				282
Increase in cash surrender value of life insurance			—				842
Other			323				5
Total noninterest income			2,490				3,343
Noninterest Expense
Salaries and employee benefits			8,888				11,083
Occupancy and equipment			2,901				3,245
Professional services			3,333				2,102
Goodwill impairment			21,000				—
Marketing			115				688
Foreclosed properties			788				345
Amortization of core deposit intangible			555				573
FDIC insurance			3,200				1,175
Other			3,212				2,297
Total noninterest expense			43,992				21,508
Loss before income taxes			(104,047	)			(10,316	)
Provision for (benefit from) income taxes			3,834				(4,996	)
Net Loss			(107,881	)			(5,320	)
Preferred stock dividends and premium accretion			4,320				2,123
Loss available to common stockholders		$	(112,201	)		$	(7,443	)
Basic loss per share		$	(3.16	)		$	(0.27	)
Diluted loss per share		$	(3.16	)		$	(0.27	)
Cash dividends declared per common share		$	—			$	—

See accompanying notes to unaudited consolidated financial statements.

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY (Unaudited)
For the three months ended March 31, 2010 and 2009
(In thousands, except share and per share data)

																						Accumulated
										Additional												Other								Total
		Preferred				Common				Paid in								Accumulated				Comprehensive				Treasury				Stockholders’
		Stock				Stock				Capital				Warrant				Deficit				Loss				Stock				(Deficit) Equity
Balance, December 31, 2008		$	1			$	296			$	383,491			$	5,229			$	(66,325	)		$	(2,122	)		$	(14,736	)		$	305,834
Cash dividends declared ($48.4375 per share) on Series A preferred stock			—				—				—				—				(836	)			—				—				(836	)
Cash dividends declared ($9.72 per share) on Series T preferred stock			—				—				—				—				(824	)			—				—				(824	)
Issuance of 128,970 shares restricted stock			—				1				(1	)			—				—				—				—				—
Accreted discount on Series T preferred stock			—				—				228				—				(228	)			—				—				—
Stock-based compensation expense			—				—				379				—				—				—				—				379
Repurchase of 10,695 shares of common stock under benefit plan			—				—				—				—				—				—				(17	)			(17	)
Comprehensive loss
Net loss			—				—				—				—				(5,320	)			—				—				(5,320	)
Prior service cost, net of income taxes			—				—				—				—				—				15				—				15
Net increase in fair value of securities classified as available- for-sale, net of income taxes			—				—				—				—				—				1,839				—				1,839
Total comprehensive loss																															(3,466	)
Balance, March 31, 2009		$	1			$	297			$	384,097			$	5,229			$	(73,533	)		$	(268	)		$	(14,753	)		$	301,070
Balance, December 31, 2009		$	1			$	301			$	385,616			$	5,229			$	(311,620	)		$	(8,298	)		$	(14,753	)		$	56,476
Exchange of 14,149 shares of Series A preferred stock for 10,029,946 shares of common stock, net of issuance costs			—				100				(2,429	)			—				—				—				—				(2,329	)
Exchange of 84,784 shares of Series T preferred stock for 89,388 shares of Series G preferred stock, net of issuance costs			—				—				(67,834	)			—				67,492				—				—				(342	)
Amendment of warrant to purchase 4,282,020 shares of common stock			—				—				—				(4,934	)			4,934				—				—				—
Issuance of 25,000 shares of restricted stock			—				—				—				—				—				—				—				—
Accreted discount on Series T preferred stock			—				—				182				—				(182	)			—				—				—
Stock-based compensation expense			—				—				137				—				—				—				—				137
Comprehensive loss
Net loss			—				—				—				—				(107,881	)			—				—				(107,881	)
Prior service cost			—				—				—				—				—				24				—				24
Net increase in fair value of securities classified as available-for-sale			—				—				—				—				—				4,430				—				4,430
Total comprehensive loss																															(103,427	)
Balance, March 31, 2010		$	1			$	401			$	315,672			$	295			$	(347,257	)		$	(3,844	)		$	(14,753	)		$	(49,485	)

See accompanying notes to unaudited consolidated financial statements.

MIDWEST BANC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the three Months Ended March 31, 2010 and 2009
(In thousands)

		2010				2009
Cash flows from operating activities
Net loss		$	(107,881	)		$	(5,320	)
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation			1,074				1,023
Provision for credit losses			77,050				13,253
Amortization of core deposit and other intangibles			417				356
Goodwill impairment charge			21,000				—
Amortization of premiums and discounts on securities, net			323				211
Increase in cash surrender value of life insurance			—				(842	)
Deferred income taxes			4,310				(9,427	)
(Gain) loss on disposition of foreclosed properties, net			(170	)			196
Impairment loss on foreclosed properties			356				—
Amortization of deferred stock based compensation			137				379
Change in other assets			1,263				3,696
Change in other liabilities			2,105				529
Net cash (used in) provided by operating activities			(16	)			4,054
Cash flows from investing activities
Maturities of securities available-for-sale			260,000				47,000
Principal payments on securities available-for-sale			16,258				17,000
Principal payments on securities held-to-maturity			—				1,154
Purchases of securities available-for-sale			(258,295	)			(125,084	)
Loan originations and principal collections, net			68,269				(92,505	)
Proceeds from disposition of foreclosed properties			4,835				244
Additions to property and equipment			(266	)			(1,237	)
Net cash provided by (used in) investing activities			90,801				(153,428	)
Cash flows from financing activities
Net (decrease) increase in deposits			(149,839	)			131,264
Capitalized issuance costs of Series A exchange			(2,329	)			—
Capitalized issuance costs of Series T exchange			(342	)			—
Repayment of borrowings			—				(40,000	)
Preferred stock cash dividends paid			—				(1,660	)
Change in federal funds purchased and securities sold under agreements to repurchase			—				55,000
Repurchase of common shares under stock and incentive option plan			—				(17	)
Net cash (used in) provided by financing activities			(152,510	)			144,587
Decrease in cash and cash equivalents			(61,725	)			(4,787	)
Cash and cash equivalents at beginning of period			442,110				63,065
Cash and cash equivalents at end of period		$	380,385			$	58,278
Supplemental disclosures
Cash paid during period for:
Interest		$	15,281			$	23,169
Income taxes			—				582

