Exhibit 13

|                                                                                      |  |             |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|------------------------------------------------------------------------------------- |  | ----------- | --------- | ---- | - | --------- | -- | ---- | --------- | ---- | - | --------- | - | - | --------- | -
|Stockholders
 Information2006-2010 Summary
 (dollars in thousands except share data) |  | December 31 |          
|                                                                                      |  |             |          
|                                                                                     
|For the Years Ended                                                                   |  | 2010        |           | 2009 |   | 2008      |    | 2007 |           | 2006 |  
|Net income (loss)                                                                     |  | $           | (16,979   | )    | $ | (21,126   | )  | $    | 7,326     |      | $ | 6,770     |   | $ | 6,488     |  
|Net income (loss) available to common stockholders                                    |  |             | (18,262   | )    |   | (22,329   | )  |      | 7,326     |      |   | 6,770     |   |   | 6,488     |  
|Common cash dividends                                                                 |  |             | -0-       |      |   | 2,311     |    |      | 3,696     |      |   | 3,597     |   |   | 3,542     |  
|Net income (loss) available to common stockholders to average
 stockholders equity   |  |             | (23.82    | )%   |   | (22.81    | )% |      | 10.59     | %    |   | 10.32     | % |   | 10.07     | %
|                                                                                      |  |             |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|At Year-End                                                                           |  |             |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Common stock shares outstanding                                                       |  |             | 3,325,941 |      |   | 3,306,369 |    |      | 3,298,041 |      |   | 3,308,447 |   |   | 3,351,410 |  
|Treasury shares outstanding                                                           |  |             | 1,152,354 |      |   | 1,171,926 |    |      | 1,180,254 |      |   | 1,169,848 |   |   | 1,126,885 |  
|Basic weighted average shares outstanding                                             |  |             | 3,311,291 |      |   | 3,301,016 |    |      | 3,297,990 |      |   | 3,326,467 |   |   | 3,369,567 |  
|Diluted weighted average shares outstanding                                           |  |             | 3,311,291 |      |   | 3,301,479 |    |      | 3,314,439 |      |   | 3,334,406 |   |   | 3,389,765 |  
|                                                                                      |  |             |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Per Share Data                                                                        |  |             |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Basic earnings (loss) per share available to common stockholders                      |  | $           | (5.52     | )    | $ | (6.76     | )  | $    | 2.22      |      | $ | 2.04      |   | $ | 1.93      |  
|Diluted earnings (loss) per share available to common stockholders                    |  |             | (5.52     | )    |   | (6.76     | )  |      | 2.21      |      |   | 2.03      |   |   | 1.91      |  
|Common book value                                                                     |  |             | 9.58      |      |   | 15.03     |    |      | 21.97     |      |   | 20.74     |   |   | 19.50     |  
|Common cash dividends                                                                 |  |             | -0-       |      |   | 0.70      |    |      | 1.12      |      |   | 1.08      |   |   | 1.05      |  
|                                                                                      |  |             |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Market Valuation (at year-end)                                                        |  |             |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Stock price                                                                           |  | $           | 3.64      |      | $ | 10.81     |    | $    | 22.14     |      | $ | 24.25     |   | $ | 32.55     |  
|Price/Earnings multiple                                                               |  |             | n/a       |      |   | n/a       |    |      | 10.0      |      |   | 11.9      |   |   | 16.9      |  
|                                                                                     

8

---



|           |                                                                                                                 
|---------- | ----------------------------------------------------------------------------------------------------------------
|(BKD LOGO) | 225 N. Water Street, Suite 400
 P.O. Box 1580
 Decatur, IL 62525-1580
 217.429.2411 Fax 217.429.6109 www.bkd.com
|           |                                                                                                                 

Report of Independent Registered Public
Accounting Firm

Audit Committee, Board of
Directors and Stockholders 
Princeton National Bancorp, Inc. 
Princeton, Illinois

We have audited the
accompanying consolidated balance sheets of Princeton National Bancorp, Inc. as
of December 31, 2010 and 2009, and the related consolidated statements of
income, stockholders equity and cash flows for each of the years in the
three-year period ended December 31, 2010. The Companys management is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. Our audits included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Princeton National Bancorp, Inc.
as of December 31, 2010 and 2009, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2010,
in conformity with accounting principles generally accepted in the United
States of America.

-s- BKD, LLP

Decatur, Illinois 
March 30, 2011

|                      |                      
|--------------------- | ---------------------
|(EXPERIENCE BKD LOGO) | (PRAXITY MEMBER LOGO)

9

---



Consolidated
Balance Sheets(dollars
in thousands except share data)

|                                                                                                   |  |             |           |      |   |           |  
|-------------------------------------------------------------------------------------------------- |  | ----------- | --------- | ---- | - | --------- | -
|                                                                                                   |  | December 31
|                                                                                                   |  | 2010        |           | 2009 |  
|                                                                                                   |  |             |           |      |  
|ASSETS                                                                                             |  |             |           |      |   |           |  
|Cash and due from banks                                                                            |  | $           | 12,992    |      | $ | 15,546    |  
|Interest-bearing deposits with financial institutions                                              |  |             | 30,888    |      |   | 55,527    |  
|                                                                                                   |  |             |           |      |   |           |  
|Total cash and cash equivalents                                                                    |  |             | 43,880    |      |   | 71,073    |  
|Loans held-for-sale, at lower of cost or market                                                    |  |             | 5,515     |      |   | 3,296     |  
|Investment securities:                                                                             |  |             |           |      |   |           |  
|Available-for-sale, at fair value                                                                  |  |             | 248,752   |      |   | 288,474   |  
|Held-to-maturity, at amortized cost (fair value of $12,472 and
 $13,331)                           |  |             | 12,187    |      |   | 12,793    |  
|                                                                                                   |  |             |           |      |   |           |  
|Total investment securities                                                                        |  |             | 260,939   |      |   | 301,267   |  
|Loans:                                                                                             |  |             |           |      |   |           |  
|Loans, net of unearned interest                                                                    |  |             | 704,074   |      |   | 798,074   |  
|Allowance for loan losses                                                                          |  |             | (29,726   | )    |   | (12,075   | )
|                                                                                                   |  |             |           |      |   |           |  
|Net loans                                                                                          |  |             | 674,348   |      |   | 785,999   |  
|Premises and equipment, net of accumulated depreciation                                            |  |             | 26,901    |      |   | 28,269    |  
|Land held for sale, at lower of cost or market                                                     |  |             | 2,244     |      |   | 2,354     |  
|Federal Reserve and Federal Home Loan Bank stock                                                   |  |             | 4,498     |      |   | 4,230     |  
|Bank-owned life insurance                                                                          |  |             | 23,416    |      |   | 22,540    |  
|Accrued interest receivable                                                                        |  |             | 7,482     |      |   | 9,267     |  
|Other real estate owned                                                                            |  |             | 20,652    |      |   | 17,658    |  
|Deferred income taxes                                                                              |  |             | 10,512    |      |   | 608       |  
|Intangible assets, net of accumulated amortization                                                 |  |             | 2,531     |      |   | 3,347     |  
|Other assets                                                                                       |  |             | 13,553    |      |   | 11,430    |  
|                                                                                                   |  |             |           |      |   |           |  
|TOTAL ASSETS                                                                                       |  | $           | 1,096,471 |      | $ | 1,261,338 |  
|                                                                                                   |  |             |           |      |   |           |  
|                                                                                                   |  |             |           |      |   |           |  
|                                                                                                   |  |             |           |      |   |           |  
|LIABILITIES                                                                                        |  |             |           |      |   |           |  
|Deposits:                                                                                          |  |             |           |      |   |           |  
|Demand                                                                                             |  | $           | 138,683   |      | $ | 136,026   |  
|Interest-bearing demand                                                                            |  |             | 383,126   |      |   | 374,624   |  
|Savings                                                                                            |  |             | 74,817    |      |   | 68,292    |  
|Time                                                                                               |  |             | 366,335   |      |   | 496,597   |  
|                                                                                                   |  |             |           |      |   |           |  
|Total deposits                                                                                     |  |             | 962,961   |      |   | 1,075,539 |  
|Borrowings:                                                                                        |  |             |           |      |   |           |  
|Customer repurchase agreements                                                                     |  |             | 35,806    |      |   | 47,327    |  
|Interest-bearing demand notes issued to the U.S. Treasury                                          |  |             | 1,753     |      |   | 1,021     |  
|Advances from the Federal Home Loan Bank                                                           |  |             | 9,000     |      |   | 31,500    |  
|Trust preferred securities                                                                         |  |             | 25,000    |      |   | 25,000    |  
|                                                                                                   |  |             |           |      |   |           |  
|Total borrowings                                                                                   |  |             | 71,559    |      |   | 104,848   |  
|Other liabilities                                                                                  |  |             | 5,090     |      |   | 6,291     |  
|                                                                                                   |  |             |           |      |   |           |  
|TOTAL LIABILITIES                                                                                  |  |             | 1,039,610 |      |   | 1,186,678 |  
|                                                                                                   |  |             |           |      |   |           |  
|                                                                                                   |  |             |           |      |   |           |  
|STOCKHOLDERS EQUITY                                                                               |  |             |           |      |   |           |  
|Preferred stock: no par value, 100,000 shares authorized:                                          |  |             |           |      |   |           |  
|25,083 shares issued and outstanding at December 31, 2010 and 2009                                 |  |             | 24,986    |      |   | 24,958    |  
|Common stock: $5 par value, 7,000,000 shares authorized:                                           |  |             |           |      |   |           |  
|4,478,295 shares issued at December 31, 2010 and 2009                                              |  |             | 22,391    |      |   | 22,391    |  
|Common stock warrants                                                                              |  |             | 150       |      |   | 150       |  
|Surplus                                                                                            |  |             | 18,275    |      |   | 18,423    |  
|Retained earnings                                                                                  |  |             | 11,589    |      |   | 29,851    |  
|Accumulated other comprehensive income, net of tax                                                 |  |             | 3,064     |      |   | 2,816     |  
|Less: cost of 1,152,354 and 1,171,926 treasury shares at December 31,
 2010 and 2009, respectively |  |             | (23,594   | )    |   | (23,929   | )
|                                                                                                   |  |             |           |      |   |           |  
|TOTAL STOCKHOLDERS EQUITY                                                                         |  |             | 56,861    |      |   | 74,660    |  
|                                                                                                   |  |             |           |      |   |           |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                         |  | $           | 1,096,471 |      | $ | 1,261,338 |  
|                                                                                                   |  |             |           |      |   |           |  
|                                                                                                  
|                                                                                                   |  |             |           |      |   |           |  
|                                                                                                  
|See accompanying notes to consolidated financial statements.                                      

10

---



Consolidated
Statements of Income(dollars
in thousands except share data)

|                                                                             |  |                                 |           |      |   |           |   |   |           | 
|---------------------------------------------------------------------------- |  | ------------------------------- | --------- | ---- | - | --------- | - | - | --------- | 
|                                                                             |  | For the Years Ended December 31 |          
|                                                                             |  | 2010                            |           | 2009 |   | 2008      |  
|                                                                             |  |                                 |           |      |   |           |  
|Interest income:                                                             |  |                                 |           |      |   |           |   |   |           | 
|Interest and fees on loans                                                   |  | $                               | 39,310    |      | $ | 43,719    |   | $ | 47,715    | 
|Interest and dividends on investment securities:                             |  |                                 |           |      |   |           |   |   |           | 
|Taxable                                                                      |  |                                 | 6,290     |      |   | 7,607     |   |   | 6,834     | 
|Tax-exempt                                                                   |  |                                 | 3,827     |      |   | 5,296     |   |   | 4,148     | 
|Interest on federal funds sold                                               |  |                                 | -0-       |      |   | -0-       |   |   | 71        | 
|Interest on interest-bearing deposits in other banks                         |  |                                 | 139       |      |   | 114       |   |   | 54        | 
|                                                                             |  |                                 |           |      |   |           |   |   |           | 
|Total interest income                                                        |  |                                 | 49,566    |      |   | 56,736    |   |   | 58,822    | 
|                                                                             |  |                                 |           |      |   |           |   |   |           | 
|Interest expense:                                                            |  |                                 |           |      |   |           |   |   |           | 
|Interest on deposits                                                         |  |                                 | 10,385    |      |   | 19,220    |   |   | 23,782    | 
|Interest on borrowings                                                       |  |                                 | 1,853     |      |   | 2,865     |   |   | 3,519     | 
|                                                                             |  |                                 |           |      |   |           |   |   |           | 
|Total interest expense                                                       |  |                                 | 12,238    |      |   | 22,085    |   |   | 27,301    | 
|                                                                             |  |                                 |           |      |   |           |   |   |           | 
|Net interest income                                                          |  |                                 | 37,328    |      |   | 34,651    |   |   | 31,521    | 
|Provision for loan losses                                                    |  |                                 | 40,550    |      |   | 11,062    |   |   | 2,968     | 
|                                                                             |  |                                 |           |      |   |           |   |   |           | 
|Net interest income (loss) after provision for loan
 losses                  |  |                                 | (3,222    | )    |   | 23,589    |   |   | 28,553    | 
|                                                                             |  |                                 |           |      |   |           |   |   |           | 
|Non-interest income:                                                         |  |                                 |           |      |   |           |   |   |           | 
|Trust and farm management fees                                               |  |                                 | 1,148     |      |   | 1,334     |   |   | 1,530     | 
|Service charges on deposit accounts                                          |  |                                 | 3,695     |      |   | 3,961     |   |   | 4,408     | 
|Other service charges                                                        |  |                                 | 1,913     |      |   | 1,954     |   |   | 2,137     | 
|Gain on sales of securities available-for-sale                               |  |                                 | 722       |      |   | 1,781     |   |   | 405       | 
|Brokerage fee income                                                         |  |                                 | 754       |      |   | 857       |   |   | 913       | 
|Mortgage servicing rights impairment                                         |  |                                 | (110      | )    |   | (185      | ) |   | -0-       | 
|Mortgage banking income, net                                                 |  |                                 | 2,383     |      |   | 2,462     |   |   | 1,069     | 
|Bank-owned life insurance income                                             |  |                                 | 910       |      |   | 941       |   |   | 874       | 
|Other operating income                                                       |  |                                 | 77        |      |   | 139       |   |   | 257       | 
|                                                                             |  |                                 |           |      |   |           |   |   |           | 
|Total non-interest income                                                    |  |                                 | 11,492    |      |   | 13,244    |   |   | 11,593    | 
|                                                                             |  |                                 |           |      |   |           |   |   |           | 
|Non-interest expense:                                                        |  |                                 |           |      |   |           |   |   |           | 
|Salaries and employee benefits                                               |  |                                 | 18,211    |      |   | 18,011    |   |   | 17,692    | 
|Occupancy                                                                    |  |                                 | 2,635     |      |   | 2,598     |   |   | 2,559     | 
|Equipment expense                                                            |  |                                 | 3,117     |      |   | 3,071     |   |   | 2,996     | 
|Federal insurance assessments                                                |  |                                 | 2,519     |      |   | 2,584     |   |   | 845       | 
|Goodwill impairment losses                                                   |  |                                 | -0-       |      |   | 24,521    |   |   | -0-       | 
|Intangible assets amortization                                               |  |                                 | 807       |      |   | 816       |   |   | 714       | 
|Data processing                                                              |  |                                 | 1,327     |      |   | 1,290     |   |   | 1,151     | 
|Marketing                                                                    |  |                                 | 696       |      |   | 751       |   |   | 742       | 
|Other real estate expenses, net                                              |  |                                 | 2,586     |      |   | 1,064     |   |   | 201       | 
|Loan collection expenses                                                     |  |                                 | 691       |      |   | 581       |   |   | 218       | 
|Write-down of land held-for-sale                                             |  |                                 | 110       |      |   | -0-       |   |   | -0-       | 
|Other operating expense                                                      |  |                                 | 4,454     |      |   | 4,272     |   |   | 4,005     | 
|                                                                             |  |                                 |           |      |   |           |   |   |           | 
|Total non-interest expense                                                   |  |                                 | 37,153    |      |   | 59,559    |   |   | 31,123    | 
|                                                                             |  |                                 |           |      |   |           |   |   |           | 
|Income (loss) before income taxes                                            |  |                                 | (28,883   | )    |   | (22,726   | ) |   | 9,023     | 
|Income tax expense (benefit)                                                 |  |                                 | (11,904   | )    |   | (1,600    | ) |   | 1,697     | 
|                                                                             |  |                                 |           |      |   |           |   |   |           | 
|Net income (loss)                                                            |  | $                               | (16,979   | )    | $ | (21,126   | ) | $ | 7,326     | 
|                                                                             |  |                                 |           |      |   |           |   |   |           | 
|Dividends on preferred shares                                                |  |                                 | 1,255     |      |   | 1,178     |   |   | -0-       | 
|Accretion of preferred stock discount                                        |  |                                 | 28        |      |   | 25        |   |   | -0-       | 
|                                                                             |  |                                 |           |      |   |           |   |   |           | 
|Net income (loss) available to common stockholders                           |  | $                               | (18,262   | )    | $ | (22,329   | ) | $ | 7,326     | 
|                                                                             |  |                                 |           |      |   |           |   |   |           | 
|                                                                             |  |                                 |           |      |   |           |   |   |           | 
|Earnings (loss) per share:                                                   |  |                                 |           |      |   |           |   |   |           | 
|Basic net income (loss) per common share available to common
 stockholders   |  | $                               | (5.52     | )    | $ | (6.76     | ) | $ | 2.22      | 
|Diluted net income (loss) per common share available to common
 stockholders |  | $                               | (5.52     | )    | $ | (6.76     | ) | $ | 2.21      | 
|Basic weighted average shares outstanding                                    |  |                                 | 3,311,291 |      |   | 3,301,016 |   |   | 3,297,990 | 
|Diluted weighted average shares outstanding                                  |  |                                 | 3,311,291 |      |   | 3,301,479 |   |   | 3,314,439 | 
|                                                                            
|                                                                             |  |                                 |           |      |   |           |   |   |           | 

See accompanying notes to consolidated
financial statements.

