Summary of MIDWEST BANC HOLDINGS INC

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended as a review of significant factors affecting the financial condition and results of operations of the Company for the periods indicated. The discussion should be read in conjunction with the unaudited Consolidated Financial Statements and the Notes thereto presented herein. In addition to historical information, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed in this report.
Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. By their nature, changes in these assumptions and estimates could significantly affect the Company's financial position or results of operations. Actual results could differ from those estimates. Those critical accounting policies that are of particular significance to the Company are discussed in the Company's Registration Statement on Form S-4 (File No. 333-160985) filed with the SEC on October 26, 2009 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates."
Recent Developments
On October 22, 2009, the Company entered into a forbearance agreement ("Forbearance Agreement") with its lender that provides for a forbearance period through March 31, 2010, during which time the Company will continue to pursue completion of its previously disclosed capital plan. Management believes that the Forbearance Agreement provides the Company sufficient time to complete all major elements of the capital plan; however there can be no assurance that any or all major elements of the capital plan will be completed in a timely manner or at all. During the forbearance period, the Company is not obligated to make interest and principal payments in excess of funds held in a deposit security account (which will be funded with $325,000), and while retaining all rights and remedies under the credit agreements, the lender has agreed not to demand payment of amounts due or begin foreclosure proceedings in respect of the collateral, which consists primarily of all the stock of the Company's principal subsidiary, Midwest Bank and Trust Company, and has 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. These proceeds, when received, will be placed in the deposit security account, and will be available for interest and principal payments. The Forbearance Agreement may terminate prior to March 31, 2010 if the Company defaults under any of its representations, warranties or obligations contained in either the Forbearance Agreement or credit agreements, or the Bank becomes subject to receivership by the FDIC or the Company becomes subject to other bankruptcy or insolvency type proceeding.
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, as modified by the covenant waivers, at the time the Forbearance Agreement was entered into will once again become due and payable, along with such other amounts as may have become due during the forbearance period. Absent successful completion of all or a significant portion of the Capital Plan, the Company expects that it would not be able to meet any demands for payment of amounts then due at the expiration of the forbearance period. If the Company is unable to renegotiate, renew, replace or expand its sources of financing on acceptable terms, it may have a material adverse effect on the Company's business and results of operations.
The Bank's primary regulators, the Federal Reserve Bank of Chicago and the Illinois Department of Financial and Professional Regulation, Division of Banking, have recently completed a safety and soundness examination of the Bank. As a result of that examination, the Company expects that the Federal Reserve Bank and the Division of Banking will request that the Bank enter into a formal supervisory action requiring it to take certain steps intended to improve its overall condition. Such a supervisory action could require the Bank,

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among other things, to: implement the capital restoration plan described below to strengthen the Bank's capital position; develop a plan to improve the quality of the Bank's loan portfolio by charging off loans and reducing its position in assets classified as "substandard;" develop and implement a plan to enhance the Bank's liquidity position; and enhance the Bank's loan underwriting and workout remediation teams. The final supervisory action may contain other conditions and targeted time frames as specified by the regulators.
The Company believes that the successful completion of all or a significant portion of the Capital Plan will enable the Bank to meet the requirements of any formal supervisory action with the regulators and will ensure that the Bank is able to comply with applicable bank regulations. However, the successful completion of all or any portion of the capital plan is not assured and if the Company or the Bank is unable to comply with the terms of the anticipated supervisory action or any other applicable regulations, the Company and the Bank could become subject to additional, heightened supervisory actions and orders. If our regulators were to take such additional actions, the Company and the Bank could become subject to various requirements limiting the ability to develop new business lines, mandating additional capital, and/or requiring the sale of certain assets and liabilities. Failure of the Company to meet these conditions could lead to further enforcement action on behalf of the regulators. The terms of any such additional regulatory actions, orders or agreements could have a materially adverse effect on the business of the Bank and the Company.
Brogan Ptacin and Kelly J. O'Keeffe, each an Executive Vice President of the Bank, resigned from the Bank effective August 14, 2009. Messrs. Ptacin and O'Keeffe's responsibilities were assigned to other members of management.
On July 28, 2009, the Board of Directors of the Bank and the Company accepted the resignation of three directors, reducing the Boards from eleven to eight members. On September 21, 2009, the Company announced the death of Director Thomas A. Rosenquist. The boards of the Company and the Bank now have seven members.
On July 28, 2009, the Company announced that it had developed a detailed capital plan and timeline for execution (the "Capital Plan"). The Capital Plan was adopted in order to, among other things, improve the Company's common equity capital and raise additional capital to enable it to better withstand and respond to adverse market conditions. Management has completed, or is in the process of completing, a number of steps as part of the Capital Plan, including:
• Cost reduction initiatives which will eliminate $14.6 million in expenses on an annualized basis when compared to either our 2008 expenses excluding the goodwill impairment and loss on extinguishment of debt or our 2nd quarter 2009 expenses similarly excluding the FDIC special assessment and severance expenses. This will be accomplished through a reduction in force of over 100 employees, which was completed by September 30, 2009, salary reductions for employees led by the Company's top executives' salaries of 7% to 10%, suspension of certain benefits, elimination of discretionary projects and initiatives and an increased focus on expense control;