See accompanying notes to unaudited consolidated financial statements.

MIDWEST BANC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — REGULATORY ACTIONS

     As of March 31, 2010, the most recent Federal Reserve Bank notification categorized the Bank as critically undercapitalized under the regulatory framework for prompt corrective action.

     Effective on March 30, 2010, as a result of its significantly undercapitalized status, Midwest Banc Holdings, Inc.’s (the “Company”) wholly owned subsidiary, Midwest Bank and Trust Company (the “Bank”) consented to the issuance of a Prompt Corrective Action Directive (“PCA”) by the Board of Governors of the Federal Reserve System. The PCA provides that the Bank, in conjunction with the Company, must within 45 days of March 30, 2010, i.e., by May 13, 2010 (the “PCA Deadline”), either: (i) increase the Bank’s capital so that it becomes adequately capitalized; (ii) enter into and close on an agreement to sell the Bank subject to regulatory approval and customary closing conditions; or (iii) take other necessary measures to make the Bank adequately capitalized. The Company does not expect that it will be able to satisfy the capital requirement set forth in the PCA by the PCA Deadline. If the Company is unable to satisfy such requirement by the PCA Deadline, the Company believes it is likely its bank regulators would place the Bank into Federal Deposit Insurance Corporation’s (“FDIC”) receivership.

     The PCA also prohibits the Bank from making any capital distributions, including dividends and from soliciting and accepting new deposits bearing an interest rate that exceeds the prevailing effective rates on deposits of comparable amounts and maturities in the Bank’s market area. On April 30, 2010, the Bank submitted to the Federal Reserve Bank a plan and timetable for conforming the rates of interest paid on existing non-time deposit accounts to these levels as required under the PCA.

     The PCA also subjects the Bank to other operating restrictions, including payment of bonuses to senior executive officers and increasing their compensation, restrictions on asset growth and branching, and ensuring that all transactions between the Bank and any affiliates comply with Section 23A of the Federal Reserve Act. The Bank was already in compliance with certain of these guidelines as the Bank was significantly undercapitalized for regulatory purposes at the time of the PCA. For example, the Bank has been complying with the FDIC rules relating to the payment of interest on deposits. The Company and the Bank continue to be subject to the written agreement, as described below.

     Prior to the receipt of the PCA, as a result of a safety and soundness examination of the Bank by the Federal Reserve Bank and the Illinois Department of Financial and Professional Regulation, Division of Banking (the “Illinois Division of Banking”), the Company and the Bank entered into a written agreement (the “Written Agreement”) with the Federal Reserve Bank and the Illinois Division of Banking on December 18, 2009, intended to strengthen the Bank and improve the Company’s overall financial condition. As disclosed in previous documents filed with the Securities and Exchange Commission, the Company had anticipated entering into a formal supervisory action following the completion of the examination and had already taken many of the steps referenced in the Written Agreement.

     The Written Agreement establishes timeframes for the completion of measures which have been previously identified by the Company and the regulators as important to improve the Company’s financial performance. Under the Written Agreement, the Company was required to prepare and file with the regulators, within specified timeframes, various specific plans designed to improve (i) board oversight over the management and operations of the Bank, (ii) credit risk management practices, (iii) management of problem loans, (iv) the allowance for loan losses, (v) the Bank’s earnings and budget, (vi) liquidity and funds management and (vii) interest rate risk management.

     The Written Agreement requires, among other things, that the Company and the Bank obtain prior approval in order to pay dividends. In addition, the Company must obtain prior approval of the Federal Reserve Bank to (i) take any other form of payment from the Bank representing a reduction in capital of the Bank; (ii) make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities; (iii) incur, increase or guarantee any debt; or (iv) purchase or redeem any shares of the Company’s stock. Pursuant to the terms of the Written Agreement, the Company and the Bank were also required, within 60 days of the date of the Written Agreement, to submit an acceptable written plan to the regulators to maintain sufficient capital at the Company, on a consolidated basis, and at the Bank on a standalone basis. The Company submitted its written plan in February 2010.

