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 August 3, 2009 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates." Recent Developments
On May 15, 2009, 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. Mr. Herencia, 49, spent 17 years at Banco Popular. In addition to serving as executive vice president of Popular, Inc. since 1997, and president and director of Banco Popular North America since December 2001, he served as chief operating officer, senior credit officer and reported to Popular's CFO in charge of capital markets, M&A and rating agencies between 1991 and 2001. Prior to joining Popular, Mr. Herencia spent 10 years in a variety of senior positions at The First National Bank of Chicago, including serving as head of the emerging markets division and operations in Latin America. He was directly involved in the restructure, workout and debt for equity swaps of public and private sector credits in Latin America.
Under Mr. Herencia's direction, the Company immediately tightened its loan underwriting and pricing criteria and began aggressive balance sheet repositioning activities. 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 an asset reduction for the second quarter of 2009 and a reduction in risk-weighted assets as defined for regulatory capital purposes. The Company remains adequately capitalized and the Bank remains well capitalized as of June 30, 2009.
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 take steps to defer interest payments on $60.8 million of its junior subordinated debentures as permitted by the terms of such debentures. Since the May 6th announcement, the Company has begun to defer interest on its junior subordinated debentures. The

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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 in the near future.
On July 28, 2009, the Company announced that it has 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, in-process and to be completed by September 30, 2009, salary reductions for employees led by our 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");

• Other possible capital raising activities;

• 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 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.

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, its business, and the value of its securities, may 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 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.

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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 Six Months Ended
                                                  June 30,                     March 31,                        June 30,
                                          2009                2008               2009                  2009                    2008
                                                                (Dollars in thousands, except per share data)
Statement of Income Data:
Total interest income                  $    40,662         $    47,244        $    42,266         $        82,928          $     98,039
Total interest expense                      19,607              24,479             21,164                  40,771                53,058

Net interest income                         21,055              22,765             21,102                  42,157                44,981
Provision for loan losses                   20,000               4,415             13,000                  33,000                 9,815
Noninterest income                           7,295               4,394              3,343                  10,638                 6,184
Noninterest expenses                        25,170              20,368             21,761                  46,931                48,977

Income before income taxes                 (16,820 )             2,376            (10,316 )               (27,136 )              (7,627 )
Provision for income taxes                  59,647                 (52 )           (4,996 )                54,651                (4,639 )

Net (loss) income                          (76,467 )             2,428        $    (5,320 )               (81,787 )              (2,988 )
Preferred stock dividends and
premium accretion                            1,290                 836              2,123                   3,413                 1,671
Income allocated to participating
securities (9)                                   -                  35                  -                       -                     -

Net (loss) income available to
common stockholders (9)                $   (77,757 )       $     1,557        $    (7,443 )       $       (85,200 )        $     (4,659 )

Per Share Data:
Earnings per share (basic)             $     (2.78 )       $      0.06        $     (0.27 )       $         (3.05 )        $      (0.17 )
Earnings per share (diluted)                 (2.78 )              0.06              (0.27 )                 (3.05 )               (0.17 )
Cash dividends declared on common
stock                                            -                0.13                  -                       -                  0.26
Book value                                    3.45               11.76               6.38                    3.45                 11.76
Tangible book value (non-GAAP
measure) (8)                                  0.15                5.48               3.05                    0.15                  5.48
Selected Financial Ratios:
Return on average assets (1)                 (8.38 )%             0.26 %            (0.59 )%                (4.51 )%              (0.16 )%
Return on average equity (2)               (103.60 )              2.57              (7.12 )                (55.07 )               (1.58 )
Dividend payout ratio                            -              237.83                  -                       -                   N/M
Average equity to average assets              8.09               10.30               8.30                    8.20                 10.34
Tier 1 common capital to
risk-weighted assets                          0.33                5.50               1.25                    0.33                  5.50
Tier 1 risk-based capital to
risk-weighted assets                          7.20                9.09               7.42                    7.20                  9.09
Total risk-based capital to
risk-weighted assets                          9.03               10.43               9.18                    9.03                 10.43
Net interest margin (tax
equivalent) (3)(4)                            2.52                2.89               2.63                    2.55                  2.86
Loan to deposit ratio                       100.82              106.88             101.85                  100.82                106.88
Net overhead expense to average
assets (5)                                    2.34                1.75               2.05                    2.20                  1.38
Efficiency ratio (6)                         97.21               69.60              84.04                   91.29                 67.36
Loan Quality Ratios:
Allowance for loan losses to
total loans                                   2.50                0.90               2.05                    2.50                  0.90
Provision for loan losses to
total loans                                   3.13                0.71               2.03                    2.60                  0.79
Net loans charged off to average
total loans                                   1.41                0.35               0.70                    1.06                  1.14
Nonaccrual loans to total loans               3.71                1.64               3.10                    3.71                  1.64
Nonperforming assets to total
assets (7)                                    3.52                1.16               2.96                    3.52                  1.16
Allowance for loan losses to
nonaccrual loans                              0.67 x              0.55 x             0.66 x                  0.67 x                0.55 x
Balance Sheet Data:
Total assets                           $ 3,569,199         $ 3,726,720        $ 3,713,064         $     3,569,199          $  3,726,720
Total earning assets                     3,344,103           3,275,580          3,339,448               3,344,103             3,275,580
Average assets                           3,660,670           3,686,350          3,648,873               3,654,804             3,686,309
Loans                                    2,559,257           2,501,082          2,591,048               2,559,257             2,501,082
Allowance for loan losses                   63,893              22,606             53,011                  63,893                22,606
Deposits                                 2,538,490           2,340,043          2,544,005               2,538,490             2,340,043
Borrowings                                 777,074             974,007            832,057                 777,074               974,007
Stockholders' equity                       219,671             370,698            301,070                 219,671               370,698
Tangible stockholders' equity
(non-GAAP measure) (8)                     127,272             195,751            208,098                 127,272               195,751

