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 Item 7 of the Company's 2007 Annual Report on Form 10-K.
Recent Economic Developments
In response to the financial crises affecting the overall banking system and financial markets, on October 3, 2008, the Emergency Economic Stabilization Act of 2008, ESSA, was enacted. Under the EESA, the United States Treasury Department, the U.S. Treasury, has the authority to, among other things, purchase mortgages, mortgage backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.
On October 3, 2008 the Troubled Asset Relief Program (TARP) was signed into law. The TARP gave the Treasury authority to deploy up to $750 billion into the financial system with an objective of improving liquidity in capital markets. On October 24, 2008, the U.S. Treasury announced plans to direct $250 billion of this authority into preferred stock investments in financial institutions. The general terms of this preferred stock program are as follows for a participant:
pay 5% dividends on the U.S. Treasury's preferred stock for the first five years and 9% dividends thereafter; cannot increase common stock dividends for three years while Treasury is an investor without their permission; the U.S. Treasury receives warrants entitling it to buy a participant's common stock equal to 15% of the U.S. Treasury's total initial investment in the participant; and the participating company's executives must agree to certain compensation restrictions, and restrictions on the amount of executive compensation which is tax deductible and other detailed terms and conditions. The term of this preferred stock program could reduce investment returns to participating companies' stockholders by restricting dividends to common stockholders, diluting existing stockholders' interests, and restricting capital management practices. The TARP capital purchase program is a voluntary program designed to help healthy institutions build capital to support the U.S. economy by increasing the flow of financing to U.S. businesses and consumers. Although the Company exceeds all applicable regulatory capital requirements, it submitted an application for participation in the TARP capital purchase program and on October 29, 2008 received preliminary approval for $85.5 million of capital.
It is management's understanding that the Treasury selected only financially strong institutions to receive capital. The TARP infusion will strengthen the Company's balance sheet. On a pro forma basis, the Company and the Bank's total risk based capital to risk-weighted assets ratio would be approximately 11.13% and 10.80%, respectively.
The Federal Deposit Insurance Corporation, FDIC, insures deposits at FDIC insured financial institutions up to certain limits. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund. Assessment rates set by the FDIC effective January 1, 2007 range from 5 to 43 basis points.
Current economic conditions have increased expectations for bank failures, in which case the FDIC would take control of failed banks and ensure payment of deposits up to insured limits using the resources of the Deposit Insurance Fund. In 2009, the FDIC plans to increase premium assessments to maintain adequate funding of the Deposit Insurance Fund. These increases in premium assessments will increase the Company's expenses. Details regarding the computation of these increased premium assessments are just becoming available.
The EESA included a provision for an increase in the amount of deposits insured by the FDIC to $250,000 until December 2009. On October 14, 2008, the FDIC announced a new program, the Temporary Liquidity Guarantee Program, that provides unlimited deposit insurance on funds in noninterest-bearing transaction deposit accounts not otherwise covered by the existing deposit insurance limit of $250,000. All eligible institutions will be covered under the program December 5, 2008 without incurring any costs. After the initial period, participating institutions will be assessed a 10 basis point surcharge on the additional insured deposits. The Company has elected to participate in the Temporary Liquidity Guarantee Program and incur the surcharge as a cost of participation. The behavior of depositors in regard to the level of FDIC insurance could cause the Company's existing customers to reduce the amount of deposits held at the Company, and or could cause new customers to open deposit accounts. The level and composition of the Company's deposit portfolio directly impacts its funding cost and net interest margin.
The actions described above, together with additional actions announced by the Treasury and other regulatory agencies continue to develop. It is not clear at this time what impact EESA, TARP, other liquidity and funding initiatives of the Treasury and other bank regulatory agencies that have been previously announced, and any additional programs that may be initiated in the future will have on the financial markets and the financial services industry. The extreme levels of volatility and limited credit availability currently being experienced could continue to effect the U.S. banking industry and the broader U.S. and global economies, which will have an affect on all financial institutions, including the Company.