MIDWEST BANC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

     The Company and the Bank were notified on March 25, 2010, by the Federal Reserve Bank, that the Bank’s capital plan was not accepted. According to the Federal Reserve Bank, the plan was not accepted because, among other things, the Company had not yet raised $125 million of new equity, which is a condition to the Company’s ability to convert to common stock, the new series of fixed rate cumulative mandatorily convertible preferred stock (“Series G”), that the Company issued to the U.S. Department of the Treasury (the “U.S. Treasury”) in March 2010 in exchange for all of the Company’s outstanding Series T fixed rate cumulative perpetual preferred stock (“Series T”) and cumulative dividends not declared or paid, previously held by the U.S. Treasury.

     The Company does not expect that it will be able to satisfy the capital-related requirements set forth in the Written Agreement and the PCA by the PCA Deadline. The Company believes that the successful completion of all or a significant portion of its capital plan, which includes executing transactions that seek to improve the Company’s and the Bank’s capital position, increase its common equity and Tier 1 capital and raise additional capital (“Capital Plan”), would help the Bank and the Company to meet the requirements of the Written Agreement and the PCA. The Company has completed a number of significant steps as part of the Capital Plan. The steps completed in 2009 and the beginning of 2010 include the exchange of 82% of the Company’s outstanding shares of Series A noncumulative redeemable convertible perpetual preferred stock for common stock, the exchange of all of the Company’s outstanding Series T preferred stock for the Series G preferred stock, cost reduction initiatives, and refined cumulative credit loss projections. The Company believes that an equity raise of approximately $250 million together with an agreement by its primary lender to convert the amount outstanding under its credit agreements to equity capital is now required for the Company and Bank to become and remain well capitalized and continue to operate as a going concern. The Company has not received any commitment for a new capital investment, and presently does not expect to raise sufficient capital prior to the PCA Deadline. If the Company does not promptly raise a sufficient amount of new equity capital, or, alternatively, execute another strategic initiative, the Company may become subject to a voluntary or involuntary bankruptcy filing and the Company believes it is likely that the Bank would be placed into receivership by bank regulators.

NOTE 2 — REGULATORY CAPITAL

     As noted above, the Bank was categorized as critically undercapitalized under the regulatory framework for prompt corrective action as of March 31, 2010. In addition to the restrictions already placed on the Bank under the PCA, the Bank is no longer able to engage in the following activities without prior approval:

	•		enter into an material transactions outside the usual course of business;
	•		extend any credit for highly leveraged transactions;
	•		amend its charter or by-laws;
	•		make any material changes in its accounting methods;
	•		engage in any “covered transactions” as defined in Section 23A(b) of the Federal Reserve Act;
	•		pay excessive compensation or bonuses; or
	•		pay interest on new or renewed liabilities at a rate that would increase the Bank’s weighted average cost of funds to a level significantly exceeding the prevailing rates of interest on insured deposits in the Bank’s normal market area.

MIDWEST BANC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

     The Bank is no longer able to accept or renew brokered deposits or secure deposits at rates that are higher than the prevailing effective rates on insured deposits of comparable amounts or maturities in the Bank’s normal market area or 75 basis points higher than the national rates published weekly by the FDIC, pay dividends or make other capital distributions, obtain funds through Federal funds lines, or obtain advances from the Federal Reserve Bank.

     In addition, the agreements with one of the Bank’s repurchase agreement counterparties could permit that counterparty to terminate the repurchase agreements as a result of the Bank being categorized as less than well capitalized. At March 31, 2010, the Bank’s repurchase agreements with those provisions totaled $262.7 million with fixed interest rates ranging from 2.76% to 4.65%, maturities ranging from approximately seven to eight years, and quarterly call provisions (at the counterparty’s option). Due to the relatively high fixed rates on these borrowings as compared to currently low market rates of interest, the Bank would incur substantial costs to unwind these repurchase agreements if terminated prior to their maturities. These associated unwind costs could have a material adverse effect on the Company’s results of operations and financial condition in the period of payment. The associated unwind costs would be the difference between the fair value and carrying value of the repurchase agreements on the date of termination. Because the repurchase agreements are collateralized at an amount sufficient to cover any such unwind costs which may be incurred, any such costs would result in a charge in the statement of operations but would not expect to have an adverse effect on the Bank’s liquidity. See Note 4 — Basis of Presentation, Going Concern of the notes to the unaudited consolidated financial statements.

NOTE 3 — FORBEARANCE AGREEMENT

     The Company’s credit agreements with a correspondent bank at March 31, 2010 included a revolving line of credit, term note, and subordinated debt. At September 30, 2009, the Company was in violation of the financial, regulatory capital, and nonperforming loan covenants contained in the revolving line of credit and term note. The Company also did not make a required principal payment on the term note due on July 1, 2009 and did not pay all of the aggregate outstanding principal on the revolving line of credit that matured July 3, 2009. On July 8, 2009, the lender advised the Company that the non-compliance and failure to make the principal payments constitute events of default. See Note 16 — Credit Agreements of the notes to the unaudited consolidated financial statements.

     On October 22, 2009, the Company entered into a forbearance agreement (“Forbearance Agreement”) with its lender that provided for a forbearance period that expired on March 31, 2010. During the forbearance period, the Company was not obligated to make interest and principal payments in excess of funds held in a deposit security account (which was initially funded with $325,000), and while retaining all rights and remedies under the credit agreements, the lender agreed not to demand payment of amounts due or begin foreclosure proceedings in respect of the collateral, which consists of all the stock of the Company’s principal subsidiary, the Bank, and agreed to forbear from exercising the rights and remedies available to it in respect of existing defaults and future compliance with certain covenants through March 31, 2010. As part of the Forbearance Agreement, the Company entered into a tax refund security agreement under which it agreed to deliver to the lender the expected proceeds to be received in connection with an outstanding Federal income tax refund in the approximate amount of $2.1 million. No proceeds from this tax refund have been received as of March 31, 2010. Although, the Forbearance Agreement terminated on March 31, 2010, management continues in its efforts on restructuring the Company’s outstanding credit agreements with its primary lender. The lender has not waived or committed to waive any default or event of default.