11

---



Consolidated Statements of Changes in
Stockholders Equity(dollars in
thousands except share data)

|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 |         |       |   |       |  |   |         |   |   |         |  
|------------------------------------------------------------------------------------------- |  | ---------------- | ------ | ------------- | - | ----------------------- |  | ------- | --- | ------------------ | - | ------------------------------------------------------------ | - | --------------- | ------- | ----- | - | ----- |  | - | ------- | - | - | ------- | -
|                                                                                            |  | Preferred
 Stock |        | Common
 Stock |   | Common
 Stock
 Warrants |  | Surplus |     | Retained
 Earnings |   | Accumulated
 Other
 Comprehensive
 Income
 net of tax effect |   | Treasury
 Stock |         | Total |  
|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 |         |       |  
|Balance, January 1, 2008                                                                    |  | $                | -0-    |               | $ | 22,391                  |  | $       | -0- |                    | $ | 18,275                                                       |   | $               | 51,279  |       | $ | 344   |  | $ | (23,682 | ) | $ | 68,607  |  
|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 |         |       |   |       |  |   |         |   |   |         |  
|Net income                                                                                  |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 | 7,326   |       |   |       |  |   |         |   |   | 7,326   |  
|Sale of 4,894 shares of treasury stock                                                      |  |                  |        |               |   |                         |  |         |     |                    |   | 40                                                           |   |                 |         |       |   |       |  |   | 84      |   |   | 124     |  
|Purchase of 20,000 shares of treasury stock                                                 |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 |         |       |   |       |  |   | (553    | ) |   | (553    | )
|Exercise of stock options and re-issuance of treasury stock (4,700
 shares)                 |  |                  |        |               |   |                         |  |         |     |                    |   | 21                                                           |   |                 |         |       |   |       |  |   | 80      |   |   | 101     |  
|Cash dividends ($1.12 per share)                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 | (3,696  | )     |   |       |  |   |         |   |   | (3,696  | )
|Amortization of unearned compensation expense                                               |  |                  |        |               |   |                         |  |         |     |                    |   | 84                                                           |   |                 |         |       |   |       |  |   |         |   |   | 84      |  
|Adjustment to initially apply ASC 715, split-dollar life insurance                          |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 | (580    | )     |   |       |  |   |         |   |   | (580    | )
|Other comprehensive income, net of $660 tax effect                                          |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 |         |       |   | 1,058 |  |   |         |   |   | 1,058   |  
|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 |         |       |   |       |  |   |         |   |   |         |  
|Balance, December 31, 2008                                                                  |  | $                | -0-    |               | $ | 22,391                  |  | $       | -0- |                    | $ | 18,420                                                       |   | $               | 54,329  |       | $ | 1,402 |  | $ | (24,071 | ) | $ | 72,471  |  
|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 |         |       |   |       |  |   |         |   |   |         |  
|Net loss                                                                                    |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 | (21,126 | )     |   |       |  |   |         |   |   | (21,126 | )
|Sale of 25,083 shares of preferred stock and 155,025 common stock
 warrants, net of expense |  |                  | 24,933 |               |   |                         |  |         | 150 |                    |   | (63                                                          | ) |                 |         |       |   |       |  |   |         |   |   | 25,020  |  
|Dividends on preferred stock                                                                |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 | (1,016  | )     |   |       |  |   |         |   |   | (1,016  | )
|Accretion on preferred stock discount                                                       |  |                  | 25     |               |   |                         |  |         |     |                    |   |                                                              |   |                 | (25     | )     |   |       |  |   |         |   |   | -0-     |  
|Sale of 8,328 shares of treasury common stock                                               |  |                  |        |               |   |                         |  |         |     |                    |   | (28                                                          | ) |                 |         |       |   |       |  |   | 142     |   |   | 114     |  
|Dividends on common stock ($.70 per share)                                                  |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 | (2,311  | )     |   |       |  |   |         |   |   | (2,311  | )
|Amortization of unearned compensation expense                                               |  |                  |        |               |   |                         |  |         |     |                    |   | 94                                                           |   |                 |         |       |   |       |  |   |         |   |   | 94      |  
|Other comprehensive income, net of $868 tax effect                                          |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 |         |       |   | 1,414 |  |   |         |   |   | 1,414   |  
|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 |         |       |   |       |  |   |         |   |   |         |  
|Balance, December 31, 2009                                                                  |  | $                | 24,958 |               | $ | 22,391                  |  | $       | 150 |                    | $ | 18,423                                                       |   | $               | 29,851  |       | $ | 2,816 |  | $ | (23,929 | ) | $ | 74,660  |  
|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 |         |       |   |       |  |   |         |   |   |         |  
|Net loss                                                                                    |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 | (16,979 | )     |   |       |  |   |         |   |   | (16,979 | )
|Dividends on preferred stock                                                                |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 | (1,255  | )     |   |       |  |   |         |   |   | (1,255  | )
|Accretion on preferred stock discount                                                       |  |                  | 28     |               |   |                         |  |         |     |                    |   |                                                              |   |                 | (28     | )     |   |       |  |   |         |   |   | -0-     |  
|Sale of 11,072 shares of treasury common stock                                              |  |                  |        |               |   |                         |  |         |     |                    |   | (135                                                         | ) |                 |         |       |   |       |  |   | 190     |   |   | 55      |  
|Award of 8,500 shares of nonvested common stock out of treasury common
 stock               |  |                  |        |               |   |                         |  |         |     |                    |   | (102                                                         | ) |                 |         |       |   |       |  |   | 145     |   |   | 43      |  
|Amortization of unearned compensation expense                                               |  |                  |        |               |   |                         |  |         |     |                    |   | 89                                                           |   |                 |         |       |   |       |  |   |         |   |   | 89      |  
|Other comprehensive income, net of $157 tax effect                                          |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 |         |       |   | 248   |  |   |         |   |   | 248     |  
|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 |         |       |   |       |  |   |         |   |   |         |  
|Balance, December 31, 2010                                                                  |  | $                | 24,986 |               | $ | 22,391                  |  | $       | 150 |                    | $ | 18,275                                                       |   | $               | 11,589  |       | $ | 3,064 |  | $ | (23,594 | ) | $ | 56,861  |  
|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 |         |       |   |       |  |   |         |   |   |         |  
|                                                                                           
|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                              |   |                 |         |       |   |       |  |   |         |   |   |         |  

See accompanying notes to
consolidated financial statements.

12

---



Consolidated Statements of Cash Flows(dollars in
thousands)

|                                                                                          |  |                                 |          |      |   |          |   |   |          |  
|----------------------------------------------------------------------------------------- |  | ------------------------------- | -------- | ---- | - | -------- | - | - | -------- | -
|                                                                                          |  | For the Years Ended December 31 |         
|                                                                                          |  | 2010                            |          | 2009 |   | 2008     |  
|                                                                                          |  |                                 |          |      |   |          |  
|Operating
 activities:                                                                    |  |                                 |          |      |   |          |   |   |          |  
|Net income (loss)                                                                         |  | $                               | (16,979  | )    | $ | (21,126  | ) | $ | 7,326    |  
|Adjustments to reconcile net income (loss) to net cash provided by
 operating activities: |  |                                 |          |      |   |          |   |   |          |  
|Depreciation                                                                              |  |                                 | 2,075    |      |   | 2,170    |   |   | 2,219    |  
|Provision for loan losses                                                                 |  |                                 | 40,550   |      |   | 11,062   |   |   | 2,968    |  
|Deferred income tax (benefit) expense                                                     |  |                                 | (10,061  | )    |   | (3,747   | ) |   | (602     | )
|Impairment of goodwill                                                                    |  |                                 | -0-      |      |   | 24,521   |   |   | -0-      |  
|Amortization of intangible assets and other purchase accounting
 adjustments, net         |  |                                 | 816      |      |   | 816      |   |   | 714      |  
|Amortization (accretion) of premiums and discounts on investment
 securities, net         |  |                                 | 1,544    |      |   | 1,549    |   |   | 56       |  
|Gain on sales of securities available-for-sale, net                                       |  |                                 | (722     | )    |   | (1,781   | ) |   | (405     | )
|Compensation expense for vested stock options                                             |  |                                 | 89       |      |   | 94       |   |   | 84       |  
|Impairment of mortgage servicing rights, net of recoveries                                |  |                                 | 110      |      |   | 185      |   |   | -0-      |  
|Loss on sales or writedowns of other real estate owned, net                               |  |                                 | 1,380    |      |   | 943      |   |   | 2        |  
|Writedown of land held for sale                                                           |  |                                 | 110      |      |   | -0-      |   |   | -0-      |  
|Loans originated for sale                                                                 |  |                                 | (126,400 | )    |   | (141,315 | ) |   | (77,851  | )
|Proceeds from sales of loans originated for sale                                          |  |                                 | 124,181  |      |   | 140,174  |   |   | 76,624   |  
|Decrease in accrued interest payable                                                      |  |                                 | (1,660   | )    |   | (1,473   | ) |   | (669     | )
|Decrease in accrued interest receivable                                                   |  |                                 | 1,785    |      |   | 426      |   |   | 1,183    |  
|Increase in other assets                                                                  |  |                                 | (3,109   | )    |   | (7,099   | ) |   | (398     | )
|Increase (decrease) in other liabilities                                                  |  |                                 | 459      |      |   | (502     | ) |   | (1,066   | )
|                                                                                          |  |                                 |          |      |   |          |   |   |          |  
|                                                                                          |  |                                 |          |      |   |          |   |   |          |  
|Net
 cash provided by (used in) operating activities                                      |  |                                 | 14,168   |      |   | 4,897    |   |   | 10,185   |  
|                                                                                          |  |                                 |          |      |   |          |   |   |          |  
|                                                                                          |  |                                 |          |      |   |          |   |   |          |  
|Investing
 activities:                                                                    |  |                                 |          |      |   |          |   |   |          |  
|Proceeds from sales of investment securities available-for-sale                           |  |                                 | 52,730   |      |   | 88,847   |   |   | 38,499   |  
|Proceeds from maturities of investment securities available-for-sale                      |  |                                 | 23,863   |      |   | 58,550   |   |   | 53,568   |  
|Purchase of investment securities available-for-sale                                      |  |                                 | (37,288  | )    |   | (196,419 | ) |   | (112,754 | )
|Proceeds from maturities of investment securities held-to-maturity                        |  |                                 | 4,129    |      |   | 4,564    |   |   | 2,100    |  
|Purchase of investment securities held-to-maturity                                        |  |                                 | (3,523   | )    |   | (3,182   | ) |   | (1,944   | )
|Proceeds from sales of other real estate owned                                            |  |                                 | 6,675    |      |   | 549      |   |   | 891      |  
|Net (increase) decrease in loans                                                          |  |                                 | 60,052   |      |   | (27,873  | ) |   | (71,668  | )
|Purchase of premises and equipment                                                        |  |                                 | (707     | )    |   | (1,142   | ) |   | (1,725   | )
|Purchase of Federal Home Loan and Federal Reserve Bank stock                              |  |                                 | (268     | )    |   | (19      | ) |   | (113     | )
|                                                                                          |  |                                 |          |      |   |          |   |   |          |  
|                                                                                          |  |                                 |          |      |   |          |   |   |          |  
|Net
 cash provided by (used in) investing activities                                      |  |                                 | 105,663  |      |   | (76,125  | ) |   | (93,146  | )
|                                                                                          |  |                                 |          |      |   |          |   |   |          |  
|                                                                                          |  |                                 |          |      |   |          |   |   |          |  
|Financing
 activities:                                                                    |  |                                 |          |      |   |          |   |   |          |  
|Net increase (decrease) in deposits                                                       |  |                                 | (112,578 | )    |   | 113,408  |   |   | 70,725   |  
|Net increase (decrease) in short-term borrowings                                          |  |                                 | (10,789  | )    |   | 2,875    |   |   | (18,082  | )
|Proceeds from borrowings                                                                  |  |                                 | -0-      |      |   | -0-      |   |   | 33,000   |  
|Repayment of borrowings                                                                   |  |                                 | (22,500  | )    |   | (16,050  | ) |   | (6,001   | )
|Dividends paid on preferred stock                                                         |  |                                 | (1,255   | )    |   | (1,016   | ) |   | -0-      |  
|Dividends paid on common stock                                                            |  |                                 | -0-      |      |   | (2,311   | ) |   | (3,696   | )
|Purchase of treasury stock                                                                |  |                                 | -0-      |      |   | -0-      |   |   | (553     | )
|Sales of treasury stock                                                                   |  |                                 | 55       |      |   | 114      |   |   | 124      |  
|Exercise of stock options and issuance of treasury stock                                  |  |                                 | -0-      |      |   | -0-      |   |   | 101      |  
|Award of nonvested stock from treasury stock                                              |  |                                 | 43       |      |   | -0-      |   |   | -0-      |  
|Proceeds from issuance of preferred stock and common stock warrants,
 net of expenses     |  |                                 | -0-      |      |   | 25,020   |   |   | -0-      |  
|                                                                                          |  |                                 |          |      |   |          |   |   |          |  
|                                                                                         
|Net
 cash provided by (used in) financing activities                                      |  |                                 | (147,024 | )    |   | 122,040  |   |   | 75,618   |  
|                                                                                          |  |                                 |          |      |   |          |   |   |          |  
|                                                                                          |  |                                 |          |      |   |          |   |   |          |  
|Increase (decrease) in cash
 and cash equivalents                                         |  |                                 | (27,193  | )    |   | 50,812   |   |   | (7,343   | )
|Cash and cash equivalents
 at beginning of year                                           |  |                                 | 71,073   |      |   | 20,261   |   |   | 27,604   |  
|                                                                                          |  |                                 |          |      |   |          |   |   |          |  
|                                                                                         
|Cash and cash equivalents
 at end of year                                                 |  | $                               | 43,880   |      | $ | 71,073   |   | $ | 20,261   |  
|                                                                                          |  |                                 |          |      |   |          |   |   |          |  
|                                                                                          |  |                                 |          |      |   |          |   |   |          |  
|Cash paid during the year
 for:                                                           |  |                                 |          |      |   |          |   |   |          |  
|Interest                                                                                  |  | $                               | 13,898   |      | $ | 23,558   |   | $ | 27,970   |  
|Income taxes                                                                              |  | $                               | 1,019    |      | $ | 2,040    |   | $ | 3,123    |  
|Supplemental disclosure of
 non-cash flow activities:                                     |  |                                 |          |      |   |          |   |   |          |  
|Loans transferred to other real estate owned                                              |  | $                               | 11,049   |      | $ | 16,663   |   | $ | 2,547    |  
|Land transferred to held-for-sale                                                         |  | $                               | -0-      |      | $ | -0
 -    |   | $ | 1,010    |  
|                                                                                         
|                                                                                          |  |                                 |          |      |   |          |   |   |          |  

See accompanying notes to
consolidated financial statements.

13

---



Notes to Consolidated Financial Statements(dollar amounts
in thousands except share data)

1. Summary of Significant Accounting Policies

The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America and
conform with general practices within the banking industry. A description of
the significant accounting policies follows:

Nature of Operations - Princeton National
Bancorp, Inc. (the Corporation) is a bank holding company whose principal
activity is the ownership and management of its wholly-owned subsidiary,
Citizens First National Bank (the Bank or subsidiary bank). The Bank is
primarily engaged in providing a full range of banking and financial services
to individual and corporate customers located primarily in North Central
Illinois. The Bank is subject to competition from other financial institutions.
The Bank is subject to the regulation of certain federal and state agencies and
undergoes periodic examinations by those regulatory authorities.

Basis of Consolidation - The Consolidated
Financial Statements of the Corporation include the accounts of the Corporation
and its wholly-owned subsidiary, Citizens First National Bank. Intercompany
accounts and transactions have been eliminated in consolidation. The
Corporation, through the subsidiary bank, operates in a single segment engaging
in general retail and commercial banking.

Use of Estimates - In order to prepare the
Corporations Consolidated Financial Statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make certain estimates that affect the amounts reported in the
Consolidated Financial Statements and accompanying notes. These estimates may
differ from actual results.

Material
estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses, the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans, fair
value measurements of investment securities, income tax accruals and deferrals,
evaluation of the impairment of intangibles and mortgage servicing rights.

Interest-bearing Deposits in Banks - Interest-bearing deposits with financial
institutions mature within one year and are carried at cost.

Investment Securities - Investment
securities which the Corporation has the positive intent and ability to hold to
maturity are classified as held-to-maturity and recorded at amortized cost. The
Corporation does not have a trading portfolio. All other investment securities
that are not classified as held-to-maturity are classified as
available-for-sale. Investment securities available-for-sale are recorded at
fair value, with any changes in fair value reflected as a separate component of
stockholders equity, net of related tax effects. Gains and losses on the sales
of securities are determined using the specific identification method. Premiums
and discounts on investment securities are amortized or accreted over the
contractual lives of those securities. The method of amortization or accretion
results in a constant effective yield on those securities (the interest
method). Any security for which there has been other than temporary impairment
of value is written down to its estimated market value through a charge to
earnings.

For
debt securities with fair value below carrying value when the Corporation does
not intend to sell a debt security, and it is more likely than not the
Corporation will not have to sell the security before recovery of its cost
basis, it recognizes the credit component of an other-than-temporary impairment
of a debt security in earnings and the remaining portion in other comprehensive
income. For held-to-maturity debt securities, the amount of an
other-than-temporary impairment recorded in other comprehensive income for the
noncredit portion of a previous other-than-temporary impairment is amortized
prospectively over the remaining life of the security on the basis of the
timing of future estimated cash flows of the security.

