31 2008 with a total risk based capital ratio of10

The income tax benefits related to the first and thirdquarter losses were appropriately recognized as capital losses in those periods.New laws enacted in the fourth quarter enable banks to treat losses on the saleof these securities as ordinary losses rather than capital losses. Accordingly, a significant portion of the tax benefits, $16.6million or $0.60 per share, were recognized in the fourth quarter for lossesreported in the third quarter. Many well-known and well-respectedinstitutions disappeared from the landscape as financial markets were paralyzedand a fundamental lack of confidence created a worldwide liquidity crisis. "The problems seemed to peak in late fall, unfortunately, at the same time wewere attempting to raise additional capital," said James Giancola, CEO ofMidwest Banc Holdings.

"The instability of the markets caused us to put thateffort on hold. Shortly thereafter, we were selected to be one of the firstpublicly-owned community banks in the nation, and the first community bank inChicago, to receive TARP funds The U.S. Treasurys $84.8 million purchase ofour preferred stock allowed us to retain our well-capitalized position, andgives us the flexibility necessary to take advantage of future opportunities." Initiatives to Improve 2009 PerformanceMidwest undertook several important initiatives in 2008 and in the fourthquarter, specifically, to better position itself for improved performance in2009. The Company nearly doubled its allowance for loan losses in the second half ofthe year, including increases of $16.8 million in the third quarter and $5.0million in the fourth quarter, bringing the total allowance for loan losses to$44.4 million at Dec. 31, 2008, or 1.77 percent of loans, up from 0.90 percentof total loans at June 30, 2008; Problem credits were aggressively charged-down to realizable values by $54million during the year, with $15 million being charged-off in the fourthquarter (amounts are net of recoveries); Holding company borrowings under its revolving line of credit were reduced by$12 million in the fourth quarter; Several steps were taken to substantially improve the Companys liquidityposition, including: Refocused efforts on core deposit generation Expanded funding sources Expanded analytics and forecasting tools Two unprofitable branches, Lake Zurich and Addison Village, were closed latein the fourth quarter, two Chicago offices are being relocated, and a new officewill be opened in the Chicago Loop in the first quarter; The Company received $84.8 million in new equity capital under the TARPprogram; and Midwest elected to participate in the FDICs Temporary Liquidity GuaranteeProgram, through which all non-interest bearing transaction accounts are fullyguaranteed, as are NOW accounts earning less than 0.5 percent interest.CapitalThe total risk-based capital ratio for Midwest Banc Holdings, Inc at Dec 31,2008, was 10.07 percent on a consolidated company basis Midwest Bank waswell-capitalized at Dec. 31, 2008, with a total risk based capital ratio of10.54 percent At Dec.

31, 2008, the consolidated Company had a tier 1 riskbased capital ratio of 8.30 percent and the Bank had a tier 1 risk based capitalratio of 8.24 percent. All of the Banks capital ratios exceed the regulatoryguidelines for classification as "well-capitalized," which is the highestregulatory capital rating given to financial institutions. The holding companyhas the ability to downstream additional capital to the Bank to maintain its"well-capitalized" standing, if necessary. Loan Portfolio & Asset QualityAverage total loans decreased $12.9 million during the fourth quarter, but theyear-end balance was up $15.5 million compared to Sept. 30, 2008, after $15.0million in net loan charge-offs, which were primarily related to residentialconstruction loans. Areduction in construction lending that began earlier in the year continued inthe fourth quarter with construction and land development loans declining by $30million, or 7.7 percent, from the third quarter. Construction and landdevelopment loans now represent 15 percent of the total loan portfolio, downfrom 19 percent one year ago.