     Upon the expiration of the forbearance period, the principal and interest payments that were due under the revolving line of credit and the term note became due and payable, along with such other amounts as may have become due during the forbearance period. The Company is not able to meet any demands for payment of amounts due. If the Company is unable to renegotiate, renew, replace or expand its sources of financing on acceptable terms, it will have a material adverse effect on the Company’s business and results of operations. See Note 4 — Basis of Presentation, Going Concern of the notes to the unaudited consolidated financial statements.

MIDWEST BANC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 — BASIS OF PRESENTATION

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

     The annualized results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results expected for the full year ending December 31, 2010. Certain items in the prior year financial statements were reclassified to conform to the current year’s presentation. Such reclassifications had no effect on net loss.

     Going Concern: The consolidated financial statements of the Company have been prepared assuming that the Company will continue as a going concern. The Company incurred net losses of $107.9 million for the three months ended March 31, 2010 and $242.7 million for the year ended December 31, 2009. The losses are primarily due to provisions for credit losses, goodwill impairment charges, and tax charges related to a valuation allowance on deferred tax assets. Due to the resulting deterioration in capital levels of the Company and the Bank, combined with (i) the uncertainty as to the Company’s ability to raise sufficient amounts of new equity capital, (ii) recent regulatory actions with respect to the Company and the Bank, and (iii) the Company’s inability to repay amounts owed under its loan agreements with its primary lender if the primary lender were to declare the amounts outstanding thereunder immediately due and payable, (as discussed in Notes 1, 2, and 3 of the notes to the unaudited consolidated financial statements), there is substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

     Management’s plans in regard to these matters are described in detail in Note 1 — Regulatory Actions of the notes to the unaudited consolidated financial statements. The Company continues to pursue transactions that could improve the Company’s and the Bank’s capital ratios, restructure its obligations under the Company’s loan agreements with its primary lender (as described in Note 3 — Forbearance Agreement and Note 16 — Credit Agreements of the notes to the unaudited consolidated financial statements) and raise additional equity capital to permit the Bank and the Company to meet and maintain minimum regulatory capital levels as required under the Written Agreement and PCA, and provide the necessary liquidity to provide for future operating needs. If the Company does not promptly raise a sufficient amount of new equity capital, or alternatively, execute another strategic initiative, the Company may become subject to a voluntary or involuntary bankruptcy filing and the Company believes it is likely that the Bank would be placed into receivership by bank regulators.

NOTE 5 — NEW ACCOUNTING PRONOUNCEMENTS

     In January 2010, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) to authoritative guidance on improving disclosures about fair value measurements (ASU 2010-6). This guidance requires new disclosures for transfers in and out of Levels 1 and 2 and the reasons for the transfers as well as an additional breakout of asset and liability categories. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009. The adoption of this guidance did not have a material effect on the Company’s consolidated results of operations or consolidated financial position. This guidance also requires purchases, sales, issuances and settlements to be reported separately in the summary of changes in Level 3 fair value measurements. This additional guidance is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.

     In February 2010, the FASB amended its Accounting Standards Codification^tm (“ASC”) that establish principles and requirements for subsequent events (ASC 855) to clarify that an SEC filer is not required to disclose the date through which subsequent events have been evaluated in the financial statements (ASU 2010-09). The adoption of this guidance did not have a material effect on the Company’s consolidated results of operations or consolidated financial position. See Note 19 — Subsequent Events of the notes to the unaudited consolidated financial statements for more information.

MIDWEST BANC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

     In June 2009, the FASB issued authoritative guidance establishing accounting and reporting standards for transfers and servicing of financial assets and also establishing the accounting for transfers of servicing rights (ASC 860). This guidance eliminates the concept of a qualifying special-purpose entity and introduces the concept of a “participating interest,” which will limit the circumstances where the transfer of a portion of a financial asset will qualify as a sale, assuming all other derecognition criteria are met. This guidance also clarifies and amends the derecognition criteria for determining whether a transfer qualifies for sale accounting as well as requires additional disclosures. These additional disclosures are intended to provide greater transparency about a transferor’s continuing involvement with transferred assets. The adoption of this guidance on January 1, 2010 did not have a material effect on the Company’s consolidated results of operations or consolidated financial position.

     In June 2009, the FASB issued authoritative guidance which eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity (ASC 810). If an enterprise is required to consolidate an entity as a result of the initial application of this standard, it should describe the transition method(s) applied and shall disclose the amount and classification in its statement of financial position of the consolidated assets or liabilities by the transition method(s) applied. If an enterprise is required to deconsolidate an entity as a result of the initial application of this standard, it should disclose the amount of any cumulative effect adjustment related to deconsolidation separately from any cumulative effect adjustment related to consolidation of entities. The adoption of this guidance on January 1, 2010 did not have a material effect on the Company’s consolidated results of operations or consolidated financial position.