Federal Reserve and Federal Home Loan Bank

Stock
- The subsidiary bank held Federal Home Loan Bank and Federal Reserve Bank
stock totaling $2,373 and $2,125 at December 31, 2010, and $2,373 and $1,857 at
December 31, 2009, respectively. During the third quarter of 2007, the Federal
Home Loan Bank of Chicago received a Cease and Desist Order from their
regulator, the Federal Housing Finance Board. The Federal Home Loan Bank will
continue to provide liquidity and funding through advances, however, the order
prohibits capital stock repurchases until a time to be determined by the
Federal Housing Finance Board and requires their approval for dividends. With
regard to dividends, the Federal Home Loan Bank of Chicago continues to assess
its dividend capacity each quarter and make appropriate request for approval.
While there were no dividends paid in 2010, 2009 or 2008, a dividend was
declared based on preliminary results from the fourth quarter of 2010, payable
in February 2011. Management performed an analysis and deemed the cost-method
investment in Federal Home Loan Bank stock was ultimately recoverable.

Loans
Held For Sale - Mortgage
loans originated and intended for sale in the secondary market are carried at
the lower of cost or fair value in the aggregate. Net unrealized losses, if
any, are recognized through a valuation allowance by charges to non-interest
income. Gains and losses on loan sales are recorded in non-interest income, and
direct loan origination costs and fees are deferred at origination of the loan
and are recognized in non-interest income upon sale of the loan.

Loans - Loans are stated at the principal

amount
outstanding, net of unearned interest and allowance for loan losses. Interest
on commercial, real estate and certain installment loans is credited to
operations as earned, based upon the principal amount outstanding. Interest on
other installment loans is credited to operations using a method which
approximates the interest method. Certain non-refundable loan origination fees
and direct costs are deferred at the time a loan is originated. Net deferred
loan fees are recognized as yield adjustments over the contractual life of the
loan fees using the interest method.

It
is the subsidiary banks policy to discontinue the accrual of interest on any
loan when, in the opinion of management, full and timely payment of principal
and interest is not expected, or principal and interest is due and remains
unpaid for 90 days or more, unless the loan is both well-secured and in the
process of collection. Interest on these loans is recorded as income only when
the collection of principal has been assured and only to the extent interest
payments are received.

Impaired
loans are measured based on current information and events, if it is probable
the Corporation will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan agreement.
Certain groups of small-balance homogeneous loans, which are collectively
evaluated for impairment and are generally represented by consumer and
residential mortgage loans and loans held-for-sale, are not analyzed
individually for impairment. The Corporation generally identifies impaired
loans within the non-accrual and restructured commercial and commercial real
estate portfolios on an individual loan-by-loan basis. The measurement of
impaired loans is generally based on the fair value of the related collateral.

Allowance
for Loan Losses - The
allowance for loan losses is increased by provisions charged to operating
expense and decreased by charge-offs, net of recoveries, and is available to
absorb probable losses on loans. Loan losses are charged against the allowance
when management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.

The
allowance is based on factors that include overall composition of the loan
portfolio, types of loans, past loss experience, loan delinquencies,
substandard and doubtful credits, and such other factors that, in managements
best judgment, deserve evaluation in estimating loan losses.

In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the subsidiary banks allowance for loan losses.
Such agencies may require the subsidiary bank to recognize additions to the
allowance for loan losses based on their judgments of information available to
them at the time of their examination.

14

---



The
allowance consists of allocated and general components. The allocated
components relate to loans that are classified as impaired. For those loans
that are classified as impaired, an allowance is established when the
discounted cash flows (or collateral value or observable market price) of the
impaired loan is lower than the carrying value of that loan. The general
component covers non-classified loans and is based on historical charge-off
experience and expected loss given default derived from the Corporations
internal risk rating process. Other adjustments may be made to the allowance
for pools of loans after an assessment of internal or external influences on
credit quality that are not fully reflected in the historical loss or risk
rating data.

A
loan is considered impaired when, based on current information and events, it
is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrowers
prior payment record and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan basis for
commercial and construction loans by either the present value of expected
future cash flows discounted at the loans effective interest rate, the loans
obtainable market price or the fair value of the collateral if the loan is
collateral dependent.

Groups
of loans with similar risk characteristics are collectively evaluated for
impairment based on the groups historical loss experience adjusted for changes
in trends, conditions and other relevant factors that affect repayment of the
loans. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment measurements, unless such loans
are the subject of a restructuring agreement due to financial difficulties of
the borrower.

Sales of First Mortgage Loans and Loan

Servicing
- The subsidiary bank sells certain first mortgage loans on a non-recourse
basis. The total cost of these loans is allocated between loans and servicing
rights, based on the relative fair value of each. Loan servicing fees are
recognized to income, and loan servicing costs are charged to expense, as
incurred. Loans held-for-sale are stated at the lower of aggregate cost or
market. Mortgage loans serviced for others are not included in the accompanying
Consolidated Balance Sheets.

The
Corporation recognizes as a separate asset the rights to service mortgage loans
for others. Mortgage servicing rights are recorded at the lower of cost or
market value and are included in other assets in the Consolidated Balance
Sheets. Mortgage servicing rights are amortized in proportion to the amount of
principal received on loans serviced. The amortization of capitalized mortgage
servicing rights is reflected in the Consolidated Statements of Income as a
reduction to mortgage banking income. Impairment of mortgage servicing rights
is assessed based on the fair value of those rights. Fair values are estimated
using discounted cash flows based on a current market interest rate. For
purposes of measuring impairment, the rights are stratified based on the
predominant risk characteristics of the underlying loans. The predominant
characteristic currently used for stratification is type of loan. The amount of
impairment recognized is the amount by which the capitalized mortgage servicing
rights for a stratum exceed their fair value.

Premises and Equipment - Premises and
equipment are carried at cost, less accumulated depreciation. Depreciation is
computed on the straight-line basis over the estimated useful lives of the
assets, as follows: buildings, fifteen to forty years and furniture and
equipment, three to fifteen years. The carrying amounts of assets sold or
retired and the related accumulated depreciation are eliminated from the
accounts, and any resulting gains or losses are reflected in income.

Intangible Assets - The Corporation has
identifiable intangible assets assigned to core deposit relationships and
customer lists acquired. Identifiable intangible assets generally arise from
branches acquired that the Corporation accounted for as purchases. Such assets
consist of the excess of the purchase price over the fair value of net assets
acquired, with specific amounts assigned to core deposit relationships.
Intangible assets are amortized by the straight-line method over various
periods up to fifteen years. Management reviews intangible assets for possible
impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may be not recoverable. As of December 31, 2010, no
impairment was deemed necessary.

Other Real Estate Owned - Other real estate
owned represents assets to which the subsidiary bank has acquired legal title
in satisfaction of indebtedness. Such real estate is recorded at the lower of
cost or fair market value at the date of acquisition, less estimated selling
costs. Any deficiency, at the date of transfer, is charged to the allowance for
loan losses. Subsequent declines in value, based on changes in market
conditions, are recorded to expense as incurred. Gains or losses on the
disposition of other real estate owned are recorded to the income statement in
the period in which they are realized.

Income Taxes - The Corporation accounts

for
income taxes in accordance with income tax accounting guidance (ASC 740 
Income Taxes). The income tax accounting guidance results in two components of
income tax expense: current and deferred. Current income tax expense reflects taxes
to be paid or refunded for the current period by applying the provisions of the
enacted tax law to the taxable income or excess of deductions over revenues.
The Corporation determines deferred income taxes using the liability (or
balance sheet) method. Under this method, the net deferred tax asset or
liability is based on the tax effects of the differences between the book and
tax bases of assets and liabilities, and enacted changes in tax rates and laws
are recognized in the period in which they occur.

Deferred
income tax expense results from changes in deferred tax assets and liabilities
between periods. Deferred tax assets are recognized if it is more likely than
not, based on the technical merits, that the tax position will be realized or sustained
upon examination. The term more likely than not means a likelihood of more than
50 percent; the terms examined and upon examination also include resolution of
the related appeals or litigation processes, if any. A tax position that meets
the more-likely-than-not recognition threshold is initially and subsequently
measured as the largest amount of tax benefit that has a greater than 50
percent likelihood of being realized upon settlement with a taxing authority
that has full knowledge of all relevant information. The threshold considers
the facts, circumstances and information available at the reporting date and is
subject to managements judgment. Deferred tax assets are reduced by a
valuation allowance if, based on the weight of evidence available, it is more
likely than not that some portion or all of a deferred tax asset will not be
realized.

The
Corporation recognizes interest and penalties on income taxes as a component of
income tax expense.

The
Corporation files consolidated income tax returns with its subsidiaries.

Trust Assets - Assets held in fiduciary or
agency capabilities are not included in the Consolidated Balance Sheets since
such items are not assets of the Corporation. Fees from trust activities are recorded
on an accrual basis over the period in which the service is provided. Fees are
a function of the market value of assets managed and administered, the volume
of transactions and fees for other services rendered, as set forth in the
underlying client agreement with fiduciary services. This revenue recognition
involves the use of estimates and assumptions, including components that are
calculated based on estimated asset valuations and transaction volumes.
Generally, the actual trust fee is charged to each account on a monthly
prorated basis. Any out-of-pocket expenses for services not typically covered
by the fee schedule for trust activities are charged directly to the trust
account on a gross basis as trust revenue is incurred. The Corporation was the
manager or administrator of 907 trust accounts with assets totaling
approximately $175,519 at December 31, 2010 and 965 trust accounts with assets
totaling approximately $171,429 at December 31, 2009.

Treasury Stock - Treasury stock is stated
at cost. Cost is determined by the first-in, first-out method.

15

---



Notes to Consolidated Financial Statements(Continued)(dollar amounts in thousands except share data)

Transfers of Financial Assets - Transfers
of financial assets are accounted for as sales, when control over the assets
has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Corporation - put
presumptively beyond the reach of the transferor and its creditors, even in
bankruptcy or other receivership, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets and (3) the Corporation does not maintain
effective control over the transferred assets through an agreement to
repurchase them before their maturity or the ability to unilaterally cause the
holder to return specific assets.

Earnings Per Share - Basic earnings (loss)
per share represents income (loss) available to common stockholders divided by
the weighted-average number of common shares outstanding each period. Diluted
earnings per share reflects additional potential common shares that would have
been outstanding if dilutive potential common shares had been issued, as well
as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Corporation relate solely to
outstanding stock options and warrants issued in conjunction with the Capital Purchase
Program/Troubled Asset Relief Program (TARP). (See Note 20 - Capital Purchase
Program/Troubled Asset Relief Program (TARP) in the Notes to Consolidated
Financial Statements.

Treasury
shares are not deemed outstanding for earnings per share calculations.

Comprehensive Income - Comprehensive

income
consists of net income and other comprehensive income, net of applicable income
taxes. Other comprehensive income includes unrealized appreciation
(depreciation) on available-for-sale securities and changes in the funded
status of the post-retirement health care plan.

Cash Equivalents - The Corporation
considers all liquid investments with original maturities of three months or
less to be cash equivalents. At December 31, 2010 and 2009, cash equivalents
consisted of non-interest bearing and interest-bearing cash accounts.

The
financial institutions holding the Corporations cash accounts are
participating in the FDICs Transaction Account Guarantee Program. Under that
program, through December 31, 2010, all non-interest bearing transaction
accounts are fully guaranteed by the FDIC for the entire amount in the account.
Pursuant to legislation enacted in 2010, the FDIC will fully insure all
non-interest bearing transaction accounts beginning December 31, 2010 through
December 31, 2012, at all FDIC-insured institutions.

The
Corporations interest-bearing cash accounts are held at the Federal Home Loan
and Federal Reserve Banks of Chicago and are fully guaranteed for the entire
amount in the account.

Reclassification - Certain amounts in the
2009 and 2008 Consolidated Financial Statements have been reclassified to
conform to the 2010 presentation. These reclassifications had no effect on net
income.

Stock Options - At December 31, 2010 and
2009, the Corporation had a share-based employee compensation plan, which is
described more fully in Note 14 - Employee, Officer and Director Benefit
Plans in the Notes to Consolidated Financial Statements. The Corporation
accounts for this plan under the recognition and measurement principles of
Financial Accounting Standards Board Accounting Standards Codification 718 (ASC
718), Share-Based Payment. The number of shares of common stock authorized
under the stock option plans is 802,500. The exercise price must be at least
100% of the fair market value of the common stock on the date of the grant, and
the option term cannot exceed ten years.

Beginning
in 2010, the Corporation awarded nonvested shares at no cost to certain
officers as described more fully in Note 14 - Employee, Officer and Director
Benefit Plans in the Notes to Consolidated Financial Statements. The Corporation
also accounts for this plan under the recognition and measurement principles of
ASC 718, Share-Based Payment.

Impact of New Accounting Standards - In
January 2010, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) No. 2009-16, Transfers and Servicing (Topic
860) - Accounting for Transfers of Financial Assets. ASU 2009-16 amends prior
accounting guidance to enhance reporting about transfers of financial assets,
including securitizations, and where companies have continuing exposure to the
risks related to transferred financial assets. ASU 2009-16 eliminates the
concept of a qualifying special-purpose entity and changes the requirements
for derecognizing financial assets. ASU 2009-16 also requires additional
disclosures about all continuing involvements with transferred financial assets
including information about gains and losses resulting from transfers during
the period. The provisions of ASU 2009-16 did not have a significant impact on
the Corporations Consolidated Financial Statements.

The
FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic
820) - Improving Disclosures About Fair Value Measurements. ASU 2010-06
requires expanded disclosures related to fair value measurements including (i)
the amounts of significant transfers of assets or liabilities between Levels 1
and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the
reasons for transfers of assets or liabilities in or out of Level 3 of the fair
value hierarchy, with significant transfers disclosed separately, (iii) the
policy for determining when transfers between levels of the fair value
hierarchy are recognized and (iv) for recurring fair value measurements of
assets and liabilities in Level 3 of the fair value hierarchy, a gross
presentation of information about purchases, sales, issuances and settlements.
ASU 2010-06 further clarifies that (i) fair value measurement disclosures
should be provided for each class of assets and liabilities (rather than major
category), which would generally be a subset of assets or liabilities within a
line item in the statement of financial position and (ii) companies should
provide disclosures about the valuation techniques and inputs used to measure
fair value for both recurring and nonrecurring fair value measurements for each
class of assets and liabilities included in Levels 2 and 3 of the fair value
hierarchy. The disclosures related to the gross presentation of purchases,
sales, issuances and settlements of assets and liabilities included in Level 3
of the fair value hierarchy will be required for the Corporation beginning
January 1, 2011. The remaining disclosure requirements and clarifications made
by ASU 2010-06 became effective for the Corporation on January 1, 2010. The
adoption of this accounting standard related to expanded disclosures of the
Corporations fair value measurements is included in Note 16 - Fair Value of
Financial Instruments to the Consolidated Financial Statements and had no
impact on the retained earnings of the Corporation or the Corporations statements
of income or condition.

ASU
No. 2010-20, Receivables (Topic 310) - Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses, requires entities
to provide disclosures designed to facilitate financial statement users
evaluation of (i) the nature of credit risk inherent in the entitys portfolio
of financing receivables, (ii) how that risk is analyzed and assessed in
arriving at the allowance for credit losses and (iii) the changes and reasons for
those changes in the allowance for credit losses. Disclosures must be
disaggregated by portfolio segment, the level at which an entity develops and
documents a systematic method for determining its allowance for credit losses,
and class of financing receivable, which is generally a disaggregation of
portfolio segment. The required disclosures include, among other things, a
rollforward of the allowance for credit losses as well as information about
modified, impaired, non-accrual and past due loans and credit quality
indicators. ASU 2010-20 became effective for the Corporations financial
statements as of December 31, 2010, as it relates to disclosures required as of
the end of a reporting period. Disclosures that relate to activity during a
reporting period will be required for the Corporations financial statements
that include periods beginning on or after January 1, 2011. ASU 2011-01,
Receivables (Topic 310) - Deferral of the Effective Date of Disclosures about
Troubled Debt Restructurings in Update No. 2010-20, temporarily deferred the
effective date for disclosures related to troubled debt restructurings to
coincide with the effective date of a proposed accounting standards update
related to troubled debt restructurings, which is currently expected to be
effective for periods ending after June 15, 2011. The adoption of this
accounting standard related to expanded disclosures of the Corporations
disclosures about the credit quality of loans and the allowance for loan and
lease losses is included in Note 5 - Loans and the Allowance for Loan Losses
to the Consolidated Financial Statements and had no impact on the retained
earnings of the Corporation or the Corporations statements of income or
condition.

16

---



2. Earnings Per Share

The
following table sets forth the computation for basic and diluted earnings
(loss) per share for the years ended December 31, 2010, 2009 and 2008:

|                                                                      |  |      |           |      |   |           |   |   |           | 
|--------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | - | - | --------- | 
|                                                                      |  | 2010 |           | 2009 |   | 2008      |  
|Numerator:                                                            |  |      |           |      |   |           |   |   |           | 
|Net income (loss) available to common

stockholders                   |  | $    | (18,262   | )    | $ | (22,329   | ) | $ | 7,326     | 
|Denominator:                                                          |  |      |           |      |   |           |   |   |           | 
|Basic earnings per share - weighted average common

shares            |  |      | 3,311,291 |      |   | 3,301,016 |   |   | 3,297,990 | 
|Effect of dilutive securities - stock options                         |  |      | -0-       |      |   | 463       |   |   | 16,449    | 
|                                                                      |  |      |           |      |   |           |   |   |           | 
|Diluted earnings per share - adjusted weighted average

common shares |  |      | 3,311,291 |      |   | 3,301,479 |   |   | 3,314,439 | 
|Net income (loss) per share
 available to common stockholders         |  |      |           |      |   |           |   |   |           | 
|Basic                                                                 |  | $    | (5.52     | )    | $ | (6.76     | ) | $ | 2.22      | 
|Diluted                                                               |  | $    | (5.52     | )    | $ | (6.76     | ) | $ | 2.21      | 

The
following shares were not considered in computing diluted earnings per share
for the years ended December 31, 2010, 2009 and 2008 because they were
anti-dilutive:

|                                                                                |  |      |         |      |  |         |  |  |         | 
|------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ------- |  |  | ------- | 
|                                                                                |  | 2010 |         | 2009 |  | 2008    | 
|                                                                                |  |      |         |      |  |         |  |  |         | 
|Stock options to purchase shares of common stock                                |  |      | 555,277 |      |  | 519,777 |  |  | 341,516 | 
|                                                                                |  |      |         |      |  |         |  |  |         | 
|Average dilutive potential common shares associated with common stock
 warrants |  |      | 155,025 |      |  | 155,025 |  |  | -0-     | 

3. Cash and Due From Banks

The
average compensating balances held at correspondent banks during 2010 and 2009 were
$3,272 and $2,384, respectively. The subsidiary bank maintains such
compensating balances with correspondent banks to offset charges for services
rendered by those banks. In addition, the Federal Reserve Bank required the
subsidiary bank to maintain average balances of approximately $5,002 and
$4,007, for 2010 and 2009, respectively, as reserve requirements.