(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.

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

                                                 Three Months Ended                         Six Months Ended
                                             June 30,                 March 31,                 June 30,
                                       2009            2008             2009              2009            2008
Net interest income                  $ 21,055        $ 22,765        $    21,102        $ 42,157        $ 44,981
Tax-equivalent adjustment to
net interest income                         -             909                357               -           1,801

Net interest income, fully
tax-equivalent basis                 $ 21,055        $ 23,674        $    21,459        $ 42,157        $ 46,782

No
tax-equivalent
adjustment is
included for
the quarter
and six months
ended June 30,
2009 as a
result of the
Company's
current tax
positon.

(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 and foreclosed properties.

(8) Stockholders' equity less goodwill, core deposit 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 (in thousands):

                                                                At June 30,                 At March 31,
                                                          2009              2008                2009
Stockholders' equity                                    $ 219,671        $  370,698        $      301,070
Core deposit intangible and other intangibles, net        (13,537 )         (15,864 )             (14,110 )
Goodwill                                                  (78,862 )        (159,083 )             (78,862 )

Tangible stockholders' equity                           $ 127,272        $  195,751        $      208,098

(9) Prior periods with earnings were re-stated as required by FSP EITF 03-6-1, 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.

Results of Operations - Three and Six Months Ended June 30, 2009 and 2008 Set forth below are highlights of the second quarter of 2009 results compared to the second quarter of 2008 and the first quarter of 2009.
• Basic and diluted loss per share for the three months ended June 30, 2009 was $2.78 compared to earnings of $0.06 for the comparable period in 2008 and a loss of $0.27 for the first quarter of 2009.

• Net loss for the second quarter of 2009 was $76.5 million compared to $5.3 million loss in the first quarter of 2009 and earnings of $2.4 million for the second quarter of 2008.

• The Company recorded a $57.9 million tax charge due to a valuation allowance on its deferred tax assets and an $8.1 million tax charge related to the liquidation of bank owned life insurance in the second quarter of 2009.

• The Company recognized net gains on the securities portfolio repositioning of $4.3 million in the second quarter of 2009.

• Net interest income decreased 7.5% to $21.1 million in the second quarter of 2009 compared to $22.8 million in the second quarter of 2008 but was flat compared to the first quarter of 2009. The net interest margin decreased to 2.52% in the second quarter of 2009 compared to 2.63% in the first quarter of 2009 and 2.89% in the second quarter of 2008 as a result of repositioning the securities portfolio into shorter term lower yielding securities.

• The annualized return on average assets for the three months ended June 30, 2009 was (8.38)% compared to 0.26% for the similar period in 2008 and (0.59)% for the first quarter of 2009.

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• The annualized return on average equity for the three months ended June 30, 2009 was (103.60)% compared to 2.57% for the similar period in 2008 and
(7.12)% for the first quarter of 2009.

• The provision for loan losses was $20.0 million in the second quarter of 2009 compared to $4.4 million for the comparable period in 2008 and $13.0 million in the first quarter of 2009.

• Noninterest income increased 66.0% to $7.3 million in the second quarter of 2009 compared to $4.4 million in the second quarter of 2008 and was $4.0 million higher than the $3.3 million in the first quarter of 2009, due to the $4.3 million net gains on the securities portfolio repositioning. Noninterest income ignoring the securities gains and impairment loss for the second quarter of 2009 was $3.8 million.