• Retained independent consultants to refine credit loss projections through 2010;

• Broadened investment banking support to assist with the capital plan;

• Undertaking an offer to holders of the Company's outstanding Depositary Shares, each representing 1/100th fractional interest in a share of the Company's Series A noncumulative redeemable convertible perpetual preferred stock, to exchange their Depositary Shares for shares of the Company's common stock (the "Exchange Offer"). On October 26, 2009, the Company amended its registration statement previously filed with the SEC in connection with the proposed Exchange Offer;

• Possible capital raising activities;

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• Continued negotiations with the company's primary lender to restructure $55.0 million senior debt and $15.0 million subordinated debt;

• Analyzed the ability to exchange $59.0 million of trust preferred securities into equity. We have been advised an exchange for equity cannot be facilitated for the collateral in a trust preferred pooled securitization as a consequence of the tax status of the trust prohibiting the ownership of an equity security; and

• Filed an initial application seeking an investment by the U.S. Treasury of up to approximately $137.9 million (based on June 30, 2009 risk weighted assets) pursuant to its Capital Assistance Program ("CAP") that would be used to redeem the $84.8 million outstanding preferred stock issued to the U.S. Treasury under its Capital Purchase Program ("CPP") in 2008. The Company would seek to convert the CAP preferred stock to common stock following issuance of the CAP preferred stock to the U.S. Treasury (subject to regulatory approval). A condition precedent to the redemption of the $84.8 million outstanding preferred stock issued under the CPP is the payment of the deferred dividends, which were $2.7 million thorugh September 30, 2009.

• The Company is in negotiations with the U.S. Treasury related to conversion of the $84.8 million outstanding preferred stock issued to the U.S. Treasury under its Capital Purchase Program in 2008, to common stock. Subsequent to filing its intitial application, the Company amended its application to reduce the amount of the requested investment to $84.8 million.

The Company believes the successful completion of its Capital Plan would substantially improve its capital position; however, no assurances can be made that the Company will be able to successfully complete all, or any portion of its Capital Plan, or that the Capital Plan will not be materially modified in the future. The Company's decision to implement its Capital Plan reflects the adverse effect that the severe downturn in the commercial and residential real estate markets has had on the Company's financial condition and capital base, as well as its assessment of current regulatory expectations of adequate levels of common equity capital. If the Company is not able to successfully complete a substantial portion of its Capital Plan, the Company expects that its business, and the value of its securities, will be materially and adversely affected, and it will be more difficult for the Company to meet the capital requirements expected of it by its primary banking regulators.
On May 6, 2009, the Company announced that Roberto R. Herencia was named president and Chief Executive Officer of the Company and the Bank, replacing J. J. Fritz, who became senior executive vice president of Midwest Banc Holdings. Mr. Herencia, who also was appointed to the board of directors of the Company, was formerly president and director of Banco Popular North America based in Chicago and executive vice president of Popular, Inc., the parent company. Under Mr. Herencia's direction, the Company immediately tightened its loan underwriting and pricing criteria, began aggressive balance sheet repositioning activities, and developed a comprehensive capital plan, as discussed above. These activities are designed to right-size the Company, preserve capital and reduce the risk inherent in the balance sheet. As a result of these activities, the Company reported asset reductions for the second and third quarters of 2009 and reductions in risk-weighted assets as defined for regulatory capital purposes.
The Company announced on May 6, 2009, that the Board of Directors made the decision to suspend the dividend on the $43.1 million of Series A noncumulative redeemable convertible perpetual preferred stock; defer the dividend on the $84.8 million of Series T preferred stock; and defer interest payments on $60.8 million of its junior subordinated debentures as permitted by the terms of such debentures. The Company has no current plans to resume dividend payments in respect of the Series A preferred stock or the Series T preferred stock or interest payments in respect of its junior subordinated debentures.

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Selected Consolidated Financial Data
   The following table sets forth certain selected consolidated financial data
at or for the periods indicated.