4. Investment Securities

The
amortized cost, gross unrealized gains, gross unrealized losses and estimated
fair value of available-for-sale and held-to-maturity securities by major
security type at December 31, 2010 and December 31, 2009 were as follows:

|                                     |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|------------------------------------ |  | ---------------- | ------- | -------------------------- | - | --------------------------- |  | ------------ | ------ | - | - | ------- | 
|                                     |  | 2010             |        
|                                     |  | Amortized 
 Cost |         | Gross 
 Unrealized 
 Gains |   | Gross 
 Unrealized 
 Losses |  | Fair 
 Value |       
|                                     |  |                  |         |                            |   |                             |  |              |       
|Available-for-sale:                  |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|United States Government and         |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|federal agency and U.S. Government   |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|sponsored enterprises (GSEs)         |  | $                | 77,166  |                            | $ | 1,671                       |  | $            | (633   | ) | $ | 78,204  | 
|State and Municipal                  |  |                  | 113,308 |                            |   | 2,730                       |  |              | (384   | ) |   | 115,654 | 
|Collateralized mortgage obligations: |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|GSE residential                      |  |                  | 52,746  |                            |   | 2,148                       |  |              | -0-    |   |   | 54,894  | 
|                                     |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|Total                                |  |                  | 243,220 |                            |   | 6,549                       |  |              | (1,017 | ) |   | 248,752 | 
|                                     |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|Held-to-maturity:                    |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|State and Municipal                  |  |                  | 12,187  |                            |   | 309                         |  |              | (24    | ) |   | 12,472  | 
|                                     |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|Total                                |  | $                | 255,407 |                            | $ | 6,858                       |  | $            | (1,041 | ) | $ | 261,224 | 
|                                     |  |                  |         |                            |   |                             |  |              |        |   |   |         | 

|                                     |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|------------------------------------ |  | ---------------- | ------- | -------------------------- | - | --------------------------- |  | ------------ | ------ | - | - | ------- | 
|                                     |  | 2009             |        
|                                     |  | Amortized 
 Cost |         | Gross 
 Unrealized 
 Gains |   | Gross 
 Unrealized 
 Losses |  | Fair 
 Value |       
|                                     |  |                  |         |                            |   |                             |  |              |       
|Available-for-sale:                  |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|United States Government and         |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|federal agency and U.S. Government   |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|sponsored enterprises (GSEs)         |  | $                | 95,498  |                            | $ | 1,560                       |  | $            | (745   | ) | $ | 96,313  | 
|State and Municipal                  |  |                  | 116,864 |                            |   | 3,580                       |  |              | (366   | ) |   | 120,078 | 
|Collateralized mortgage obligations: |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|GSE residential                      |  |                  | 70,985  |                            |   | 1,156                       |  |              | (58    | ) |   | 72,083  | 
|                                     |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|Total                                |  |                  | 283,347 |                            |   | 6,296                       |  |              | (1,169 | ) |   | 288,474 | 
|                                     |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|Held-to-maturity:                    |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|State and Municipal                  |  |                  | 12,793  |                            |   | 547                         |  |              | (9     | ) |   | 13,331  | 
|                                     |  |                  |         |                            |   |                             |  |              |        |   |   |         | 
|Total                                |  | $                | 296,140 |                            | $ | 6,843                       |  | $            | (1,178 | ) | $ | 301,805 | 
|                                     |  |                  |         |                            |   |                             |  |              |        |   |   |         | 

17

---



Notes to Consolidated Financial Statements (Continued)
(dollar amounts in thousands except share data)

Maturities
of investment securities classified as available-for-sale and held-to-maturity
were as follows at December 31, 2010:

|                                       |  |                             |         |              |   |         | 
|-------------------------------------- |  | --------------------------- | ------- | ------------ | - | ------- | 
|                                       |  | Adjusted 
 Carrying 
 Value |         | Fair 
 Value |  
|                                       |  |                             |         |              |  
|Available-for-sale:                    |  |                             |         |              |   |         | 
|Due in one year or less                |  | $                           | 2,677   |              | $ | 2,730   | 
|Due after one year through five years  |  |                             | 26,271  |              |   | 26,984  | 
|Due after five years through ten years |  |                             | 65,031  |              |   | 66,322  | 
|Due after ten years                    |  |                             | 39,601  |              |   | 40,008  | 
|                                       |  |                             |         |              |   |         | 
|                                       |  |                             | 133,580 |              |   | 136,044 | 
|                                       |  |                             |         |              |   |         | 
|Mortgage-backed securities             |  |                             | 56,893  |              |   | 57,813  | 
|Collateralized mortgage obligations    |  |                             | 52,747  |              |   | 54,895  | 
|                                       |  |                             |         |              |   |         | 
|                                       |  | $                           | 243,220 |              | $ | 248,752 | 
|                                       |  |                             |         |              |   |         | 
|Held-to-maturity:                      |  |                             |         |              |   |         | 
|Due in one year or less                |  | $                           | 2,841   |              | $ | 2,866   | 
|Due after one year through five years  |  |                             | 6,627   |              |   | 6,862   | 
|Due after five years through ten years |  |                             | 2,540   |              |   | 2,567   | 
|Due after ten years                    |  |                             | 179     |              |   | 177     | 
|                                       |  |                             |         |              |   |         | 
|                                       |  | $                           | 12,187  |              | $ | 12,472  | 
|                                       |  |                             |         |              |   |         | 

Proceeds
from sales of investment securities available-for-sale during 2010, 2009 and
2008 were $52,730, $88,847 and $38,499, respectively. Gross gains were realized
of $974 in 2010, $3,323 in 2009 and $431 in 2008 on those sales. Gross losses
were realized of $252 in 2010, $1,542 in 2009 and $26 in 2008 on those sales.
There was resulting tax expense of $280 in 2010, $690 in 2009 and $157 in 2008
from those sales. There were no sales of investment securities classified as
held-to-maturity during 2010, 2009 or 2008.

Securities
with unrealized losses at December 31, 2010 and 2009 not recognized in income
are as follows:

|                                                                                              |  |                     |        |                           |   |              |   |                           |       |              |   |                           |   |   |        |  |   |        |  
|--------------------------------------------------------------------------------------------- |  | ------------------- | ------ | ------------------------- | - | ------------ | - | ------------------------- | ----- | ------------ | - | ------------------------- | - | - | ------ |  | - | ------ | -
|                                                                                              |  |                     |        |                           |   | 2010         |   |                           |       |              |  
|                                                                                              |  | Less than 12 Months |        | 12 Months or More         |   | Total        |  
|                                                                                              |  | Fair 
 Value        |        | Gross 
 Unrealized 
 Loss |   | Fair 
 Value |   | Gross 
 Unrealized 
 Loss |       | Fair 
 Value |   | Gross 
 Unrealized 
 Loss |  
|                                                                                              |  |                     |        |                           |   |              |   |                           |       |              |   |                           |  
|United States Government and federal agency and U.S.
 Government sponsored enterprises (GSEs) |  | $                   | 26,238 |                           | $ | (633         | ) | $                         | -0-   |              | $ | -0-                       |   | $ | 26,238 |  | $ | (633   | )
|State and Municipal                                                                           |  |                     | 20,493 |                           |   | (367         | ) |                           | 1,343 |              |   | (41                       | ) |   | 21,836 |  |   | (408   | )
|Collateralized mortgage obligations:                                                          |  |                     |        |                           |   |              |   |                           |       |              |   |                           |   |   |        |  |   |        |  
|GSE residential                                                                               |  |                     | 6      |                           |   | -0-          |   |                           | -0-   |              |   | -0-                       |   |   | 6      |  |   | -0-    |  
|                                                                                              |  |                     |        |                           |   |              |   |                           |       |              |   |                           |   |   |        |  |   |        |  
|Total temporarily impaired                                                                    |  | $                   | 46,737 |                           | $ | (1,000       | ) | $                         | 1,343 |              | $ | (41                       | ) | $ | 48,080 |  | $ | (1,041 | )
|                                                                                              |  |                     |        |                           |   |              |   |                           |       |              |   |                           |   |   |        |  |   |        |  

|                                                                                              |  |                     |        |                         |   |             |   |                         |       |             |   |                         |   |   |        |  |   |        |  
|--------------------------------------------------------------------------------------------- |  | ------------------- | ------ | ----------------------- | - | ----------- | - | ----------------------- | ----- | ----------- | - | ----------------------- | - | - | ------ |  | - | ------ | -
|                                                                                              |  |                     |        |                         |   | 2009        |   |                         |       |             |  
|                                                                                              |  | Less
than 12 Months |        | 12
Months or More       |   | Total       |  
|                                                                                              |  | Fair

Value         |        | Gross

Unrealized 
Loss |   | Fair

Value |   | Gross

Unrealized 
Loss |       | Fair

Value |   | Gross

Unrealized 
Loss |  
|                                                                                              |  |                     |        |                         |   |             |   |                         |       |             |   |                         |  
|United States Government and federal agency and U.S. Government
 sponsored enterprises (GSEs) |  | $                   | 39,012 |                         | $ | (745        | ) | $                       | 7     |             | $ | -0-                     |   | $ | 39,019 |  | $ | (745   | )
|State and Municipal                                                                           |  |                     | 17,114 |                         |   | (255        | ) |                         | 5,344 |             |   | (120                    | ) |   | 22,458 |  |   | (375   | )
|Collateralized mortgage obligations GSE residential                                           |  |                     | 8,006  |                         |   | (58         | ) |                         | -0-   |             |   | -0-                     |   |   | 8,006  |  |   | (58    | )
|                                                                                              |  |                     |        |                         |   |             |   |                         |       |             |   |                         |   |   |        |  |   |        |  
|Total temporarily impaired                                                                    |  | $                   | 64,132 |                         | $ | (1,058      | ) | $                       | 5,351 |             | $ | (120                    | ) | $ | 69,483 |  | $ | (1,178 | )
|                                                                                              |  |                     |        |                         |   |             |   |                         |       |             |   |                         |   |   |        |  |   |        |  

As
of December 31, 2010, the amount of securities with an unrealized loss of more
than twelve consecutive months is not material.

There
are 68 securities in an unrealized loss position in the investment portfolio at
December 31, 2010, all due to interest rate changes and not credit events.
These unrealized losses are considered temporary and, therefore, have not been
recognized into income, because the issuers are of high credit quality and
management has the ability and intent to hold for the foreseeable future. The
fair value is expected to recover as the investments approach their maturity
date or there is a downward shift in interest rates.

The
carrying value of securities pledged as collateral to secure public deposits
and for other purposes was $209,512 at December 31, 2010 and $283,011 at
December 31, 2009.

18

---



5. Loans and Allowance for Loan Losses

The
composition of the loan portfolio as of December 31 was as follows:

|                                    |  |      |         |      |   |         | 
|----------------------------------- |  | ---- | ------- | ---- | - | ------- | 
|                                    |  | 2010 |         | 2009 |  
|Commercial                          |  | $    | 138,325 |      | $ | 163,761 | 
|Agricultural                        |  |      | 78,086  |      |   | 77,060  | 
|Agricultural Real Estate            |  |      | 46,361  |      |   | 61,348  | 
|Commercial Real Estate              |  |      | 205,301 |      |   | 214,767 | 
|Commercial Real Estate
 Development |  |      | 88,402  |      |   | 102,633 | 
|Residential Real Estate             |  |      | 90,869  |      |   | 108,096 | 
|                                    |  |      |         |      |   |         | 
|Total real estate                   |  |      | 430,933 |      |   | 486,844 | 
|                                    |  |      |         |      |   |         | 
|Consumer                            |  |      | 56,730  |      |   | 70,409  | 
|                                    |  |      |         |      |   |         | 
|Total                               |  | $    | 704,074 |      | $ | 798,074 | 
|                                    |  |      |         |      |   |         | 

At
December 31, 2010 and 2009, the Corporation held $205,301 and $214,767 in
commercial real estate and $88,402 and $102,633 in commercial real estate
development, respectively. Generally, those loans are collateralized by the
real estate being financed. The loans are expected to be repaid from cash flows
or from proceeds of sale of the real estate of the borrowers.

At
December 31, 2010 and 2009, the Corporation held $78,086 and $77,060 in
agricultural production loans and $46,361 and $61,348 in agricultural real
estate loans, respectively. Generally, those loans are collateralized by the
assets of the borrower. The loans are expected to be repaid from cash flows or
from proceeds of sale of selected assets of the borrowers.

During
2010, the Corporation experienced a higher level of charge-offs due in part to
the economic environment, particularly in the commercial sector. Accordingly,
with the higher charge-offs and the increased level of non-performing loans,
the Corporation recorded a provision for loan losses of $40,550 (an increase of
$29,488, or 266.6%, over the 2009 provision).

The
following table presents the balance in the allowance for loan losses and the
recorded investment in loans based on portfolio segment and impairment method
as of December 31, 2010.

|                                                      |  |            |         |              |   |                           |   |                         |        |                                       |   |                          |  |          |        |             |   |        |  |   |        |  |   |      |   |   |         |  | 
|----------------------------------------------------- |  | ---------- | ------- | ------------ | - | ------------------------- | - | ----------------------- | ------ | ------------------------------------- | - | ------------------------ |  | -------- | ------ | ----------- | - | ------ |  | - | ------ |  | - | ---- | - | - | ------- |  | 
|                                                      |  | Commercial |         | Agricultural |   | Agricultural
 Real Estate |   | Commercial
 Real Estate |        | Commercial
 Real Estate 
 Development |   | Residential
 Real Estate |  | Consumer |        | Unallocated |   | Total  | 
|                                                      |  |            |         |              |   |                           |   |                         |        |                                       |   |                          |  |          |        |             |   |        | 
|Allowance for Loan Losses                             |  |            |         |              |   |                           |   |                         |        |                                       |   |                          |  |          |        |             |   |        |  |   |        |  |   |      |   |   |         | 
|Balance, beginning of year                            |  | $          | 181     |              | $ | 129                       |   | $                       | 1,181  |                                       | $ | 2,661                    |  | $        | 3,022  |             | $ | 3,419  |  | $ | 1,059  |  | $ | 423  |   | $ | 12,075  | 
|Provision charged to expense                          |  |            | 9,134   |              |   | (173                      | ) |                         | (1,054 | )                                     |   | 4,828                    |  |          | 25,681 |             |   | 745    |  |   | 1,774  |  |   | (385 | ) |   | 40,550  | 
|Less: loans charged off                               |  |            | 4,888   |              |   | -0-                       |   |                         | 68     |                                       |   | 1,460                    |  |          | 13,177 |             |   | 2,267  |  |   | 1,306  |  |   | -0-  |   |   | 23,166  | 
|Recoveries                                            |  |            | 8       |              |   | 143                       |   |                         | 48     |                                       |   | -0-                      |  |          | -0-    |             |   | -0-    |  |   | 68     |  |   | -0-  |   |   | 267     | 
|                                                      |  |            |         |              |   |                           |   |                         |        |                                       |   |                          |  |          |        |             |   |        |  |   |        |  |   |      |   |   |         | 
|Balance, end of year                                  |  | $          | 4,435   |              | $ | 99                        |   | $                       | 107    |                                       | $ | 6,029                    |  | $        | 15,526 |             | $ | 1,897  |  | $ | 1,595  |  | $ | 38   |   | $ | 29,726  | 
|                                                      |  |            |         |              |   |                           |   |                         |        |                                       |   |                          |  |          |        |             |   |        |  |   |        |  |   |      |   |   |         | 
|Ending Balance: individually evaluated for impairment |  | $          | 1,004   |              | $ | -0-                       |   | $                       | -0-    |                                       | $ | 3,425                    |  | $        | 6,906  |             | $ | 484    |  | $ | 426    |  | $ | -0-  |   | $ | 12,245  | 
|                                                      |  |            |         |              |   |                           |   |                         |        |                                       |   |                          |  |          |        |             |   |        |  |   |        |  |   |      |   |   |         | 
|Ending Balance: collectively evaluated for impairment |  | $          | 3,431   |              | $ | 99                        |   | $                       | 107    |                                       | $ | 2,604                    |  | $        | 8,620  |             | $ | 1,413  |  | $ | 1,169  |  | $ | 38   |   | $ | 17,481  | 
|                                                      |  |            |         |              |   |                           |   |                         |        |                                       |   |                          |  |          |        |             |   |        |  |   |        |  |   |      |   |   |         | 
|                                                      |  |            |         |              |   |                           |   |                         |        |                                       |   |                          |  |          |        |             |   |        |  |   |        |  |   |      |   |   |         | 
|Loans                                                 |  |            |         |              |   |                           |   |                         |        |                                       |   |                          |  |          |        |             |   |        |  |   |        |  |   |      |   |   |         | 
|Ending Balance                                        |  | $          | 138,325 |              | $ | 78,086                    |   | $                       | 46,361 |                                       | $ | 205,301                  |  | $        | 88,402 |             | $ | 90,869 |  | $ | 56,730 |  | $ | -0-  |   | $ | 704,074 | 
|                                                      |  |            |         |              |   |                           |   |                         |        |                                       |   |                          |  |          |        |             |   |        |  |   |        |  |   |      |   |   |         | 
|Ending Balance: individually evaluated for impairment |  | $          | 2,085   |              | $ | -0-                       |   | $                       | -0-    |                                       | $ | 18,130                   |  | $        | 18,334 |             | $ | 3,873  |  | $ | 734    |  | $ | -0-  |   | $ | 43,156  | 
|                                                      |  |            |         |              |   |                           |   |                         |        |                                       |   |                          |  |          |        |             |   |        |  |   |        |  |   |      |   |   |         | 
|Ending Balance: collectively evaluated for impairment |  | $          | 136,240 |              | $ | 78,086                    |   | $                       | 46,361 |                                       | $ | 187,171                  |  | $        | 70,068 |             | $ | 86,996 |  | $ | 55,996 |  | $ | -0-  |   | $ | 660,918 | 
|                                                      |  |            |         |              |   |                           |   |                         |        |                                       |   |                          |  |          |        |             |   |        |  |   |        |  |   |      |   |   |         | 