• Noninterest expenses increased 23.6% to $25.2 million in the second quarter of 2009 compared to $20.4 million in the second quarter of 2008 and was $3.4 million higher than the $21.8 million in the first quarter of 2009.

• The increase in noninterest expenses was largely due to the FDIC insurance special assessment of $1.7 million and increased regular quarterly FDIC premiums which was $1.7 million and $350,000 higher than the second quarter of 2008 and the first quarter of 2009, respectively. The Company also recognized net severance expense of $699,000 in the second quarter of 2009.

Set forth below are highlights of the six months ended June 30, 2009 results compared to the results for the six months ended June 30, 2008.
• Basic and diluted loss per share for the six months ended June 30, 2009 was $3.05 compared to $0.17 for the same period in 2008.

• Net interest income decreased 6.3% to $42.2 million in the first half of 2009 compared to $45.0 million in the first half of 2008. The net interest margin was 2.55% for the six months ended June 30, 2009 compared to 2.86% for the similar period of 2008.

• The annualized return on average assets for the six months ended June 30, 2009 was (4.51)% compared to (0.16)% for the similar period in 2008.

• The annualized return on average equity for the six months ended June 30, 2009 was (55.07)% compared to (1.58)% for the similar period in 2008.

• The provision for loan losses was $33.0 million in the first half of 2009 compared to $9.8 million for the comparable period in 2008.

• Noninterest income increased 72.0% to $10.6 million in the first six months of 2009 compared to $6.2 million in the same period of 2008. Excluding the impairment charges and net gains on securities transactions and the gain on the sale of real estate, noninterest income was $7.1 million for the first half of 2009 compared to $8.5 million for same period in 2008.

• Noninterest expenses decreased by 4.2% to $46.9 million in the first half of 2009 compared to $49.0 million in the first half of 2008. Excluding the loss on extinguishment of debt, noninterest expenses were $41.9 million the first half of 2008. The increase in noninterest expenses was largely due to the FDIC insurance special assessment of $1.7 million and increased regular quarterly FDIC premiums which was $2.1 million higher than the first six months of 2008.

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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
                                         June 30, 2009                                     June 30, 2008                                    March 31, 2009
                            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                     $    59,551              75            0.50 %     $    22,696              98            1.73 %     $     4,787       $      37            3.09 %
Securities:
Taxable(1)                    626,489           4,663            2.98           701,254           9,512            5.43           629,783           6,940            4.41
Exempt from federal
income
taxes(1)                       43,005             406            3.78            61,635             912            5.92            58,551             846            5.78

Total securities              669,494           5,069            3.03           762,889          10,424            5.47           688,334           7,786            4.52
FRB and FHLB stock             30,301             170            2.24            29,264             184            2.52            31,698             190            2.40
Loans:
Commercial
loans(1)(2)(3)                549,168           6,770            4.93           486,794           7,360            6.05           530,467           6,588            4.97
Commercial real
estate
loans(1)(2)(3)(4)           1,675,704          24,608            5.87         1,642,838          25,702            6.26         1,663,760          24,230            5.83
Agricultural
loans(2)(3)                     9,991             164            6.57             6,139              95            6.19             7,516             119            6.33
Consumer real estate
loans(2)(3)(4)                343,898           3,708            4.31           313,556           4,120            5.26           335,768           3,566            4.25
Consumer installment
loans(2)(3)                     5,996              98            6.54            10,159             170            6.69             6,259             107            6.84

Total loans                 2,584,757          35,348            5.47         2,459,486          37,447            6.09         2,543,770          34,610            5.44

Total
interest-earning
assets                    $ 3,344,103       $  40,662            4.86 %     $ 3,274,335       $  48,153            5.88 %     $ 3,268,589       $  42,623            5.22 %

Noninterest-Earning
Assets:
Cash                      $    44,037                                       $    52,693                                       $    69,006
Premises and
equipment, net                 39,331                                            38,144                                            38,166
Allowance for loan
losses                        (58,211 )                                         (20,412 )                                         (46,503 )
Other assets                  291,410                                           341,590                                           319,615

Total
noninterest-earning
assets                        316,567                                           412,015                                           380,284

Total assets              $ 3,660,670                                       $ 3,686,350                                       $ 3,648,873


Interest-Bearing
Liabilities:
Deposits:
Interest-bearing
demand deposits           $   178,231       $     222            0.50 %     $   215,076       $     492            0.92 %     $   173,291       $     256            0.59 %
. . .