NOTE 6 — SECURITIES

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

		March 31, 2010
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		(In thousands)
Obligations of U.S. Treasury		$	293,974			$	—			$	(9	)		$	293,965
Mortgage-backed securities:
U.S. government agencies — residential (1)			259,892				1,659				(1,051	)			260,500
Equity securities of U.S. government-sponsored entities (2)			2,749				138				(703	)			2,184
Corporate and other debt securities			14,871				—				(3,901	)			10,970
Total securities available-for-sale		$	571,486			$	1,797			$	(5,664	)		$	567,619

MIDWEST BANC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

		December 31, 2009
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		(In thousands)
Obligations of U.S. Treasury		$	310,954			$	6			$	(13	)		$	310,947
Mortgage-backed securities:
U.S. government agencies — residential (1)			259,878				219				(3,822	)			256,275
U.S. government-sponsored entities — residential (2)			1,271				—				(12	)			1,259
Equity securities of U.S. government-sponsored entities (3)			2,749				105				(582	)			2,272
Corporate and other debt securities			14,920				—				(4,199	)			10,721
Total securities available-for-sale		$	589,772			$	330			$	(8,628	)		$	581,474

     The following is a summary of the fair value of securities available-for-sale with unrealized losses and the time period of those unrealized losses:

		March 31, 2010
		Less Than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
Securities available-for-sale:
Obligations of U.S. Treasury		$	293,965			$	(9	)		$	—			$	—			$	293,965			$	(9	)
Mortgage-backed securities:
U.S. government agencies — residential (1)			70,774				(1,051	)			—				—				70,774				(1,051	)
Equity securities of U.S. government-sponsored entities (2)			1,054				(221	)			497				(482	)			1,551				(703	)
Corporate and other debt securities			—				—				10,970				(3,901	)			10,970				(3,901	)
Total temporarily impaired securities		$	365,793			$	(1,281	)		$	11,467			$	(4,383	)		$	377,260			$	(5,664	)

MIDWEST BANC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

		December 31, 2009
		Less Than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
Securities available-for-sale:
Obligations of U.S. Treasury		$	150,954			$	(13	)		$	—			$	—			$	150,954			$	(13	)
Mortgage-backed securities:
U.S. government agencies — residential (1)			204,754				(3,822	)			—				—				204,754				(3,822	)
U.S. government-sponsored entities — residential (2)			1,259				(12	)			—				—				1,259				(12	)
Equity securities of U.S. government-sponsored entities (3)			219				(64	)			461				(518	)			680				(582	)
Corporate and other debt securities			—				—				10,721				(4,199	)			10,721				(4,199	)
Total temporarily impaired securities		$	357,186			$	(3,911	)		$	11,182			$	(4,717	)		$	368,368			$	(8,628	)

     The unrealized loss on available-for-sale securities is included in other comprehensive loss on the consolidated balance sheets. Management has concluded that no individual unrealized loss as of March 31, 2010, identified in the preceding table, represents other-than-temporary impairment. These unrealized losses are primarily attributable to the general credit environment and turmoil in the market for securities related to the housing industry and are not representative of the associated collateral arrangements or repayment capability of the specific underlying securities. Management expects to recover the entire amortized cost basis of these securities. The Company does not intend to sell nor would it be required to sell the securities shown in the table with unrealized losses before recovering their amortized cost.

NOTE 7 — LOANS

     Major classifications of loans, based on source of repayment, are summarized as follows:

		March 31,								December 31,
		2010								2009
						% of Gross								% of Gross
		Amount				Loans				Amount				Loans
		(Dollars in thousands)
Commercial		$	923,843				42.3	%		$	972,090				41.9	%
Construction			245,586				11.2				293,215				12.6
Commercial real estate			695,511				31.8				725,814				31.3
Home equity			209,993				9.7				219,183				9.5
Other consumer			4,877				0.2				5,454				0.2
Residential mortgage			105,186				4.8				105,147				4.5
Total loans, gross			2,184,996				100.0	%			2,320,903				100.0	%
Net deferred fees			(556	)							(584	)
Total loans, net		$	2,184,440							$	2,320,319

     The Company reclassified $2.1 million and $441,000 in overdraft deposits to loans as of March 31, 2010 and December 31, 2009, respectively.

MIDWEST BANC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 — ALLOWANCE FOR LOAN LOSSES

     Following is a summary of activity in the allowance for loan losses:

		Three Months Ended
		March 31,
		2010				2009
		(In thousands)
Balance at beginning of period		$	128,800			$	44,432
Provision for loan losses			76,300				13,000
Loans charged off			(63,810	)			(4,819	)
Recoveries on loans previously charged off			994				398
Net loans charged off			(62,816	)			(4,421	)
Balance at end of period		$	142,284			$	53,011

     The provision for credit losses reflected on the consolidated statements of operations includes the provision for loan losses and the provision for unfunded commitment losses as follows:

		Three Months Ended
		March 31,
		2010				2009
		(In thousands)
Provision for loan losses		$	76,300			$	13,000
Provision for unfunded commitment losses			750				253
Provision for credit losses		$	77,050			$	13,253