Changes
in the allowance for loan losses for the years ended December 31, 2009 and 2008
were as follows:

|                                           |  |      |        |      |   |        |  
|------------------------------------------ |  | ---- | ------ | ---- | - | ------ | -
|                                           |  | 2009 |        | 2008 |  
|Balance, January 1                         |  | $    | 5,064  |      | $ | 3,248  |  
|Provision for loan losses                  |  |      | 11,602 |      |   | 2,968  |  
|Loans charged off                          |  |      | (4,256 | )    |   | (1,334 | )
|Recoveries of loans previously charged off |  |      | 205    |      |   | 182    |  
|                                           |  |      |        |      |   |        |  
|Balance, December 31                       |  | $    | 12,075 |      | $ | 5,064  |  
|                                           |  |      |        |      |   |        |  

19

---



Notes to Consolidated Financial Statements (Continued)
(dollar amounts in thousands except share data)

The
following tables present the credit risk profile of the Corporations loan
portfolio based on rating category and payment activity as of December 31,
2010:

Commercial
Credit Exposure: Credit Risk Profile by Creditworthiness Category

|              |  |            |         |              |   |                            |  |                          |        |                                        |   |         |  |   |        |  |   |         | 
|------------- |  | ---------- | ------- | ------------ | - | -------------------------- |  | ------------------------ | ------ | -------------------------------------- | - | ------- |  | - | ------ |  | - | ------- | 
|Risk
 Rating: |  | Commercial |         | Agricultural |   | Agricultural 
 Real Estate |  | Commercial 
 Real Estate |        | Commercial 
 Real Estate 
 Development |   | Total   | 
|1-2           |  | $          | 3,921   |              | $ | 12,680                     |  | $                        | 5,346  |                                        | $ | 5,676   |  | $ | 52     |  | $ | 27,675  | 
|3             |  |            | 90,147  |              |   | 41,653                     |  |                          | 27,742 |                                        |   | 101,219 |  |   | 13,631 |  |   | 274,392 | 
|4             |  |            | 23,495  |              |   | 17,319                     |  |                          | 9,195  |                                        |   | 29,985  |  |   | 8,744  |  |   | 88,738  | 
|5             |  |            | 3,370   |              |   | 2,994                      |  |                          | 3,385  |                                        |   | 25,814  |  |   | 22,414 |  |   | 57,977  | 
|6             |  |            | 17,392  |              |   | 3,440                      |  |                          | 693    |                                        |   | 42,607  |  |   | 43,561 |  |   | 107,693 | 
|7             |  |            | -0-     |              |   | -0-                        |  |                          | -0-    |                                        |   | -0-     |  |   | -0-    |  |   | -0-     | 
|              |  |            |         |              |   |                            |  |                          |        |                                        |   |         |  |   |        |  |   |         | 
|Total         |  | $          | 138,325 |              | $ | 78,086                     |  | $                        | 46,361 |                                        | $ | 205,301 |  | $ | 88,402 |  | $ | 556,475 | 
|              |  |            |         |              |   |                            |  |                          |        |                                        |   |         |  |   |        |  |   |         | 

Consumer
Credit Exposure: Credit Risk Profile by Creditworthiness Category

|                |  |                           |        |          |   |        |  |   |         | 
|--------------- |  | ------------------------- | ------ | -------- | - | ------ |  | - | ------- | 
|Risk
 Rating:   |  | Residential 
 Real Estate |        | Consumer |   | Total  | 
|Pass            |  | $                         | 81,504 |          | $ | 53,958 |  | $ | 135,462 | 
|Special Mention |  |                           | 314    |          |   | 147    |  |   | 461     | 
|Substandard     |  |                           | 9,051  |          |   | 2,539  |  |   | 11,590  | 
|Doubtful        |  |                           | -0-    |          |   | 86     |  |   | 86      | 
|                |  |                           |        |          |   |        |  |   |         | 
|Total           |  | $                         | 90,869 |          | $ | 56,730 |  | $ | 147,599 | 
|                |  |                           |        |          |   |        |  |   |         | 

Credit Quality Indicators

The
Corporation categorizes loans into risk categories based on relevant
information about the ability of borrowers to service their debt such as
current financial information, historical payment experience, credit
documentation, public information and current economic trends among other
factors. The Corporation analyzes loans individually by classifying the loans
as to credit risk. This analysis is performed on all loans at origination and
regularly reviewed by the Risk Management department.

The
Corporation has established a uniform internal risk rating methodology for
commercial loans utilizing risk grades from 1 through 7, with 1 being
considered excellent and the rating of 7 being considered doubtful. A summary
of the general definitions for the risk ratings follows:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1 | Prime Quality: This
 category includes all obligors whose balance sheet, current position,
 capitalization, profitability and cash flow have been demonstrated to be
 consistently of such high quality that the potential for significant
 disruption in their financial performance is virtually nonexistent. Such
 borrowers have excellent management in place with depth, well defined and
 established product lines or services, and operate businesses generally
 isolated from the normal influences of the business cycle.                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 2 | High Quality: Borrowers
 assigned this rating are considered above average with high quality and
 excellent credit standards based on leverage, liquidity and debt coverage
 ratios, as well as having excellent management in critical areas.                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 3 | Satisfactory Average
 Quality: This category includes borrowers that have average leverage,
 liquidity and debt service ratios that compare favorably with industry
 standards.                                                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 4 | Low Pass: This risk rating
 includes borrowers that have below average leverage, liquidity and debt
 service coverage ratios and management that may not be as solid on a
 historical basis or may compare less favorably with industry standards but
 are still considered acceptable.                                                                                                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 5 | Watch/Special Mention
 (OAEM): A borrower assigned to this rating category exhibits potential
 weaknesses or early warning signals that deserve close monitoring by
 management. If left uncorrected, these potential weaknesses may result in the
 borrower being unable to meet its financial obligations at some future date.                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 6 | Substandard: A substandard
 rating is assigned to a borrower whose credit is inadequately protected by
 the paying capacity of the borrower, or by the collateral pledged, if any.
 Loans so classified have a well-defined weakness or weaknesses that
 jeopardize the liquidation of the debt. These credits are characterized by
 the distinct possibility that the Corporation will sustain some loss if
 deficiencies are not corrected.                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 7 | Doubtful: Borrowers
 assigned to this rating category have all of the weaknesses inherent in a
 substandard rating with the added factor that the weaknesses are pronounced
 to the point where, on the basis of current facts, conditions and values,
 collection or liquidation in full is highly questionable or improbable. While
 the possibility of loss is extremely high, the existence of specific pending
 factors, which may work to the borrowers advantage, warrants that the
 estimated loss be deferred until a more exact status can be determined.

The
Corporation classifies consumer loans in the risk rating classifications of
Pass, Special Mention, Substandard and Doubtful. These classifications
generally conform to the risk rating methodology for commercial loans as
follows: Pass - risk rating 1 through 4; Special Mention - risk rating 5;
Substandard - risk rating 6; Doubtful - risk rating 7.

20

---



The following table presents the Corporations
loan portfolio aging analysis as of December 31, 2010:

|                                   |  |                       |        |                       |   |                     |  |                  |        |                 |   |               |  |                          |         |  |   |         |  |   |       | 
|---------------------------------- |  | --------------------- | ------ | --------------------- | - | ------------------- |  | ---------------- | ------ | --------------- | - | ------------- |  | ------------------------ | ------- |  | - | ------- |  | - | ----- | 
|                                   |  | 30-59 Days 
 Past Due |        | 60-89 Days 
 Past Due |   | >90 Days 
 Past Due |  | Total 
 Past Due |        | Total 
 Current |   | Total 
 Loans |  | > 90 Days and 
 Accruing |        
|                                   |  |                       |        |                       |   |                     |  |                  |        |                 |   |               |  |                          |        
|Commercial                         |  | $                     | 2,221  |                       | $ | 420                 |  | $                | 222    |                 | $ | 2,863         |  | $                        | 126,621 |  | $ | 129,484 |  | $ | 222   | 
|Agricultural                       |  |                       | 284    |                       |   | -0-                 |  |                  | -0-    |                 |   | 284           |  |                          | 75,892  |  |   | 76,176  |  |   | -0-   | 
|Agricultural Real Estate           |  |                       | 249    |                       |   | -0-                 |  |                  | -0-    |                 |   | 249           |  |                          | 45,667  |  |   | 45,916  |  |   | -0-   | 
|Commercial Real Estate             |  |                       | 3,288  |                       |   | 1,324               |  |                  | 1,140  |                 |   | 5,752         |  |                          | 173,890 |  |   | 179,642 |  |   | 1,140 | 
|Commercial Real Estate Development |  |                       | 669    |                       |   | -0-                 |  |                  | -0-    |                 |   | 669           |  |                          | 50,642  |  |   | 51,311  |  |   | -0-   | 
|Residential Real Estate            |  |                       | 4,340  |                       |   | 1,601               |  |                  | 199    |                 |   | 6,140         |  |                          | 77,970  |  |   | 84,110  |  |   | 199   | 
|Consumer                           |  |                       | 681    |                       |   | 156                 |  |                  | -0-    |                 |   | 837           |  |                          | 55,176  |  |   | 56,013  |  |   | -0-   | 
|Non-Accrual                        |  |                       | 846    |                       |   | 8,390               |  |                  | 53,393 |                 |   | 62,629        |  |                          | 18,793  |  |   | 81,422  |  |   | -0-   | 
|                                   |  |                       |        |                       |   |                     |  |                  |        |                 |   |               |  |                          |         |  |   |         |  |   |       | 
|Total                              |  | $                     | 12,578 |                       | $ | 11,891              |  | $                | 54,954 |                 | $ | 79,423        |  | $                        | 624,651 |  | $ | 704,074 |  | $ | 1,561 | 
|                                   |  |                       |        |                       |   |                     |  |                  |        |                 |   |               |  |                          |         |  |   |         |  |   |       | 

A
loan is considered impaired, in accordance with the impairment accounting
guidance (ASC 310-10-35-16), when based on current information and events it is
probable the Corporation will be unable to collect all amounts due from the
borrower in accordance with the contractual terms of the loan. Impaired loans
include non-performing loans but also include loans modified in troubled debt
restructurings where concessions have been granted to borrowers experiencing
financial difficulties. These concessions could include a reduction in the
interest rate on the loan, payment extensions, forgiveness of principal,
forbearance or other actions intended to maximize collection.

The
following table presents impaired loans for the year ended December 31, 2010:

|                                     |  |                    |        |                              |   |                      |  |                                            |        |                                |   |        |  |   |       | 
|------------------------------------ |  | ------------------ | ------ | ---------------------------- | - | -------------------- |  | ------------------------------------------ | ------ | ------------------------------ | - | ------ |  | - | ----- | 
|                                     |  | Recorded 
 Balance |        | Unpaid 
 Principal 
 Balance |   | Specific 
 Allowance |  | Average 
 Investment 
 in Impaired 
 Loans |        | Interest 
 Income 
 Recognized |  
|                                     |  |                    |        |                              |   |                      |  |                                            |        |                                |  
|With no related allowance
 recorded: |  |                    |        |                              |   |                      |  |                                            |        |                                |   |        |  |   |       | 
|Commercial                           |  | $                  | 9,887  |                              | $ | 11,660               |  | $                                          | -0-    |                                | $ | 5,874  |  | $ | 36    | 
|Commercial Real Estate               |  |                    | 12,903 |                              |   | 13,220               |  |                                            | -0-    |                                |   | 8,915  |  |   | 480   | 
|Commercial Real Estate Development   |  |                    | 26,695 |                              |   | 36,909               |  |                                            | -0-    |                                |   | 21,573 |  |   | 225   | 
|Residential Real Estate              |  |                    | 4,680  |                              |   | 5,306                |  |                                            | -0-    |                                |   | 5,591  |  |   | 96    | 
|Consumer                             |  |                    | -0-    |                              |   | -0-                  |  |                                            | -0-    |                                |   | -0-    |  |   | -0-   | 
|With an allowance recorded:          |  |                    |        |                              |   |                      |  |                                            |        |                                |   |        |  |   |       | 
|Commercial                           |  | $                  | 1,908  |                              | $ | 2,095                |  | $                                          | 1,004  |                                | $ | 1,384  |  | $ | 59    | 
|Commercial Real Estate               |  |                    | 18,130 |                              |   | 18,130               |  |                                            | 3,425  |                                |   | 9,065  |  |   | 77    | 
|Commercial Real Estate Development   |  |                    | 18,507 |                              |   | 18,507               |  |                                            | 6,906  |                                |   | 14,444 |  |   | 428   | 
|Residential Real Estate              |  |                    | 3,873  |                              |   | 3,873                |  |                                            | 484    |                                |   | 3,505  |  |   | 82    | 
|Consumer                             |  |                    | 768    |                              |   | 735                  |  |                                            | 426    |                                |   | 679    |  |   | 14    | 
|Total:                               |  |                    |        |                              |   |                      |  |                                            |        |                                |   |        |  |   |       | 
|Commercial                           |  | $                  | 88,030 |                              | $ | 100,521              |  | $                                          | 11,335 |                                | $ | 61,254 |  | $ | 1,305 | 
|                                     |  |                    |        |                              |   |                      |  |                                            |        |                                |   |        |  |   |       | 
|Residential                          |  | $                  | 8,553  |                              | $ | 9,179                |  | $                                          | 484    |                                | $ | 9,096  |  | $ | 178   | 
|                                     |  |                    |        |                              |   |                      |  |                                            |        |                                |   |        |  |   |       | 
|Consumer                             |  | $                  | 768    |                              | $ | 735                  |  | $                                          | 426    |                                | $ | 679    |  | $ | 14    | 
|                                     |  |                    |        |                              |   |                      |  |                                            |        |                                |   |        |  |   |       | 

Included
in certain loan categories in the impaired loans are troubled debt
restructurings that were classified as impaired. At December 31, 2010, the
Corporation had $1,672 of residential real estate loans, $330 of consumer
loans, $5,293 of commercial real estate development loans and $16,091 of
commercial real estate loans that were modified in troubled debt restructurings
and impaired. Of these amounts, the Corporation had troubled debt restructurings
that were performing in accordance with their modified terms of $1,522 of
residential real estate loans, $262 of consumer loans, $5,293 of commercial
real estate development loans and $14,757 of commercial real estate loans at
December 31, 2010.

The
following table presents the Corporations non-accrual loans at December 31,
2010 and 2009. This table excludes accruing troubled debt restructurings.

|                                   |  |      |        |      |   |        | 
|---------------------------------- |  | ---- | ------ | ---- | - | ------ | 
|                                   |  | 2010 |        | 2009 |  
|Commercial                         |  | $    | 8,841  |      | $ | 10,751 | 
|Agricultural                       |  |      | 1,910  |      |   | 110    | 
|Agricultural Real Estate           |  |      | 444    |      |   | 444    | 
|Commercial Real Estate             |  |      | 25,659 |      |   | 16,169 | 
|Commercial Real Estate Development |  |      | 37,091 |      |   | 16,367 | 
|Residential Real Estate            |  |      | 6,760  |      |   | 7,024  | 
|Consumer                           |  |      | 717    |      |   | 621    | 
|                                   |  |      |        |      |   |        | 
|Total                              |  | $    | 81,422 |      | $ | 51,486 | 
|                                   |  |      |        |      |   |        | 

Interest
income that would have been recorded on these non-accrual loans, had they
remained current, was approximately $5,694, $3,256 and $1,449, respectively. At
December 31, 2010, 2009 and 2008, accruing loans delinquent 90 days or more
totaled $1,561, $2,087 and $2,655, respectively.

Impaired
loans at December 31, 2009 and 2008 totaled $44,116 and $25,128, respectively,
and consisted of commercial, commercial real estate, commercial real estate
development and residential real estate loans. Of these totals, $14,376 and
$1,976 of loans had valuation reserves totaling $4,472 and $370 at December 31,
2009 and 2008, respectively. For the years ended December 31, 2009 and 2008,
the average recorded investment in impaired loans was approximately $23,139 and
$10,414, respectively. Interest recognized on impaired loans during the portion
of the year that they were impaired was not material.