                                                 At or For the Three Months Ended                      At or For the Nine Months Ended
                                                 September 30,                   June 30,                       September 30,
                                           2009                2008                2009                   2009                    2008
                                                                  (Dollars in thousands, except per share data)
Statement of Income Data:
Total interest income                   $    35,135         $    45,888         $    40,662         $        118,063          $    143,927
Total interest expense                       19,193              23,735              19,607                   59,964                76,793

Net interest income                          15,942              22,153              21,055                   58,099                67,134
Provision for credit losses                  37,450              42,200              20,750                   71,453                52,367
Noninterest income(loss)                      3,657             (60,512 )             7,295                   14,295               (54,328 )
Noninterest expenses                         22,450             103,046              24,420                   68,378               151,671

Loss before income taxes                    (40,301 )          (183,605 )           (16,820 )                (67,437 )            (191,232 )
Provision (benefit) for income
taxes                                           966             (23,891 )            59,647                   55,617               (28,530 )

Net loss                                    (41,267 )          (159,714 )           (76,467 )               (123,054 )            (162,702 )
Preferred stock dividends and
premium accretion                             1,289                 835               1,290                    4,702                 2,506
Income allocated to participating
securities (9)                                    -                   -                   -                        -                     -

Net loss available to common
stockholders                            $   (42,556 )       $  (160,549 )       $   (77,757 )       $       (127,756 )        $   (165,208 )

Per Common Share Data:
Earnings per share (basic)              $     (1.52 )       $     (5.76 )       $     (2.78 )       $          (4.57 )        $      (5.93 )
Earnings per share (diluted)                  (1.52 )             (5.76 )             (2.78 )                  (4.57 )               (5.93 )
Cash dividends declared on common
stock                                             -                   -                   -                        -                  0.26
Book value at end of period                    2.02                5.89                3.45                     2.02                  5.89
Tangible book value at end of
period (non-GAAP measure) (9)                 (1.25 )              2.51                0.15                    (1.25 )                2.51
Selected Financial Ratios:
Return on average assets (1)                  (4.49 )%           (17.25 )%            (8.38 )%                 (4.50 )%              (5.90 )%
Return on average equity (2)                 (78.30 )           (181.60 )           (103.60 )                 (61.15 )              (58.64 )
Dividend payout ratio                             -                   -                   -                        -                   N/M
Average equity to average assets               5.73                9.50                8.09                     7.36                 10.06
Tier 1 common capital to
risk-weighted assets                          (1.24 )              2.64                0.33                    (1.24 )                2.64
Tier 1 risk-based capital                      6.05                6.26                7.20                     6.05                  6.26
Total risk-based capital                       7.95                8.04                9.03                     7.95                  8.04
Net interest margin (tax
equivalent) (3)(4)                             1.83                2.77                2.52                     2.30                  2.83
Loan to deposit ratio                         96.04               99.25              100.82                    96.04                 99.25
Net overhead expense to average
assets (5)                                     2.08               10.73                2.34                     2.12                  4.52
Efficiency ratio (6)                          97.74              386.61               97.21                    91.63                154.70
Loan Quality Ratios:
Allowance for loan losses to total
loans                                          3.40                1.58                2.50                     3.40                  1.58
Provision for loan losses to total
loans                                          5.93                6.69                3.13                     3.80                  2.77
Net loans charged off to average
total loans                                    2.71                3.98                1.41                     1.61                  2.11
Nonaccrual loans to total loans                7.90                2.42                3.71                     7.90                  2.42
Nonperforming assets to total
assets (7)                                     6.06                1.91                3.52                     6.06                  1.91
Allowance for loan losses to
nonaccrual loans                               0.43 x              0.65 x              0.67 x                   0.43 x                0.65 x
Balance Sheet Data:
Total assets                            $ 3,544,130         $ 3,583,377         $ 3,569,199         $      3,544,130          $  3,583,377
Total earning assets                      3,392,458           3,176,629           3,344,103                3,392,458             3,176,629
Average assets                            3,650,053           3,682,449           3,660,670                3,653,203             3,685,013
Loans                                     2,454,101           2,494,225           2,559,257                2,454,101             2,494,225
Allowance for loan losses                    83,506              39,428              63,893                   83,506                39,428
Deposits                                  2,555,189           2,513,004           2,538,490                2,555,189             2,513,004
Borrowings                                  777,078             829,024             777,074                  777,078               829,024
Stockholders' equity                        180,239             207,237             219,671                  180,239               207,237
Tangible stockholders' equity
(non-GAAP measure) (8)                       88,413             113,101             127,272                   88,413               113,101

(1) Net income divided by average assets.

(2) Net income divided by average equity.

(3) Net interest income, on a fully tax-equivalent basis, divided by average earning assets.

(4) The following table reconciles reported net interest income on a fully tax-equivalent basis for the periods presented:

                                                Three Months Ended                        Nine Months Ended
                                          September 30,              June 30,               September 30,
                                       2009            2008            2009             2009             2008
Net interest income                  $ 15,942        $ 22,153        $  21,055        $  58,099        $ 67,134
Tax-equivalent adjustment to
net interest income                         -             457                -                -           2,258

Net interest income, fully
tax-equivalent basis                 $ 15,942        $ 22,610        $  21,055        $  58,099        $ 69,392

No tax-equivalent adjustment is included for the 2009 periods as a result of the Company's current tax position.