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

		March 31,				December 31,
		2010				2009
		(In thousands)
Impaired loans for which no allowance for loan losses is allocated		$	57,614			$	61,456
Impaired loans with an allocation of the allowance for loan losses			207,132				200,979
Total impaired loans		$	264,746			$	262,435
Allowance for loan losses allocated to impaired loans		$	67,396			$	69,494

     Average impaired loans and interest income recognized on impaired loans are as follows:

		Three Months Ended
		March 31,
		2010				2009
		(In thousands)
Average impaired loans		$	249,504			$	63,838
Interest income recognized on impaired loans on a cash basis			117				102

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

     As of March 31, 2010 and December 31, 2009, nonaccrual loans were $278.1 million and $273.8 million, respectively. There were no loans past due 90 days but still accruing at March 31, 2010 and December 31, 2009. There were $11.5 million in accruing troubled-debt restructured loans and $51.7 million nonaccrual troubled-debt restructured loans as of March 31, 2010. There were $11.6 million in accruing troubled-debt restructured loans and $9.7 million in nonaccrual trouble-debt restructured loans as of December 31, 2009.

MIDWEST BANC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 — GOODWILL AND INTANGIBLES

     The following table presents the carrying amount and accumulated amortization of core deposit intangible assets:

		March 31, 2010												December 31, 2009
		Gross Carrying				Accumulated				Net Carrying				Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount				Amount				Amortization				Amount
		(In thousands)
Amortized core deposit intangibles		$	21,091			$	(9,255	)		$	11,836			$	21,091			$	(8,700	)		$	12,391

     The amortization of core deposit intangible assets was $555,000 for the three months ended March 31, 2010. At March 31, 2010, the projected amortization of core deposit intangible assets for the years ending December 31, 2010 through 2014 and thereafter is as follows (in thousands):

2010		$	2,222
2011			1,918
2012			1,803
2013			1,696
2014			1,626
Thereafter			3,126

     The weighted average amortization period for the core deposit intangibles is approximately seven years as of March 31, 2010.

     The following table presents the changes in the carrying amount of goodwill and core deposit intangibles during the periods presented:

						Three Months Ended
		March 31, 2010								December 31, 2009
						Core Deposit								Core Deposit
		Goodwill				Intangibles				Goodwill				Intangibles
		(In thousands)
Balance before impairment losses		$	158,862			$	12,391			$	158,862			$	14,683
Accumulated impairment losses			(94,000	)			—				(80,000	)			—
Balance at beginning of year		$	64,862			$	12,391			$	78,862			$	14,683
Impairment		$	(21,000	)		$	—			$	(14,000	)		$	—
Amortization			—				(555	)			—				(2,292	)
Balance before impairment losses		$	158,862			$	11,836			$	158,862			$	12,391
Accumulated impairment losses			(115,000	)			—				(94,000	)			—
Balance at end of period		$	43,862			$	11,836			$	64,862			$	12,391

     Goodwill is not amortized but assessed at least annually for impairment, and any impairment is recognized in the period in which it is identified. In accordance with guidelines under the authoritative guidance for intangibles — goodwill and other (ASC 350), and consistent with established Company policy, an annual review for goodwill impairment as of September 30th is conducted. However, the Company determined that activities in the first quarter of 2010 including the PCA received from its regulators, the expiration of the Forbearance Agreement, and the decline in the Bank’s regulatory capital position to critically undercapitalized constituted triggering events requiring an interim goodwill impairment test. As a result of that test, the Company recorded a $21.0 million goodwill impairment for the three months ended March 31, 2010. The Company may be required to take goodwill impairment charges in the future.

MIDWEST BANC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 — OFF-BALANCE-SHEET RISK

     In the normal course of business and to meet financing needs of customers, the Company is a party to financial instruments with off-balance-sheet risk. Since many commitments to extend credit expire without being used, the amounts below do not necessarily represent future cash commitments. These financial instruments include lines of credit, letters of credit, and commitments to extend credit. These are summarized as follows as of March 31, 2010:

		Amount of Commitment Expiration Per Period
		Within												After
		1 Year				1-3 Years				4-5 Years				5 Years				Total
		(In thousands)
Lines of Credit:
Commercial real estate		$	55,586			$	7,701			$	2,637			$	3,916			$	69,840
Home equity			24,686				23,085				34,098				21,675				103,544
Consumer			—				—				—				2,003				2,003
Commercial			139,235				714				2,142				10				142,101
Letters of credit			32,447				4,079				2,410				—				38,936
Commitments to extend credit			8,587				—				—				—				8,587
Total commitments		$	260,541			$	35,579			$	41,287			$	27,604			$	365,011

     At March 31, 2010, commitments to extend credit included $6.2 million of fixed rate loan commitments. These commitments are due to expire within 30 to 90 days of issuance and have rates ranging from 5.00% to 6.75%. Substantially all of the unused lines of credit are at adjustable rates of interest.

     The Company had a reserve for losses on unfunded commitments of $2.4 million at March 31, 2010, up from $2.2 million at December 31, 2009.

     During the second quarter of 2009, the Company began deferring payment of dividends on the $84.8 million of Series T cumulative preferred stock. The dividends on the Series T cumulative preferred stock are recorded only when declared. On March 8, 2010, the U.S. Treasury exchanged the 84,784 shares of Series T preferred stock, having an aggregate approximate liquidation preference of $84.8 million, plus approximately $4.6 million in cumulative dividends not declared or paid on such preferred stock, for a new series of fixed rate cumulative mandatorily convertible preferred stock, Series G, with the same liquidation preference. The Series G cumulative amount of dividends not declared or paid totaled $286,000 as of March 31, 2010. See Note 17 — Preferred Stock and Warrant of the notes to the unaudited consolidated financial statements for more information.