21

---



Notes to Consolidated Financial Statements(Continued)
(dollar amounts in thousands except share data)

The
Corporations subsidiary bank had loans outstanding to directors, executive
officers and to their related interests (related parties) of the Corporation
and its subsidiary bank of approximately $2,404, $9,394 and $6,356, at December
31, 2010, 2009 and 2008, respectively. These loans were made in the ordinary
course of business on substantially the same terms and conditions, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other customers and did not involve more than the normal risk
of collectibility. As a practice, the subsidiary bank does not make loans to
its executive officers. A summary of the activity in 2010 for loans made to
directors, executive officers or principal holders of common stock or to any
associate of such persons for which the aggregate to any such person exceeds
$60 at December 31, 2010 is as follows:

| |  |                          |   |                            |  |           |  |          |        |                            |  |  |   |       |  |  |  |   |       |  |  |  |   |       |  | 
| |  | ------------------------ | - | -------------------------- |  | --------- |  | -------- | ------ | -------------------------- |  |  | - | ----- |  |  |  | - | ----- |  |  |  | - | ----- |  | 
| |  | Balance
 January 1, 2010 |   | Change in
 Related Parties |  | Additions |  | Payments |        | Balance
 December 31, 2010 | 
| |  |                          |   |                            |  |           |  |          |        |                            | 
| |  |                          | $ | 9,394                      |  |           |  | $        | (5,197 | )                          |  |  | $ | 5,455 |  |  |  | $ | 7,248 |  |  |  | $ | 2,404 |  | 

6. Premises and Equipment

As
of December 31, the components of premises and equipment (at cost), less
accumulated depreciation, were as follows:

|                                |  |      |        |      |   |        | 
|------------------------------- |  | ---- | ------ | ---- | - | ------ | 
|                                |  | 2010 |        | 2009 |  
|Land                            |  | $    | 6,175  |      | $ | 6,170  | 
|Buildings                       |  |      | 30,398 |      |   | 30,364 | 
|Furniture and Equipment         |  |      | 23,597 |      |   | 22,929 | 
|                                |  |      |        |      |   |        | 
|                                |  |      | 60,170 |      |   | 59,463 | 
|Less: accumulated
 depreciation |  |      | 33,269 |      |   | 31,194 | 
|                                |  |      |        |      |   |        | 
|Total                           |  | $    | 26,901 |      | $ | 28,269 | 
|                                |  |      |        |      |   |        | 

The
Corporation owns separate lots in Elburn, Aurora and Somonauk, Illinois that
have been removed from the land balance and are shown on the Corporations
balance sheet as land held-for-sale, at the lower of cost or market. The land
in Elburn, approximately 2 acres, was purchased in 2003 in anticipation of the
construction of a branch facility and has a cost basis of $820 at December 31,
2010, down from $930 at December 31, 2009, due to a write down of $110 in 2010.
The land in Aurora, consisting of two lots remaining from the original purchase
of 14 acres in 2004 which was used to construct a branch facility, has a cost
basis of $1,344. The land in Somonauk, acquired in 2005 during the acquisition
of FSB Bancorp, Inc., consists of approximately 2 acres with a cost basis of
$80.

Depreciation
expense charged to operating expense for 2010, 2009 and 2008 was $2,075, $2,170
and $2,219, respectively.

7. Goodwill

The changes in carrying
amount of goodwill for the year ended December 31, 2009 was:

|                           |  |      |         |  
|-------------------------- |  | ---- | ------- | -
|                           |  | 2009 |        
|                           |  |      |        
|Balance as of January 1    |  | $    | 24,521  |  
|Goodwill impairment losses |  |      | (24,521 | )
|                           |  |      |         |  
|Balance as of December 31  |  | $    | -0-     |  
|                           |  |      |         |  

In
accordance with ASC 350, formerly SFAS No. 142, the Corporations goodwill was
tested annually for potential impairment and more frequently if events or
changes in circumstances indicated the asset might be impaired. Due to the
decline in the Corporations stock price and the additional provision for loan
losses and increased nonperforming assets, the Corporation hired a valuation
specialist to perform a valuation of the Corporations goodwill to test for
impairment at December 31, 2009.

ASC
350 has a two-step process to test goodwill for impairment. The first step is
to compare the estimated fair value, including goodwill, of the reporting unit
(the Corporation) to its net book value. If the estimated fair value is less
than the net book value, a second step is required. The Corporation evaluated
the first step by utilizing three valuation methodologies including the
Comparable Transactions approach, the Control Premium approach and the
Discounted Cash Flow approach. The Comparable Transactions approach is based on
pricing ratios recently paid in the sale or merger of reasonably comparable
banking franchises; the Control Premium approach is based on the Corporations
trading price and application of industry based control premiums, and the
Discounted Cash Flow approach is estimated based on the present value of
projected dividends and a terminal value, based on a five-year forward-looking
operating scenario. Based on the three approaches, it was determined the fair
value, including goodwill, was lower than its net book value. This was
primarily due to the Corporations continued stock price decline, the
additional provisions for loan losses and increased nonperforming assets.

Therefore,
the Corporation performed the second step as required by ASC 350. In the second
step of the process, the implied fair value of the Corporations goodwill
(determined by comparing the estimated fair value of the Corporation to the sum
of the fair values of the Corporations tangible and separately identifiable
intangible net assets as determined by ASC 805, formerly SFAS No. 141R) was
compared with the carrying value of goodwill in order to determine the amount
of impairment. As a result of the second step of the process, the Corporation
determined that the goodwill was fully impaired as of December 31, 2009 and
recorded an impairment charge of $24,521 in the fourth quarter of 2009.

22

---



8. Intangible Assets

The
balance of intangible assets, net of accumulated amortization, totaled $2,531
and $3,347 at December 31, 2010 and December 31, 2009, respectively.           The
following table summarizes the Corporations intangible assets, which are
subject to amortization, as of December 31, 2010 and 2009:

|                        |  |                        |       |                           |   |                        |   |                           |       |  |   |        |  
|----------------------- |  | ---------------------- | ----- | ------------------------- | - | ---------------------- | - | ------------------------- | ----- |  | - | ------ | -
|                        |  | 2010                   |       | 2009                      |  
|                        |  | Gross Carrying
 Amount |       | Accumulated
 Amortization |   | Gross Carrying
 Amount |   | Accumulated
 Amortization |      
|                        |  |                        |       |                           |   |                        |   |                           |      
|Core deposit intangible |  | $                      | 9,004 |                           | $ | (6,522                 | ) | $                         | 9,004 |  | $ | (5,715 | )
|Other acquisition costs |  |                        | 234   |                           |   | (185                   | ) |                           | 234   |  |   | (176   | )
|                        |  |                        |       |                           |   |                        |   |                           |       |  |   |        |  
|Total                   |  | $                      | 9,238 |                           | $ | (6,707                 | ) | $                         | 9,238 |  | $ | (5,891 | )
|                        |  |                        |       |                           |   |                        |   |                           |       |  |   |        |  

Intangible
asset amortization expense charged to operating expense for 2010, 2009 and 2008
was $816, $860 and $714, respectively. The following table shows the future
estimated amortization expense for the Corporations intangible assets based on
existing balances as of December 31, 2010:

Estimated
Amortization Expense for the years ended December 31:

|           |  |   |     | 
|---------- |  | - | --- | 
|2011       |  | $ | 653 | 
|2012       |  |   | 549 | 
|2013       |  |   | 526 | 
|2014       |  |   | 504 | 
|2015       |  |   | 289 | 
|Thereafter |  |   | 10  | 

Mortgage
servicing rights, which are included in other assets on the Consolidated
Balance Sheets, are accounted for on an individual loan-by-loan basis.
Accordingly, amortization is recorded in proportion to the amount of principal
payment received on loans serviced. The mortgage servicing rights are subject
to periodic impairment testing. As of December 31, 2010, the Corporation
recognized a valuation allowance on mortgage servicing rights of $110. The valuation
allowance includes impairment charges of $922, as well as a subsequent recovery
of $812 during 2010. As of December 31, 2009, the Corporation recognized a
valuation allowance on mortgage servicing rights of $185. Changes in the
carrying value of mortgage servicing rights are summarized as follows:

|                                 |  |      |       |      |   |       |   |   |       |  
|-------------------------------- |  | ---- | ----- | ---- | - | ----- | - | - | ----- | -
|                                 |  | 2010 |       | 2009 |   | 2008  |  
|Balance, January 1               |  | $    | 3,285 |      | $ | 2,936 |   | $ | 2,498 |  
|Servicing rights capitalized     |  |      | 900   |      |   | 1,196 |   |   | 815   |  
|Amortization of servicing rights |  |      | (690  | )    |   | (662  | ) |   | (377  | )
|Valuation adjustment             |  |      | (110  | )    |   | (185  | ) |   | -0-   |  
|                                 |  |      |       |      |   |       |   |   |       |  
|Balance, December 31             |  | $    | 3,385 |      | $ | 3,285 |   | $ | 2,936 |  
|                                 |  |      |       |      |   |       |   |   |       |  

Activity in the valuation allowance for
mortgage servicing rights was as follows:

|                     |  |      |      |      |   |      |   |   |     | 
|-------------------- |  | ---- | ---- | ---- | - | ---- | - | - | --- | 
|                     |  | 2010 |      | 2009 |   | 2008 |  
|Balance, January 1   |  | $    | 185  |      | $ | -0-  |   | $ | -0- | 
|Additions            |  |      | 922  |      |   | 556  |   |   | -0- | 
|Reductions           |  |      | (812 | )    |   | (371 | ) |   | -0- | 
|                     |  |      |      |      |   |      |   |   |     | 
|Balance, December 31 |  | $    | 295  |      | $ | 185  |   | $ | -0- | 
|                     |  |      |      |      |   |      |   |   |     | 

The
following table shows the future estimated amortization expense for mortgage
servicing rights based on existing balances as of December 31, 2010. The
Corporations actual amortization expense in any given period may be
significantly different from the estimated amounts displayed, depending on the
amount of additional mortgage servicing rights, changes in mortgage interest
rates, estimated prepayment speeds and market conditions.

Estimated
Amortization Expense for the year ended December 31:

|           |  |   |       | 
|---------- |  | - | ----- | 
|2011       |  | $ | 381   | 
|2012       |  |   | 357   | 
|2013       |  |   | 335   | 
|2014       |  |   | 314   | 
|2015       |  |   | 295   | 
|Thereafter |  |   | 1,703 | 

The
Corporation services loans for others with unpaid principal balances at
December 31, 2010, 2009 and 2008 of approximately $395,046, $363,862 and
$304,551, respectively.

23

---



Notes to Consolidated Financial Statements(Continued)
(dollar amounts in thousands except share data)

9. Deposits

As
of December 31, the aggregate amounts of time deposits in denominations of $100
or more and related interest expense were as follows:

|                               |  |      |         |      |   |         |  |   |         | 
|------------------------------ |  | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                               |  | 2010 |         | 2009 |   | 2008    | 
|Amount                         |  | $    | 146,685 |      | $ | 193,449 |  | $ | 232,811 | 
|Interest expense for the
 year |  |      | 1,883   |      |   | 4,044   |  |   | 4,124   | 

Total
interest expense on deposits for the years ending December 31 was as follows:

|                        |  |      |        |      |   |        |  |   |        | 
|----------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                        |  | 2010 |        | 2009 |   | 2008   | 
|Interest-bearing demand |  | $    | 2,972  |      | $ | 3,734  |  | $ | 3,647  | 
|Savings                 |  |      | 62     |      |   | 55     |  |   | 67     | 
|Time                    |  |      | 7,351  |      |   | 15,431 |  |   | 20,068 | 
|                        |  |      |        |      |   |        |  |   |        | 
|Total                   |  | $    | 10,385 |      | $ | 19,220 |  | $ | 23,782 | 
|                        |  |      |        |      |   |        |  |   |        | 

At
December 31, 2010, the scheduled maturities of time deposits are as follows:

|           |  |   |         | 
|---------- |  | - | ------- | 
|2011       |  | $ | 316,816 | 
|2012       |  |   | 42,055  | 
|2013       |  |   | 2,950   | 
|2014       |  |   | 1,184   | 
|2015       |  |   | 3,311   | 
|Thereafter |  |   | 19      | 
|           |  |   |         | 
|Total      |  | $ | 366,335 | 
|           |  |   |         | 

10. Borrowings

As
of December 31, borrowings consisted of the following:

|                                                          |  |        |        |                         |  |        |   |                         |         |  |  |      |  
|--------------------------------------------------------- |  | ------ | ------ | ----------------------- |  | ------ | - | ----------------------- | ------- |  |  | ---- | -
|                                                          |  | 2010   |        | 2009                    | 
|                                                          |  | Amount |        | Weighted
 Average
 Rate |  | Amount |   | Weighted
 Average
 Rate |        
|                                                          |  |        |        |                         |  |        |   |                         |        
|Customer repurchase agreements                            |  | $      | 35,806 |                         |  | 0.63   | % | $                       | 47,327  |  |  | 1.03 | %
|Advances from the Federal Home Loan Bank of Chicago due:  |  |        |        |                         |  |        |   |                         |         |  |  |      |  
|February 1, 2010                                          |  |        | -0-    |                         |  | n/a    |   |                         | 5,000   |  |  | 2.87 |  
|March 19, 2010                                            |  |        | -0-    |                         |  | n/a    |   |                         | 4,000   |  |  | 3.45 |  
|August 27, 2010                                           |  |        | -0-    |                         |  | n/a    |   |                         | 2,500   |  |  | 2.00 |  
|September 19, 2010                                        |  |        | -0-    |                         |  | n/a    |   |                         | 4,000   |  |  | 3.60 |  
|December 20, 2010                                         |  |        | -0-    |                         |  | n/a    |   |                         | 7,000   |  |  | 2.19 |  
|March 21, 2011                                            |  |        | 4,000  |                         |  | 1.23   |   |                         | 4,000   |  |  | 1.23 |  
|May 23, 2011                                              |  |        | 5,000  |                         |  | 0.99   |   |                         | 5,000   |  |  | 0.99 |  
|Interest-bearing demand notes issued to the U.S. Treasury |  |        | 1,753  |                         |  | 0.00   |   |                         | 1,021   |  |  | 0.00 |  
|Trust preferred securities                                |  |        | 25,000 |                         |  | 4.55   |   |                         | 25,000  |  |  | 5.68 |  
|                                                          |  |        |        |                         |  |        |   |                         |         |  |  |      |  
|Total                                                     |  | $      | 71,559 |                         |  | 2.04   | % | $                       | 104,848 |  |  | 2.51 | %
|                                                          |  |        |        |                         |  |        |   |                         |         |  |  |      |  

The
subsidiary bank has adopted a collateral pledge agreement whereby they agree to
keep on hand at all times, free of all other pledges, liens and encumbrances,
first mortgages with unpaid principal balances aggregating no less than 167% of
the outstanding secured advances from the Federal Home Loan Bank of Chicago
(FHLB). The advances from the FHLB, which have fixed interest rates ranging
from 0.99% to 1.23% as of December 31, 2010, are subject to restrictions or
penalties in the event of prepayment. All stock in the FHLB is also pledged as
additional collateral for these advances.

On
July 15, 2005, the Corporation, through its subsidiary PNBC Capital Trust I,
issued trust preferred securities in the amount of $25,000. These securities
were issued to help finance the acquisition of Somonauk FSB Bancorp, Inc.
Additionally, these securities have a maturity of thirty years and a fixed
interest rate of 5.68% for the first five years to July 15, 2010. The interest
then adjusts to a floating rate at the three-month LIBOR plus 154 basis points.
The rate on December 31, 2010 was LIBOR plus 154 basis points, or 1.84%. While
these securities are recorded as a liability for financial reporting purposes,
a portion qualifies as Tier 1 capital for regulatory purposes. According to the
provisions of ASC Topic 810, Consolidation of Variable Interest Entities,
PNBC Capital Trust I is a variable interest entity which is not required to be
consolidated by the Corporation.

On
January 24, 2011, the Corporation provided notice to Bank of America, N.A., as
successor trustee by merger, of the Corporations $25,000 in junior
subordinated debt securities due 2035 (PNBC Capital Trust I) that the
Corporation is exercising its right to defer interest payments for a period of
twenty (20) consecutive quarterly interest payment periods beginning with the
next interest payment period of March 15, 2011, unless the Corporation
subsequently gives notice that it has elected to shorten such deferral period.

Customer
repurchase agreements consist of obligations of the Bank to other parties. The
obligations are secured by investment securities and such collateral is held by
the Bank. The maximum amount of outstanding agreements at any month-end during
2010 and 2009 totaled $43,391 and $50,025, respectively, and the daily average
of such agreements totaled $36,981 and $37,921 for 2010 and 2009, respectively.
The agreements at December 31, 2010 are ongoing and as such have no fixed
maturity date.