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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,
                                          2008                2007               2008                  2008                    2007
                                                                (Dollars in thousands, except per share data)
Statement of Income Data:
Total interest income                  $    45,888         $    47,174        $    47,244        $        143,927          $    138,432
Total interest expense                      23,735              26,827             24,479                  76,793                79,056

Net interest income                         22,153              20,347             22,765                  67,134                59,376
Provision for loan losses                   41,950               1,800              4,415                  51,765                 3,481
Noninterest (loss) income                  (60,512 )             3,700              4,394                 (54,328 )              11,316
Noninterest expenses                       103,296              16,245             20,368                 152,273                49,970

(Loss) income before income taxes         (183,605 )             6,002              2,376                (191,232 )              17,241
(Benefit) provision for income
taxes                                      (23,891 )             1,166                (52 )               (28,530 )               2,886

Net (loss) income                         (159,714 )             4,836              2,428                (162,702 )              14,355
Preferred stock dividends                      835                   -                836                   2,506                     -

Net (loss) income available to
common stockholders                    $  (160,549 )       $     4,836        $     1,592        $       (165,208 )        $     14,355

Per Share Data:
Earnings per share (basic)             $     (5.76 )       $      0.20        $      0.06        $          (5.93 )        $       0.58
Earnings per share (diluted)                 (5.76 )              0.20               0.06                   (5.93 )                0.58
Cash dividends declared on common
stock                                            -                0.13               0.13                    0.26                  0.39
Book value                                    5.89               11.69              11.76                    5.89                 11.69
Tangible book value (non-GAAP
measure) (9)                                  2.51                8.02               5.48                    2.51                  8.02
Selected Financial Ratios:
Return on average assets (1)                (17.25 )%             0.64 %             0.26 %                 (5.90 )%               0.64 %
Return on average equity (2)               (181.60 )              6.75               2.57                  (58.64 )                6.67
Dividend payout ratio                            -               66.79             232.60                     N/M                 67.89
Average equity to average assets              9.50                9.41              10.30                   10.06                  9.59
Tier 1 risk-based capital                     6.26               11.42               9.09                    6.26                 11.42
Total risk-based capital                      8.04               12.51              10.43                    8.04                 12.51
Net interest margin (tax
equivalent) (3)(4)                            2.77                3.10               2.89                    2.83                  3.05
Loan to deposit ratio                        99.25              100.63             106.88                   99.25                100.63
Net overhead expense to average
assets (5)                                   10.73                1.65               1.75                    4.52                  1.72
Efficiency ratio (6)                        386.61               63.64              69.60                  154.70                 66.37
Loan Quality Ratios:
Allowance for loan losses to
total loans                                   1.58                1.24               0.90                    1.58                  1.24
Provision for loan losses to
total loans                                   6.69                0.36               0.71                    2.77                  0.23
Net loans charged off to average
total loans                                   3.98                0.13               0.35                    2.11                  0.12
Nonaccrual loans to total loans               2.42                2.23               1.64                    2.42                  2.23
Nonperforming assets to total
assets (7)                                    1.91                1.55               1.16                    1.91                  1.55
Allowance for loan losses to
nonaccrual loans                              0.65 x              0.56 x             0.55 x                  0.65 x                0.56 x
Balance Sheet Data:
Total assets                           $ 3,583,377         $ 3,032,565        $ 3,726,720        $      3,583,377          $  3,032,565
Total earning assets                     3,176,629           2,750,334          3,275,580               3,176,629             2,750,334
Average assets                           3,682,449           3,020,254          3,686,350               3,685,013             2,999,877
Loans                                    2,494,225           2,007,446          2,501,082               2,494,225             2,007,446
Allowance for loan losses                   39,428              24,879             22,606                  39,428                24,879
Deposits                                 2,513,004           1,994,927          2,340,043               2,513,004             1,994,927
Borrowings                                 829,024             717,404            974,007                 829,024               717,404
Stockholders' equity                       207,237             285,233            370,698                 207,237               285,233
Tangible stockholders' equity
(non-GAAP measure) (8)                     113,101             195,790            195,751                 113,101               195,790

(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,
                                       2008            2007            2008             2008             2007
Net interest income                  $ 22,153        $ 20,347        $  22,765        $  67,134        $ 59,376
Tax-equivalent adjustment to
net interest income                       457             837              909            2,258           2,652

Net interest income, fully
tax-equivalent basis                 $ 22,610        $ 21,184        $  23,674        $  69,392        $ 62,028

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

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

(7) Includes total nonaccrual and foreclosed properties.