     In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s financial position or results of operations.

MIDWEST BANC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 — FAIR VALUE

     The authoritative guidance for fair value measurement (ASC 820) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between willing market participants on the measurement date. This guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

     • Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

     • Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

     • Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

     The Company’s available-for-sale investment securities are the only financial assets that are measured at fair value on a recurring basis; it does not hold any financial liabilities that are measured at fair value on a recurring basis. The fair values of available-for-sale securities are determined by obtaining either quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on these securities’ relationship to other benchmark quoted securities. If quoted prices or matrix pricing are not available, the fair value is determined by an adjusted price for similar securities including unobservable inputs. The significant unobservable inputs include the underlying collateral’s ability to generate cash flows, incorporating the risks of default and loss of the underlying collateral. The cash flows are then discounted to arrive at fair value. The Company did not make any transfers of available-for-sale securities into or out of Level 1 or Level 2 during the three months ended March 31, 2010 and 2009.

     The fair values of the available-for-sale securities were measured using the following for the periods shown:

						Quoted Prices or				Significant				Significant
						Identical Assets in				Other Observable				Unobservable
		Total				Active Markets				Inputs				Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
						(In thousands)
Assets at March 31, 2010:
Obligations of U.S. Treasury		$	293,965			$	—			$	293,965			$	—
Mortgage-backed securities:
U.S. government agencies — residential (1)			260,500				—				260,500				—
Equity securities of U.S. government-sponsored entities (2)			2,184				2,184				—				—
Corporate and other debt securities			10,970				—				4,010				6,960
Available-for-sale securities		$	567,619			$	2,184			$	558,475			$	6,960
Assets at December 31, 2009:
Obligations of U.S. Treasury		$	310,947			$	—			$	310,947			$	—
Mortgage-backed securities:
U.S. government agencies — residential (1)			256,275				—				256,275				—
U.S. government-sponsored entities — residential (3)			1,259				—				1,259				—
Equity securities of U.S. government-sponsored entities (2)			2,272				2,272				—				—
Corporate and other debt securities			10,721				—				3,700				7,021
Available-for-sale securities		$	581,474			$	2,272			$	572,181			$	7,021

MIDWEST BANC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

     The following is a summary of changes in the fair value of the corporate available-for-sale securities that were measured using significant unobservable inputs for the quarters ended March 31, 2010 and 2009:

		March 31,
		2010				2009
		(In thousands)
Beginning balance		$	7,021			$	8,433
Paydowns received			(51	)			(39	)
Total gains or losses (realized/unrealized):
Included in net loss			—				—
Included in other comprehensive loss			(10	)			(1,375	)
Ending balance		$	6,960			$	7,019

     The Company’s impaired loans that are measured using the fair value of the underlying collateral are measured on a non-recurring basis. Once a loan is identified as individually impaired, management measures impairment in accordance with the authoritative guidance for loan impairments (ASC 310-10-35). At March 31, 2010, $207.1 million of the total impaired loans were evaluated based on the fair value of the collateral compared to $201.0 million at December 31, 2009. The fair value of the collateral is determined by obtaining an observable market price or by obtaining an appraised value with management applying selling and other discounts to the underlying collateral value. If an appraised value is not available, the fair value of the impaired loan is determined by an adjusted appraised value including unobservable cash flows.

     Loans which are measured for impairment using the fair value of collateral, had a gross carrying amount of $207.1 million, with an associated valuation allowance of $67.4 million for a fair value of $139.7 million at March 31, 2010, and $201.0 million, with an associated valuation allowance of $69.5 million for a fair value of $131.5 million at December 31, 2009. The provision for credit losses for the three months ended March 31, 2010 included $61.0 million of specific allowance allocations for impaired loans.

     The Company’s goodwill is assessed at least annually, at September 30, for impairment, and any such impairment is recognized in the period it is identified. A goodwill impairment test also could be triggered between annual testing dates if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill below the carrying amount. In accordance with guidelines under the authoritative guidance for intangibles — goodwill and other (ASC 350), and consistent with established Company policy, a review for goodwill impairment as of March 31, 2010 was conducted with the assistance of a nationally recognized third party valuation specialist. As a result of that test, the Company recorded a $21.0 million goodwill impairment as of March 31, 2010.