24

---



11. Income
Taxes

Income
tax expense (benefit) consisted of the following:

|                               |  |         |        |          |   |         |   |   |         |  
|------------------------------ |  | ------- | ------ | -------- | - | ------- | - | - | ------- | -
|                               |  | Current |        | Deferred |   | Total   |  
|                               |  |         |        |          |   |         |  
|Year ended
 December 31, 2010: |  |         |        |          |   |         |   |   |         |  
|Federal                        |  | $       | (1,843 | )        | $ | (7,863  | ) | $ | (9,706  | )
|State                          |  |         | -0-    |          |   | (2,198  | ) |   | (2,198  | )
|                               |  |         |        |          |   |         |   |   |         |  
|Total                          |  | $       | (1,843 | )        | $ | (10,061 | ) | $ | (11,904 | )
|                               |  |         |        |          |   |         |   |   |         |  
|                               |  |         |        |          |   |         |   |   |         |  
|Year ended December 31,
 2009: |  |         |        |          |   |         |   |   |         |  
|Federal                        |  | $       | 1,738  |          | $ | (3,191  | ) | $ | (1,453  | )
|State                          |  |         | 409    |          |   | (556    | ) |   | (147    | )
|                               |  |         |        |          |   |         |   |   |         |  
|Total                          |  | $       | 2,147  |          | $ | (3,747  | ) | $ | (1,600  | )
|                               |  |         |        |          |   |         |   |   |         |  
|Year ended December 31,
 2008: |  |         |        |          |   |         |   |   |         |  
|Federal                        |  | $       | 1,690  |          | $ | (391    | ) | $ | 1,299   |  
|State                          |  |         | 609    |          |   | (211    | ) |   | 398     |  
|                               |  |         |        |          |   |         |   |   |         |  
|Total                          |  | $       | 2,299  |          | $ | (602    | ) | $ | 1,697   |  
|                               |  |         |        |          |   |         |   |   |         |  

Income
tax expense (benefit) differed from the amounts computed by applying the U.S.
Federal income tax rate of 34 percent to pretax income (loss) as a result of
the following for the years ended December 31:

|                                                     |  |      |         |      |   |        |   |   |        |  
|---------------------------------------------------- |  | ---- | ------- | ---- | - | ------ | - | - | ------ | -
|                                                     |  | 2010 |         | 2009 |   | 2008   |  
|Computed expected tax
 expense (benefit)           |  | $    | (9,820  | )    | $ | (7,727 | ) | $ | 3,068  |  
|Increase (decrease) in
 income taxes resulting from: |  |      |         |      |   |        |   |   |        |  
|Tax-exempt income                                    |  |      | (1,391  | )    |   | (1,891 | ) |   | (1,439 | )
|Non-deductible interest expense                      |  |      | 67      |      |   | 118    |   |   | 131    |  
|State income taxes, net of federal tax benefit       |  |      | (1,452  | )    |   | (63    | ) |   | 240    |  
|Bank-owned life insurance income                     |  |      | (314    | )    |   | (350   | ) |   | (285   | )
|Non-deductible goodwill impairment                   |  |      | -0-     |      |   | 8,269  |   |   | -0-    |  
|Recharacterization of municipal income               |  |      | 962     |      |   | -0-    |   |   | -0-    |  
|Other, net                                           |  |      | 44      |      |   | 44     |   |   | (18    | )
|                                                     |  |      |         |      |   |        |   |   |        |  
|                                                     |  | $    | (11,904 | )    | $ | (1,600 | ) | $ | 1,697  |  
|                                                     |  |      |         |      |   |        |   |   |        |  

The
tax effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 2010 and
2009 are presented below:

|                                                                        |  |      |        |      |   |        |  
|----------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                                                        |  | 2010 |        | 2009 |  
|Deferred tax assets:                                                    |  |      |        |      |   |        |  
|Deferred compensation                                                   |  | $    | 143    |      | $ | 176    |  
|Allowance for loan losses                                               |  |      | 11,542 |      |   | 4,687  |  
|Nonaccrual loan interest income                                         |  |      | 942    |      |   | 408    |  
|AMT credit carryforwards                                                |  |      | 1,975  |      |   | 1,053  |  
|Post-retirement health benefit plan accrual                             |  |      | 441    |      |   | 441    |  
|Stock option expense                                                    |  |      | 104    |      |   | 70     |  
|Federal net operating losses, net                                       |  |      | 772    |      |   | -0-    |  
|State net operating losses, net of federal benefit                      |  |      | 526    |      |   | -0-    |  
|Other, net                                                              |  |      | 441    |      |   | 55     |  
|                                                                        |  |      |        |      |   |        |  
|Total gross deferred tax assets                                         |  |      | 16,886 |      |   | 6,890  |  
|                                                                        |  |      |        |      |   |        |  
|Deferred tax liabilities:                                               |  |      |        |      |   |        |  
|Buildings and equipment, principally due to differences in depreciation |  |      | (403   | )    |   | (589   | )
|Accretion                                                               |  |      | (32    | )    |   | (21    | )
|Purchase accounting adjustments                                         |  |      | (1,853 | )    |   | (2,069 | )
|FHLB stock dividends                                                    |  |      | (276   | )    |   | (276   | )
|Mortgage servicing rights                                               |  |      | (1,314 | )    |   | (1,275 | )
|Prepaid expenses                                                        |  |      | (353   | )    |   | (66    | )
|Unrealized gain on investment securities available-for-sale             |  |      | (2,143 | )    |   | (1,986 | )
|                                                                        |  |      |        |      |   |        |  
|Total gross deferred tax liabilities                                    |  |      | (6,374 | )    |   | (6,282 | )
|                                                                        |  |      |        |      |   |        |  
|Net deferred tax assets                                                 |  | $    | 10,512 |      | $ | 608    |  
|                                                                        |  |      |        |      |   |        |  

25

---



Notes to Consolidated Financial Statements(Continued)
(dollar amounts in thousands except share data)

During
2010, the Corporation filed amended tax returns for 2007 through 2009 to
recharacterize income on certain municipal securities determined to be taxable.
The effect was recognized in the 2010 tax provision as a change in estimate.

At
December 31, 2010 and 2009, the Company had alternative minimum tax credits of
$1,975 and $1,053, respectively, that can be carried forward indefinitely. At
December 31, 2010, the Company has a federal net operating loss carryforward of
$2,272 that will expire in 2030 and an Illinois net operating loss carryforward
of $10,913 that is suspended until 2014 and will expire in 2025. Management
believes it is more likely than not that the deferred tax assets will be
realized. Therefore, no valuation allowance has been recorded at December 31,
2010 and 2009.

12.
Comprehensive Income

Other
comprehensive income components and related taxes were as follows:

|                                                                  |  |      |       |      |   |        |   |   |       |  
|----------------------------------------------------------------- |  | ---- | ----- | ---- | - | ------ | - | - | ----- | -
|                                                                  |  | 2010 |       | 2009 |   | 2008   |  
|Net unrealized gains on securities available-for-sale             |  | $    | 1,127 |      | $ | 4,089  |   | $ | 2,107 |  
|Reclassification adjustment for realized gains included in income |  |      | (722  | )    |   | (1,781 | ) |   | (405  | )
|                                                                  |  |      |       |      |   |        |   |   |       |  
|                                                                  |  |      | 405   |      |   | 2,308  |   |   | 1,702 |  
|Defined benefit pension plan                                      |  |      |       |      |   |        |   |   |       |  
|Net prior service credit                                          |  |      | 62    |      |   | 62     |   |   | -0-   |  
|Amortization of transition obligation                             |  |      | -0-   |      |   | -0-    |   |   | 16    |  
|Net loss                                                          |  |      | (62   | )    |   | (88    | ) |   | -0-   |  
|                                                                  |  |      |       |      |   |        |   |   |       |  
|Other comprehensive income, before tax effect                     |  |      | 405   |      |   | 2,282  |   |   | 1,718 |  
|Tax expense                                                       |  |      | 157   |      |   | 868    |   |   | 660   |  
|                                                                  |  |      |       |      |   |        |   |   |       |  
|Other comprehensive income                                        |  | $    | 248   |      | $ | 1,414  |   | $ | 1,058 |  
|                                                                  |  |      |       |      |   |        |   |   |       |  

The
components of accumulated other comprehensive income included in stockholders
equity, are as follows:

|                                                     |  |      |        |      |   |        |   |   |       |  
|---------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | - | - | ----- | -
|                                                     |  | 2010 |        | 2009 |   | 2008   |  
|Net unrealized gain on securities available-for-sale |  | $    | 5,532  |      | $ | 5,127  |   | $ | 2,820 |  
|Net unrealized benefit obligations                   |  |      | (531   | )    |   | (531   | ) |   | (540  | )
|                                                     |  |      |        |      |   |        |   |   |       |  
|                                                     |  |      | 5,001  |      |   | 4,596  |   |   | 2,280 |  
|Tax effect                                           |  |      | (1,937 | )    |   | (1,780 | ) |   | (878  | )
|                                                     |  |      |        |      |   |        |   |   |       |  
|Net-of-tax amount                                    |  | $    | 3,064  |      | $ | 2,816  |   | $ | 1,402 |  
|                                                     |  |      |        |      |   |        |   |   |       |  

13. Regulatory Matters

The
Corporation and its subsidiary bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Corporations financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its subsidiary bank must meet specific capital
guidelines that involve quantitative measures of each entitys assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Corporations and its subsidiary banks capital
amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.

Quantitative
measures established by regulation to ensure capital adequacy require the
Corporation and its subsidiary bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital to risk-weighted assets,
and of Tier 1 capital to average adjusted assets. As of December 31, 2010, the
subsidiary bank was categorized as well-capitalized for all three ratios under
the regulatory framework, while the Corporation was classified as
well-capitalized for two ratios and adequately-capitalized for one ratio. As of
December 31, 2009, the subsidiary bank and the Corporation were categorized as
well-capitalized for all three ratios under the regulatory framework.

The most
recent notifications, at December 31, 2010 and 2009, from the federal banking
agencies categorized the subsidiary bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Corporation and the subsidiary bank must maintain total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the
table that follows, at December 31, 2010.

26

---



The Corporations and the subsidiary banks actual capital amounts and
ratios as of December 31, 2010 and 2009 are as follows:

|                                             |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|-------------------------------------------- |  | ------ | ------ | ---------------------------- |  | ----------------------------------------------------------------------------- | - | ----- | ------ | ------ |  | ----- | - | - | ------ |  |  | ----- | -
|                                             |  | Actual |        | Minimum Capital
 Requirement |  | Minimum
 To Be Well-
 Capitalized Under
 Prompt Corrective
 Action Provisions |  
|                                             |  | Amount |        | Ratio                        |  | Amount                                                                        |   | Ratio |        | Amount |  | Ratio |  
|                                             |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |  
|As of December 31, 2010:                     |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|                                             |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|Total Capital (to risk-weighted assets):     |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|Princeton National Bancorp, Inc.             |  | $      | 76,618 |                              |  | 9.68                                                                          | % | $     | 63,339 |        |  | 8.00  | % | $ | 79,174 |  |  | 10.00 | %
|Citizens First National Bank                 |  |        | 81,447 |                              |  | 10.29                                                                         | % |       | 63,326 |        |  | 8.00  | % |   | 79,157 |  |  | 10.00 | %
|                                             |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|Tier 1 Capital (to risk-weighted assets):    |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|Princeton National Bancorp, Inc.             |  | $      | 66,476 |                              |  | 8.40                                                                          | % | $     | 31,669 |        |  | 4.00  | % | $ | 47,504 |  |  | 6.00  | %
|Citizens First National Bank                 |  |        | 71,307 |                              |  | 9.01                                                                          | % |       | 31,663 |        |  | 4.00  | % |   | 47,494 |  |  | 6.00  | %
|                                             |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|Tier 1 Capital (to average adjusted assets): |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|Princeton National Bancorp, Inc.             |  | $      | 66,476 |                              |  | 5.76                                                                          | % | $     | 46,190 |        |  | 4.00  | % | $ | 57,738 |  |  | 5.00  | %
|Citizens First National Bank                 |  |        | 71,307 |                              |  | 6.18                                                                          | % |       | 46,184 |        |  | 4.00  | % |   | 57,730 |  |  | 5.00  | %
|                                             |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  

|                                              |  |        |         |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|--------------------------------------------- |  | ------ | ------- | ---------------------------- |  | ----------------------------------------------------------------------------- | - | ----- | ------ | ------ |  | ----- | - | - | ------ |  |  | ----- | -
|                                              |  | Actual |         | Minimum Capital
 Requirement |  | Minimum
 To Be Well-
 Capitalized Under
 Prompt Corrective
 Action Provisions |  
|                                              |  | Amount |         | Ratio                        |  | Amount                                                                        |   | Ratio |        | Amount |  | Ratio |  
|                                              |  |        |         |                              |  |                                                                               |   |       |        |        |  |       |  
|As of
 December 31, 2009:                     |  |        |         |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|                                              |  |        |         |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|Total
 Capital (to risk-weighted assets):     |  |        |         |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|Princeton National Bancorp, Inc.              |  | $      | 104,541 |                              |  | 11.50                                                                         | % | $     | 72,729 |        |  | 8.00  | % | $ | 90,911 |  |  | 10.00 | %
|Citizens First National Bank                  |  |        | 102,305 |                              |  | 11.25                                                                         | % |       | 72,724 |        |  | 8.00  | % |   | 90,905 |  |  | 10.00 | %
|                                              |  |        |         |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|Tier 1
 Capital (to risk-weighted assets):    |  |        |         |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|Princeton National Bancorp, Inc.              |  | $      | 93,168  |                              |  | 10.25                                                                         | % | $     | 36,364 |        |  | 4.00  | % | $ | 54,547 |  |  | 6.00  | %
|Citizens First National Bank                  |  |        | 90,933  |                              |  | 10.00                                                                         | % |       | 36,362 |        |  | 4.00  | % |   | 54,543 |  |  | 6.00  | %
|                                              |  |        |         |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|Tier 1
 Capital (to average adjusted assets): |  |        |         |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|Princeton National Bancorp, Inc.              |  | $      | 93,168  |                              |  | 7.48                                                                          | % | $     | 49,823 |        |  | 4.00  | % | $ | 62,278 |  |  | 5.00  | %
|Citizens First National Bank                  |  |        | 90,933  |                              |  | 7.30                                                                          | % |       | 49,813 |        |  | 4.00  | % |   | 62,266 |  |  | 5.00  | %
|                                              |  |        |         |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  

On March
15, 2010, the Bank entered into a written agreement (the Agreement) with the
OCC. The Agreement sets forth the Banks commitment to: (i) review and take
action as necessary regarding its allowance for loan and lease losses; (ii)
improve the Banks asset quality through the development of workout plans for
criticized assets and the assessment of credit risk; and (iii) revise the
Banks credit risk rating management information system. The Bank has taken
steps to address the issues raised in the Agreement and intends to fully comply
with the requirements set forth in the Agreement.

On February
28, 2011, as required by the Corporations primary regulator, the Federal
Reserve Bank, a resolution of the Corporations Board of Directors was passed
requiring that the Corporation obtain written approval from the Federal Reserve
Bank prior to any of the following: the declaration or payment of dividends;
any increase in debt; any distribution of interest, principal, or other sum
associated with subordinated debentures or trust preferred securities; and the
redemption of Corporation stock.

14. Employee, Officer and Director Benefit
Plans

The
subsidiary bank has a defined contribution investment 401(k) plan. Under this
plan employees could elect to contribute, on a tax-deferred basis, up to a
maximum of $17 ($23 for those employees eligible to make catch-up
contributions). In addition, the subsidiary bank will match employees
contributions up to three percent of each employees salary and match 50% of
the next two percent contributed. The subsidiary banks contribution to the
defined contribution investment 401(k) plan for 2010, 2009 and 2008 was $442,
$438 and $404, respectively.

The
subsidiary bank has an employee stock purchase program in which employees contribute
through payroll deductions. These amounts are pooled and used to purchase
shares of the Corporations common stock on a quarterly basis at the opening
bid price on the last business day of the quarter.

The
subsidiary bank also has a profit sharing plan. Annual contributions to the
subsidiary banks plan are based on a formula. The total contribution is at the
discretion of the Board of Directors. The cost of the profit sharing plan
charged to operating expense was $0 in 2010, $142 in 2009 and $409 in 2008.

Stock Based Compensation Plan

Additionally,
the Corporation has non-qualified stock option plans (the plans) for the
benefit of employees and directors of the subsidiary bank, as well as directors
of the Corporation. The plans permit the grant of share options and shares for
up to 802,500 shares of common stock. The Corporation believes that such awards
better align the interests of its employees with those of its stockholders.
Option awards are granted with an exercise price equal to the market price of
the Corporations stock at the date of grant. The option awards generally vest
based on three years of continuous service and have ten-year contractual terms.

27

---



Notes to Consolidated Financial Statements(Continued)
(dollar amounts in thousands except share data)

The fair
value of each option award is estimated on the date of grant using a
Black-Scholes closed-form model that uses the assumptions noted in the
following table. Expected volatility is based on historical volatility of the
Corporations stock and other factors. The Corporation uses historical data to
estimate option exercise and employee termination within the valuation model.
The expected term of the options granted is derived from the Corporations historical
option exercise experience and represents the period of time that options
granted are expected to be outstanding. The risk-free rate for periods within
the contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of the grant. The following assumptions were used in
estimating the fair value for options granted in 2010, 2009 and 2008:

|                          |  |      |        |      |  |        |   |  |        |  
|------------------------- |  | ---- | ------ | ---- |  | ------ | - |  | ------ | -
|                          |  | 2010 |        | 2009 |  | 2008   |  
|Expected
 volatility      |  |      | .360   |      |  | .380   |   |  | .180   |  
|Expected
 dividends       |  |      | 5.75   | %    |  | 3.56   | % |  | 4.96   | %
|Expected term
 (in years) |  |      | 7 yrs. |      |  | 3 yrs. |   |  | 3 yrs. |  
|Risk-free
 rate           |  |      | 2.71   | %    |  | 1.70   | % |  | 1.00   | %

A summary
of option activity under the Plan as of December 31, 2010, 2009 and 2008, and
changes during the years then ended, is presented as follows:

|                                |  |        |         |                                    |   |                                                 |  |                             |           |  |   |     | 
|------------------------------- |  | ------ | ------- | ---------------------------------- | - | ----------------------------------------------- |  | --------------------------- | --------- |  | - | --- | 
|                                |  | 2010   |         |                                    |   |                                                 | 
|                                |  | Shares |         | Weighted
 Average
 Exercise
 Price |   | Weighted
 Average
 Remaining
 Contractual
 Term |  | Aggregate
 Intrinsic
 Value |          
|                                |  |        |         |                                    |   |                                                 |  |                             |          
|Outstanding, beginning of year  |  |        | 523,211 |                                    | $ | 25.53                                           |  |                             |           |  |   |     | 
|Granted                         |  |        | 51,700  |                                    |   | 3.64                                            |  |                             |           |  |   |     | 
|Exercised                       |  |        | -0-     |                                    |   | n/a                                             |  |                             |           |  |   |     | 
|Forfeited or expired            |  |        | (19,634 | )                                  |   | n/a                                             |  |                             |           |  |   |     | 
|                                |  |        |         |                                    |   |                                                 |  |                             |           |  |   |     | 
|Outstanding, end of year        |  |        | 555,277 |                                    |   | 23.60                                           |  |                             | 6.31 yrs. |  | $ | -0- | 
|                                |  |        |         |                                    |   |                                                 |  |                             |           |  |   |     | 
|Options exercisable end of year |  |        | 435,469 |                                    | $ | 27.22                                           |  |                             | 5.51 yrs. |  | $ | -0- | 
|                                |  |        |         |                                    |   |                                                 |  |                             |           |  |   |     | 