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(5) Noninterest expense less noninterest income, excluding security gains or losses, divided by average assets.

(6) Noninterest expense excluding amortization and foreclosed properties expense divided by noninterest income, excluding security gains or losses, plus net interest income on a fully tax-equivalent basis.

(7) Includes total nonaccrual, troubled-debt restructured loans, and foreclosed properties.

(8) Stockholders' equity less goodwill, core deposits and other intangible assets. Management believes that tangible stockholders' equity (non-GAAP measure) is a more useful measure since it excludes the balances of intangible assets reflecting the Company's underlying worth. The following table reconciles reported stockholders' equity to tangible stockholders' equity for the periods presented:

                                                             At September 30,              At June 30,
                                                          2009             2008               2009
Stockholders' equity                                    $ 180,239        $ 207,237        $     219,671
Core deposit intangible and other intangibles, net         12,964           15,274               13,537
Goodwill                                                   78,862           78,862               78,862

Tangible stockholders' equity                           $  88,413        $ 113,101        $     127,272

(9) Prior periods with earnings were re-stated as required by the authoritative guidance for determining whether instruments granted in share-based payment transactions are participating securities (ASC 260-10-55), which was effective on January 1, 2009, to allocate earnings available to common stockholders to restricted shares of common stock that are considered participating securities.

(10) The provision for credit losses includes the provision for loan losses and the provision for unfunded commitments losses as follows:

                                                Three Months Ended                        Nine Months Ended
                                          September 30,              June 30,               September 30,
                                       2009            2008            2009             2009             2008
Provision for loan losses            $ 36,700        $ 41,950        $  20,000        $  69,700        $ 51,765
Provision for unfunded
commitments losses                        750             250              750            1,753             602

Provision for credit losses          $ 37,450        $ 42,200        $  20,750        $  71,453        $ 52,367

Results of Operations - Three and Nine Months Ended September 30, 2009 and 2008 and Three Months Ended June 30, 2009 Set forth below are highlights of the third quarter of 2009 results compared to the third quarter of 2008 and the second quarter of 2009.
Basic and diluted loss per share for the three months ended September 30, 2009 was $1.52 compared to $5.76 for the comparable period in 2008 and $2.78 for the second quarter of 2009. Net loss for the third quarter of 2009 was $41.3 million compared to $76.5 million loss in the second quarter of 2009 and loss of $159.7 million for the third quarter of 2008. The results of the second quarter of 2009 included a $57.9 million tax charge due to a valuation allowance on deferred tax assets and an $8.1 million tax charge related to the liquidation of bank owned life insurance which was partly offset by the $4.3 million in net gains on the securities portfolio repositioning.
The annualized return on average assets for the three months ended September 30, 2009 was (4.49)% compared to (17.25)% for the similar period in 2008 and (8.38)% for the second quarter of 2009. The annualized return on average equity for the three months ended September 30, 2009 was (78.30)% compared to (181.60)% for the similar period in 2008 and (103.60)% for the second quarter of 2009.
Net interest income decreased 28.0% to $15.9 million in the third quarter of 2009 compared to $22.2 million in the third quarter of 2008 and was 24.3% lower than the second quarter of 2009. Similarly, the net interest margin decreased to 1.83% in the third quarter of 2009 compared to 2.52% in the second quarter of 2009 and 2.77% in the third quarter of 2008, as a result of repositioning the securities portfolio into shorter term lower yielding securities in the second quarter of 2009, the net reversals of interest income related to the increase in nonaccrual loans, the decrease in loan balances, and the increase in low-yielding interest-bearing deposits due from banks.

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The provision for credit losses was $37.5 million in the third quarter of 2009 compared to $42.2 million for the comparable period in 2008 and $20.8 million in the second quarter of 2009. The increase in provision for credit losses in the third quarter of 2009 was due to the large increase in nonaccrual loans. See "Financial Condition - Allowance for Loan Losses." Noninterest income was $3.7 million in the third quarter of 2009 compared to ($60.5) million in the third quarter of 2008 and $7.3 million in the second quarter of 2009. The third quarter of 2008 included $16.7 million in securities losses and a $47.8 million securities impairment loss. The second quarter of 2009 included $4.3 million of net gains on the securities portfolio repositioning.
Noninterest expenses decreased $80.6 million to $22.5 million in the third quarter of 2009 compared to $103.0 million in the third quarter of 2008 and were $2.0 million lower than the $24.4 million in the second quarter of 2009. The third quarter of 2008 included an $80.0 million goodwill impairment charge. The . . .