     Assets measured at fair value on a non-recurring basis include impaired loans based on the fair value of the underlying collateral and goodwill as summarized below:

						Quoted Prices or				Significant				Significant
						Identical Assets in				Other Observable				Unobservable
		Total				Active Markets				Inputs				Inputs
		Fair Value				(Level 1)				(Level 2)				(Level 3)
						(In thousands)
Assets at March 31, 2010:
Assets:
Impaired loans		$	139,736			$	—			$	—			$	139,736
Goodwill			43,862				—				—				43,862
Assets at December 31, 2009:
Assets:
Impaired loans		$	131,485			$	—			$	—			$	131,485
Goodwill			64,862				—				—				64,862

MIDWEST BANC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

     The estimated fair values of the Company’s financial instruments were as follows:

		March 31, 2010								December 31, 2009
		Carrying				Estimated				Carrying				Estimated
		Amount				Fair Value				Amount				Fair Value
						(In thousands)
Financial assets
Cash and cash equivalents		$	380,385			$	380,385			$	442,110			$	442,110
Securities available-for-sale			567,619				567,619				581,474				581,474
Federal Reserve Bank and Federal Home Loan Bank stock			27,652				27,652				27,652				27,652
Loans, net of allowance for loan losses			2,042,156				2,037,805				2,191,519				2,137,263
Accrued interest receivable			8,399				8,399				8,584				8,584
Financial liabilities
Deposits
Noninterest-bearing			347,483				347,483				349,796				349,796
Interest-bearing			2,072,709				2,084,512				2,220,315				2,231,823
Revolving note payable			8,600				401				8,600				3,947
Securities sold under agreements to repurchase			297,650				333,411				297,650				329,298
Advances from Federal Home Loan Bank			340,000				367,265				340,000				366,277
Junior subordinated debentures			60,828				2,169				60,828				19,064
Subordinated debt			15,000				113				15,000				6,883
Term note payable			55,000				2,566				55,000				25,238
Accrued interest payable			8,610				5,139				7,798				7,798

     The remaining other assets and liabilities of the Company are not considered financial instruments and are not included in the above disclosures.

     The methods and assumptions used to determine fair values for each class of financial instrument are presented below.

     A test for goodwill impairment was conducted as of December 31, 2009, and March 31, 2010 with the assistance of a nationally recognized third party valuation specialist. In Step 2 of that test, the Company estimated the fair value of assets and liabilities in the same manner as if a purchase of the reporting unit was taking place from a market participant perspective. Management worked closely with the third party valuation specialist throughout the valuation process, provided necessary information and reviewed and approved the methodologies, assumptions and conclusions. These results serve as the basis for the Company’s fair value estimates noted in the table above.

     The fair value estimation methodology selected for the Company’s most significant assets and liabilities was based on management’s observations and knowledge of methodologies typically and currently utilized by market participants, the structure and characteristics of the asset and liability in terms of cash flows and collateral, and the availability and reliability of significant inputs required for a selected methodology and comparative data to evaluate the outcomes.

     The carrying amount is equivalent to the estimated fair value for cash and cash equivalents, Federal Reserve Bank and Federal Home Loan Bank stock, and accrued interest receivable and payable, except for the accrued interest payable on the junior subordinated debentures and credit agreements which are valued in the same manner as the related borrowings. The fair values of securities are determined by obtaining either quoted prices on nationally recognized securities exchanges or matrix pricing. The Company selected the income approach for performing loans, retail certificates of deposit, and borrowings. The Company estimated discounted fair values separately for nonaccrual loans and loans 60-89 days past due and accruing. The income approach was deemed appropriate for the assets and liabilities noted above due to the limited current comparable market transaction data available.

MIDWEST BANC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

     In computing estimated fair value, performing loans were broken into fixed and variable components, floors and collateral coverage ratios were considered, and appropriate comparable market discount rates were used to compute fair values using a discounted cash flow approach. For nonperforming loans, a 33% discount was applied to nonaccrual loans based upon recent Company loss experience and a 10% discount was applied to loans 60-89 days past due and accruing.

     The fair values of the Company’s liabilities were estimated using: price estimates from a nationally known dealer for securities sold under repurchasing agreements, market price quotes from the Federal Home Loan Bank of Chicago (“FHLBC”) on FHLBC advances, discounted cash flows for the time and brokered deposits, a weighted combination of the fair value assuming conversion to common stock at a discount and a liquidation scenario for all correspondent bank debt and a weighted combination of discounted cash flows reflecting the effects of credit spreads and a liquidation scenario value estimate for the junior subordinated debentures.

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

NOTE 12 — STOCK COMPENSATION AND RESTRICTED STOCK AWARDS

     Under the Company’s Stock and Incentive Plan (the “Plan”), officers, directors, and key employees may be granted incentive stock options to purchase the Company’s common stock at no less than 100% of the market price on the date the option is granted. Options can be granted to become exercisable immediately or after a specified vesting period or may be issued subject to performance targets. In all cases, the options have a maximum term of ten years. The Plan also permits the issuance of nonqualified stock options, stock appreciation rights, restricted stock, and restricted stock units. The Plan authorizes a total of 3,900,000 shares for issuance. There are 1,687,823 shares remaining for issuance under the Plan at March 31, 2010. It is the Company’s policy to issue new shares of its common stock in conjunction with the exercise of stock options or grants of restricted stock.

     No employee stock options were exercised during the first quarter of 2010. Total employee stock options outstanding at March 31, 2010 were 496,388 with exercise prices ranging between $1.15 and $22.03, with a weighted average exercise price of $8.11, and expiration dates between 2010 and 2019. At March 31, 2010, 228,875 options were exercisable at a weighted average exercise price per share of $15.00.

     Information about option activity follows:

						Weighted Average				Weighted Average
		Number of				Exercise Price				Grant- Date Fair
		Options				Per Share				Value Per Share
Outstanding at December 31, 2009			540,626			$	8.02			$	2.89
Forfeited			(44,238	)			6.99				2.65
Outstanding at March 31, 2010			496,388				8.11				2.91