(8) Stockholders' equity less goodwill, core deposits and other intangible assets. The following table reconciles reported stockholders' equity to tangible stockholders' equity for the periods presented:

                                                             At September 30,              At June 30,
                                                          2008             2007               2008
Stockholders' equity                                    $ 207,237        $ 285,233        $     370,698
Core deposit intangible and other intangibles, net         15,274            9,586               15,864
Goodwill                                                   78,862           79,857              159,083

Tangible stockholders' equity                           $ 113,101        $ 195,790        $     195,751

Results of Operations - Three and Nine Months Ended September 30, 2008 and 2007 The Company's performance during the third quarter of 2008 reflected several significant transactions. The Company recognized a non-cash, non-operating, other-than-temporary impairment charge of $47.8 million at September 30, 2008 on certain FNMA and FHLMC preferred equity securities similar to the impairment charge of $17.6 million taken in the first quarter of 2008. In September 2008, the Company sold a portion of its FNMA and FHLMC preferred equity securities recognizing a $16.7 million loss. It also recognized an impairment charge $80.0 million on its goodwill intangible asset as a result of the decline in market capitalization. During the third quarter of 2008, the Company had net loan charge-offs of $25.1 million and recorded a $42.0 million loan loss provision reflecting management's updated assessments of impaired loans and concerns about the continued deterioration of economic conditions. During the first quarter of 2008, the Company also incurred a loss on the early extinguishment of debt of $7.1 million from the prepayment of $130.0 million in FHLB advances, which were partially offset by a $15.2 million gain recognized on the sale of real estate.
Subsequent to the end of the third quarter of 2008, the Company was informed that it has received preliminary approval to receive $85.5 million of new capital in the form of preferred stock to be issued to the U.S. Treasury under the Troubled Asset Relief Program ("TARP") Capital Purchase Program. In addition, the Company will issue warrants to the Treasury that will allow the Treasury to acquire shares of the Company's common stock equal to $12.8 million (15% of the value of the preferred shares to be acquired). The number of shares of common stock that will be acquired upon the exercise of the warrants will be determined based upon the 20 day average trailing price ending on the last trading day prior to October 29, 2008, the date of preliminary approval. The transaction is subject to the execution of a definitive preferred stock purchase agreement with the Treasury and must be approved by the holders of the Company's Series A preferred stock (and, therefore, the holders of the Company's Series A depositary shares). The proceeds from the preferred stock issuance are expected to strengthen the Company's balance sheet. If the agreement is executed and the approval received, it is expected that the preferred shares and warrants will be issued and the new capital will be received during the fourth quarter of 2008.
Set forth below are some highlights of the third quarter of 2008 results compared to the third quarter of 2007 and second quarter of 2008. The results of the second and third quarters 2008 were affected by the Northwest Suburban acquisition which was consummated on October 1, 2007.
� Basic and diluted loss per share for the three months ended September 30, 2008 was $5.76 compared to earnings of $0.20 for the comparable period in 2007 and earnings of $0.06 for the second quarter of 2008.

� Net loss for the third quarter of 2008 was $159.7 million compared to net income of $4.8 million and $2.4 million in the third quarter of 2007 and second quarter of 2008, respectively.

� Net interest income increased 8.9% to $22.2 million in the third quarter of 2008 compared to

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$20.3 million in the third quarter of 2007 but was $612,000 lower than the second quarter of 2008, as a result of the lost dividend on the FHLMC preferred equity securities and the increase in nonaccrual loans. The net interest margin decreased to 2.77% in the third quarter of 2008 compared to 2.89% in the second quarter of 2008 for the reasons noted above. The net interest margin was 3.10% in the third quarter of 2007.

� The provision for loan losses was $42.0 million in the third quarter of 2008 compared to $1.8 million for the comparable period in 2007 and $4.4 million in the second quarter of 2008.

� Noninterest loss was $60.5 million in the third quarter of 2008 compared to income of $3.7 million in the third quarter of 2007 and $4.4 million in the second quarter of 2008. Excluding the losses on securities, noninterest income for the third quarter of 2008 increased by $247,000 compared to the same period in 2007 but was down when compared to the second quarter of 2008 by $409,000.

� Noninterest expenses, excluding the $80.0 million goodwill impairment charge, were $23.3 million in the third quarter of 2008 compared to $16.2 million in the third quarter of 2007 and $20.4 million in the second quarter of 2008.

Set forth below are some highlights of the nine months ended September 30, 2008 results compared to the results for the nine months ended September 30, 2007. The results of the first nine months of 2008 were affected by the Northwest Suburban acquisition which was consummated on October 1, 2007.
� Basic and diluted loss per share for the nine months ended September 30, 2008 were $5.93 compared to earnings of $0.58 per basic and diluted share for the same period in 2007.

� Net interest income increased 13.1% to $67.1 million in the first nine months of 2008 compared to $59.4 million in the first nine months of 2007, as a result of the Northwest Suburban acquisition and the decrease in rates on deposits even though balances increased. The net interest margin was 2.83% for the nine months ended September 30, 2008 compared to 3.05% for the similar period of 2007 due to the lost dividend on the FHLMC preferred equity securities and the increase in nonaccrual loans.

� The provision for loan losses was $51.8 million in the first nine months of 2008 compared to $3.5 million for the comparable period in 2007.

� Noninterest loss was $54.3 million in the first nine months of 2008 compared to income of $11.3 million in the same period of 2007. Excluding the gain on sale of real estate and losses on securities, noninterest income for the first nine months of 2008 increased by $1.2 million compared to the same period in 2007.

� Noninterest expenses increased to $152.3 million in the first nine months of 2008 compared to $50.0 million in the same period of 2007, mainly as a result of the $80.0 million goodwill impairment, the $7.2 million loss on early extinguishment of debt, and increased salaries and occupancy expenses as a result of the Northwest Suburban acquisition.

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Net Interest Income
     The following table sets forth the average balances, net interest income on
a tax equivalent basis and expense and average yields and rates for the
Company's interest-earning assets and interest-bearing liabilities for the
indicated periods.

                                                                                    For the Three Months Ended
                                      September 30, 2008                                September 30, 2007                                   June 30, 2008
                            Average                          Average          Average                          Average          Average                          Average
                            Balance         Interest          Rate            Balance         Interest          Rate            Balance         Interest          Rate
                                                                                      (Dollars in thousands)
Interest-Earning
Assets:
Federal funds sold
and interest-bearing
deposits due from
banks                     $     6,005              27            1.80 %     $    23,996             297            4.95 %     $    22,696              98            1.73 %
Securities:
Taxable(1)                    654,531           7,823            4.78           650,776           9,128            5.61           701,254           9,512            5.43
Exempt from federal
income taxes(1)                60,688             883            5.82            47,765             711            5.95            61,635             912            5.92

Total securities              715,219           8,706            4.87           698,541           9,839            5.63           762,889          10,424            5.47
FRB and FHLB stock             29,694             184            2.48            23,683             227            3.83            29,264             184            2.52
Loans held for sale                 -               -               -               815              11            5.40                 -               -               -
Loans:
Commercial
loans(1)(3)(4)                544,013           8,145            5.99           426,366           8,461            7.94           486,794           7,360            6.05
Commercial real
estate
loans(1)(3)(4)(6)           1,639,444          24,919            6.08         1,272,773          24,293            7.63         1,642,838          25,702            6.26
Agricultural
loans(3)(4)                     6,531             103            6.31             3,172              64            8.07             6,139              95            6.19
Consumer real estate
loans(3)(4)(6)                314,377           4,119            5.24           277,164           4,632            6.68           313,556           4,120            5.26
Consumer installment
loans(3)(4)                     8,288             142            6.85             9,644             187            7.76            10,159             170            6.69

Total loans                 2,512,653          37,428            5.96         1,989,119          37,637            7.57         2,459,486          37,447            6.09

Total
interest-earning
assets                    $ 3,263,571       $  46,345            5.68 %     $ 2,736,154       $  48,011            7.00 %     $ 3,274,335       $  48,153            5.88 %

Noninterest-Earning
Assets:
Cash                      $    57,463                                       $    51,487                                       $    52,693
Premises and
equipment, net                 38,412                                            22,404                                            38,144
Allowance for loan
losses                        (23,059 )                                         (24,255 )                                         (20,412 )
Other assets                  346,062                                           234,464                                           341,590

Total
noninterest-earning
assets                        418,878                                           284,100                                           412,015

Total assets              $ 3,682,449                                       $ 3,020,254                                       $ 3,686,350


Interest-Bearing
Liabilities:
Deposits:
Interest-bearing
demand deposits           $   194,416       $     422            0.87 %     $   175,582       $     862            1.96 %     $   215,076       $     492            0.92 %
Money-market demand
and savings accounts          393,745           1,184            1.20           365,985           2,394            2.62           399,380           1,197            1.20
Time deposits               1,487,827          13,695            3.68         1,224,836          15,378            5.02         1,448,198          14,422            3.98

Total
interest-bearing
deposits                    2,075,988          15,301            2.95         1,766,403          18,634            4.22         2,062,654          16,111            3.12

Borrowings:
Federal funds
purchased, FRB
discount window
advances, and
repurchase agreements         403,025           3,901            3.87           307,843           3,201            4.16           451,351           4,154            3.68
FHLB advances                 348,315           2,779            3.19           307,418           3,640            4.74           296,044           2,437            3.29
. . .