The
intrinsic value of the outstanding shares and the options exercisable noted
above excludes 555,277 shares and 415,319 shares, respectively, which were
anti-dilutive for 2010.

|                                 |  |        |         |                                    |   |                                                 |  |                             |           |  |   |     | 
|-------------------------------- |  | ------ | ------- | ---------------------------------- | - | ----------------------------------------------- |  | --------------------------- | --------- |  | - | --- | 
|                                 |  | 2009   |         |                                    |   |                                                 | 
|                                 |  | Shares |         | Weighted
 Average
 Exercise
 Price |   | Weighted
 Average
 Remaining
 Contractual
 Term |  | Aggregate
 Intrinsic
 Value |          
|                                 |  |        |         |                                    |   |                                                 |  |                             |          
|Outstanding,
 beginning of year  |  |        | 460,061 |                                    | $ | 27.53                                           |  |                             |           |  |   |     | 
|Granted                          |  |        | 63,150  |                                    |   | 10.91                                           |  |                             |           |  |   |     | 
|Exercised                        |  |        | -0-     |                                    |   | n/a                                             |  |                             |           |  |   |     | 
|Forfeited or
 expired            |  |        | -0-     |                                    |   | n/a                                             |  |                             |           |  |   |     | 
|                                 |  |        |         |                                    |   |                                                 |  |                             |           |  |   |     | 
|Outstanding,
 end of year        |  |        | 523,211 |                                    |   | 25.53                                           |  |                             | 6.89 yrs. |  | $ | -0- | 
|                                 |  |        |         |                                    |   |                                                 |  |                             |           |  |   |     | 
|Options
 exercisable end of year |  |        | 375,994 |                                    | $ | 28.48                                           |  |                             | 5.96 yrs. |  | $ | -0- | 
|                                 |  |        |         |                                    |   |                                                 |  |                             |           |  |   |     | 

The
intrinsic value of the outstanding shares and the options exercisable noted
above excludes 523,211 shares and 375,944 shares, respectively, which were
anti-dilutive for 2009.

|                                 |  |        |         |                                    |   |                                                 |  |                             |           |  |   |     | 
|-------------------------------- |  | ------ | ------- | ---------------------------------- | - | ----------------------------------------------- |  | --------------------------- | --------- |  | - | --- | 
|                                 |  | 2008   |         |                                    |   |                                                 | 
|                                 |  | Shares |         | Weighted
 Average
 Exercise
 Price |   | Weighted
 Average
 Remaining
 Contractual
 Term |  | Aggregate
 Intrinsic
 Value |          
|                                 |  |        |         |                                    |   |                                                 |  |                             |          
|Outstanding,
 beginning of year  |  |        | 404,186 |                                    | $ | 28.57                                           |  |                             |           |  |   |     | 
|Granted                          |  |        | 86,125  |                                    |   | 22.57                                           |  |                             |           |  |   |     | 
|Exercised                        |  |        | (4,700  | )                                  |   | 17.61                                           |  |                             |           |  |   |     | 
|Forfeited or
 expired            |  |        | (25,550 | )                                  |   | 29.37                                           |  |                             |           |  |   |     | 
|                                 |  |        |         |                                    |   |                                                 |  |                             |           |  |   |     | 
|Outstanding,
 end of year        |  |        | 460,061 |                                    |   | 27.53                                           |  |                             | 7.46 yrs. |  | $ | 172 | 
|                                 |  |        |         |                                    |   |                                                 |  |                             |           |  |   |     | 
|Options
 exercisable end of year |  |        | 295,042 |                                    | $ | 29.03                                           |  |                             | 6.40 yrs. |  | $ | 49  | 
|                                 |  |        |         |                                    |   |                                                 |  |                             |           |  |   |     | 

28

---



The
intrinsic value of the outstanding shares and the options exercisable noted
above excludes 261,566 shares and 235,972 shares, respectively, which were
anti-dilutive for 2008.

The
weighted-average grant date fair value of options granted during the years
2010, 2009 and 2008 was $35, $133 and $21, respectively. The total intrinsic
value of options exercised during the years ended December 31, 2010, 2009 and
2008 was $0, $0 and $21, respectively.

A summary
of the status of the Corporations non-vested shares and changes during the
year ended December 31, 2010, 2009 and 2008 is presented below:

|                              |  |        |         |                                           |   |      | 
|----------------------------- |  | ------ | ------- | ----------------------------------------- | - | ---- | 
|                              |  | 2010   |        
|                              |  | Shares |         | Weighted
 Average
 Grant-Date
 Fair Value |  
|                              |  |        |         |                                           |  
|Non-vested, beginning of year |  |        | 147,217 |                                           | $ | 0.97 | 
|Granted                       |  |        | 51,700  |                                           |   | 0.68 | 
|Vested                        |  |        | (72,309 | )                                         |   | 1.13 | 
|Forfeited                     |  |        | (6,800  | )                                         |   | 1.34 | 
|                              |  |        |         |                                           |   |      | 
|Non-vested, end of year       |  |        | 119,808 |                                           | $ | 0.90 | 
|                              |  |        |         |                                           |   |      | 

|                               |  |        |         |                                           |   |      | 
|------------------------------ |  | ------ | ------- | ----------------------------------------- | - | ---- | 
|                               |  | 2009   |        
|                               |  | Shares |         | Weighted
 Average
 Grant-Date
 Fair Value |  
|                               |  |        |         |                                           |  
|Non-vested,
 beginning of year |  |        | 165,019 |                                           | $ | 0.59 | 
|Granted                        |  |        | 63,150  |                                           |   | 2.11 | 
|Vested                         |  |        | (80,952 | )                                         |   | 1.09 | 
|Forfeited                      |  |        | -0-     |                                           |   | n/a  | 
|                               |  |        |         |                                           |   |      | 
|Non-vested,
 end of year       |  |        | 147,217 |                                           | $ | 0.97 | 
|                               |  |        |         |                                           |   |      | 

|                               |  |        |         |                                           |   |      | 
|------------------------------ |  | ------ | ------- | ----------------------------------------- | - | ---- | 
|                               |  | 2008   |        
|                               |  | Shares |         | Weighted
 Average
 Grant-Date
 Fair Value |  
|                               |  |        |         |                                           |  
|Non-vested,
 beginning of year |  |        | 141,939 |                                           | $ | 1.43 | 
|Granted                        |  |        | 86,125  |                                           |   | 0.36 | 
|Vested                         |  |        | (37,495 | )                                         |   | 1.43 | 
|Forfeited                      |  |        | (25,550 | )                                         |   | 1.43 | 
|                               |  |        |         |                                           |   |      | 
|Non-vested,
 end of year       |  |        | 165,019 |                                           | $ | 0.59 | 
|                               |  |        |         |                                           |   |      | 

As of
December 31, 2010, there was $137 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
plan. That cost is expected to be recognized over a weighted-average period of
3 years. The total fair value of shares vested during the years ended December
31, 2010, 2009, and 2008, was $82, $88 and $54, respectively.

During
2010, 8,500 shares were granted under the plans in the form of nonvested shares
at no cost to the officers. The nonvested shares vest annually over a five year
restriction period, and the participant is not entitled to receive distribution
on the nonvested shares during the five year period.

The fair
value of nonvested shares is determined based on the market value of the
Corporations shares on the grant date. The weighted average grant date fair
value of awards granted during 2010 was $5.05.

A summary
of the nonvested share activity during 2010 is presented below. There were no
nonvested share awards granted in 2009.

|                              |  |                   |       |                                           |   |      | 
|----------------------------- |  | ----------------- | ----- | ----------------------------------------- | - | ---- | 
|                              |  | Nonvested
 Shares |       | Weighted
 Average
 Grant-Date
 Fair Value |  
|                              |  |                   |       |                                           |  
|Nonvested,
 beginning of year |  |                   | -0-   |                                           | $ | -0-  | 
|Granted                       |  |                   | 8,500 |                                           |   | 5.05 | 
|Vested                        |  |                   | -0-   |                                           |   | -0-  | 
|Forfeited                     |  |                   | -0-   |                                           |   | -0-  | 
|                              |  |                   |       |                                           |   |      | 
|Nonvested,
 end of year       |  |                   | 8,500 |                                           | $ | 5.05 | 
|                              |  |                   |       |                                           |   |      | 

At December
31, 2010, there was approximately $43 of total unrecognized compensation
expense related to nonvested shares. The amount to be recognized as
compensation expense during the next four fiscal years is approximately $11 per
year. The total fair value of nonvested share awards vesting during 2010 is $0
as the shares first vest in January, 2015.

29

---



Notes to Consolidated Financial Statements(Continued)
(dollar amounts in thousands except share data)

15. Pension and Other Post-Retirement
Benefits

Employee Health Benefit Plan

The
Corporation does not have a defined benefit pension plan. The Corporation does
have a defined contribution investment plan which is discussed in Note 14 -
Employee, Officer, and Director Benefit Plans. The Corporation offers certain
retirees the opportunity to continue benefits in the subsidiary banks Employee
Health Benefit Plan. The Corporations level of contribution is based upon age,
service formula, date of employment and retirement date. Employees hired prior
to October 1, 1994 who retired prior to July 1, 2008 were eligible to receive
benefits under the Banks Health Benefit Plan for life. All employees hired on
or before October 1, 1994 previously were allowed coverage for life. The plan
was amended on December 31, 2007 to require employees hired on or before October
1, 1994 who retire after July 1, 2008 to convert to a Medicare Supplement Plan
at age 65. Coverage stops at age 65 for employees hired after October 1, 1994.
The Corporation uses a December 31 measurement date for its plan. Information
about the plans funded status follows:

|                                      |  |      |       |      |   |       |  
|------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|                                      |  | 2010 |       | 2009 |  
|Change in
 benefit obligation         |  |      |       |      |   |       |  
|Beginning of year                     |  | $    | 1,115 |      | $ | 1,100 |  
|Service cost                          |  |      | 23    |      |   | 23    |  
|Interest cost                         |  |      | 59    |      |   | 58    |  
|Amortization of transition obligation |  |      | -0-   |      |   | (16   | )
|Amortization of prior service cost    |  |      | (62   | )    |   | (62   | )
|Actuarial loss                        |  |      | 53    |      |   | 56    |  
|Benefits paid                         |  |      | (51   | )    |   | (44   | )
|                                      |  |      |       |      |   |       |  
|Funded status at end of year          |  | $    | 1,137 |      | $ | 1,115 |  
|                                      |  |      |       |      |   |       |  

The
components of the 2010, 2009, and 2008 net periodic post-retirement benefit
cost are shown below:

|                                           |  |      |     |      |   |      |   |   |     |  
|------------------------------------------ |  | ---- | --- | ---- | - | ---- | - | - | --- | -
|                                           |  | 2010 |     | 2009 |   | 2008 |  
|Service cost                               |  | $    | 23  |      | $ | 23   |   | $ | 20  |  
|Interest
 cost                             |  |      | 59  |      |   | 58   |   |   | 66  |  
|Amortization
 of transition obligation     |  |      | -0- |      |   | -0-  |   |   | -0- |  
|Amortization
 of prior service cost        |  |      | (62 | )    |   | (62  | ) |   | (62 | )
|Amortization
 of net loss                  |  |      | 53  |      |   | 56   |   |   | 69  |  
|                                           |  |      |     |      |   |      |   |   |     |  
|Net periodic
 post-retirement benefit cost |  | $    | 73  |      | $ | 75   |   | $ | 93  |  
|                                           |  |      |     |      |   |      |   |   |     |  

Other
changes in benefit obligations recognized in other comprehensive loss:

|                                                                            |  |      |     |      |   |      |  
|--------------------------------------------------------------------------- |  | ---- | --- | ---- | - | ---- | -
|                                                                            |  | 2010 |     | 2009 |  
|Net loss                                                                    |  | $    | (62 | )    | $ | (88  | )
|Prior
 service cost recognized                                              |  |      | 62  |      |   | 62   |  
|                                                                            |  |      |     |      |   |      |  
|Total
 recognized in other comprehensive loss                               |  |      | -0- |      |   | (26  | )
|                                                                            |  |      |     |      |   |      |  
|Total
 recognized in net periodic benefit cost and other comprehensive loss |  | $    | (73 | )    | $ | (101 | )
|                                                                            |  |      |     |      |   |      |  

The
estimated net loss, prior service cost and transition obligation for the
defined benefit plan that will be amortized from accumulated other
comprehensive income (loss) into net periodic benefit cost over the next fiscal
year is a net loss of $5.

Amounts
recognized in the Consolidated Balance Sheets:

|            |  |   |       |  |   |       | 
|----------- |  | - | ----- |  | - | ----- | 
|            |  |   | 2010  |  |   | 2009  | 
|Liabilities |  | $ | 1,137 |  | $ | 1,115 | 

Amounts
recognized in accumulated other comprehensive income (loss) and not yet
recognized as components of net periodic benefit cost consist of:

|                               |  |      |     |      |   |     |  
|------------------------------ |  | ---- | --- | ---- | - | --- | -
|                               |  | 2010 |     | 2009 |  
|Net loss                       |  | $    | (62 | )    |   | (88 | )
|Prior
 service cost recognized |  |      | 62  |      |   | 62  |  
|                               |  |      |     |      |   |     |  
|Total                          |  | $    | -0- |      | $ | (26 | )
|                               |  |      |     |      |   |     |  

The
accumulated benefit obligation for all defined benefit plans was $1,137 and
$1,115 at December 31, 2010 and 2009, respectively.

30

---



Significant assumptions
include:

|                                                                    |  |      |      |      |  |      |  
|------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | -
|                                                                    |  | 2010 |      | 2009 | 
|                                                                    |  |      |      |      | 
|Weighted
 average assumptions used to determine benefit obligation: |  |      |      |      |  |      |  
|Discount rate                                                       |  |      | 5.25 | %    |  | 5.75 | %
|Rate of compensation increase                                       |  |      | n/a  |      |  | n/a  |  
|                                                                    |  |      |      |      |  |      |  
|Weighted
 average assumptions used to determine benefit cost:       |  |      |      |      |  |      |  
|Discount rate                                                       |  |      | 5.25 | %    |  | 5.75 | %
|Expected return on plan assets                                      |  |      | n/a  |      |  | n/a  |  
|Rate of compensation increase                                       |  |      | n/a  |      |  | n/a  |  

For
measurement purposes, a 7.0% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2010 and 2009, respectively. The
rate was assumed to decrease gradually to 5.00% by the year 2015 and remain at
that level thereafter.

Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plans. A one-percentage point change in assumed health care
cost trend rates would have the following effects:

|                                                         |  |                               |   |                               |  |  |  |   |     |   | 
|-------------------------------------------------------- |  | ----------------------------- | - | ----------------------------- |  |  |  | - | --- | - | 
|                                                         |  | 1-Percentage-
 Point Increase |   | 1-Percentage-
 Point Decrease | 
|Effect on
 total of service and interest cost components |  |                               | $ | 8                             |  |  |  | $ | (7  | ) | 
|Effect on
 post-retirement benefit obligation            |  |                               |   | 75                            |  |  |  |   | (68 | ) | 

The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid as of December 31, 2010:

|          |  |                                  |   |     |  | 
|--------- |  | -------------------------------- | - | --- |  | 
|          |  | Post Retirement
 Health Benefits |  
|          |  |                                  |  
|2011      |  |                                  | $ | 67  |  | 
|2012      |  |                                  |   | 49  |  | 
|2013      |  |                                  |   | 76  |  | 
|2014      |  |                                  |   | 90  |  | 
|2015      |  |                                  |   | 108 |  | 
|2016-2020 |  |                                  |   | 546 |  | 

Split Dollar Life Insurance

ASC Topic
715 requires the Corporation to recognize a liability and compensation expense
for endorsement split-dollar life insurance arrangements that provide a benefit
to an employee that extends to post retirement periods. The benefit to the
employees is the payment of the premiums by the Corporation. The Corporation
adopted ASC Topic 715 as of January 1, 2008, through a cumulative effect
adjustment as a liability and a decrease to retained earnings of $580.
Beginning January 1, 2008, an expense was recorded as the remaining benefit is
earned with a corresponding addition to the post retirement benefit obligation.
The amount of the expense for 2010, 2009 and 2008 was $61, $58 and $36,
respectively. For the period from retirement to the estimated date of death for
the participants, this liability is reversed into income.

16. Fair Value of Financial Instruments

ASC 820,
Fair Value Measurements, defines the fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. ASC 820 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.

In
accordance with ASC 820, the Corporation groups its financial assets and
financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value. These levels are:

| |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Level 1 | Valuations for assets and liabilities traded in active exchange
 markets, such as the New York Stock Exchange. Valuations are obtained from
 readily available pricing sources for market transactions involving identical
 assets or liabilities.                                                                                                                                                                                                                                                                       
| |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Level 2 | Valuations for assets and liabilities traded in less active dealer or
 broker markets. Valuations are obtained from third party pricing services for
 identical or comparable assets or liabilities which use observable inputs
 other than Level 1 prices, such as quoted prices for similar assets or
 liabilities; quoted prices in markets that are not active; or other inputs
 that are observable or can be corroborated by observable market data for
 substantially the full term of the assets and liabilities.
| |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Level 3 | Unobservable inputs that are supported by little or no market
 activity and that are significant to the fair value of the assets or
 liabilities.                                                                                                                                                                                                                                                                                                                                                                        

Following
is a description of the valuation methodologies and inputs used for instruments
measured at fair value on a recurring basis and recognized in the accompanying
Consolidated Balance Sheets.

Available-for-Sale
Securities -The fair values of available-for-sale
securities are determined by various valuation methodologies. Where quoted
market prices are available in an active market, securities are classified
within Level 1. The Corporation has no securities classified within Level 1. If
quoted market prices are not available, then fair values are estimated by using
pricing models or quoted prices of securities with similar characteristics.
Level 2 securities include U.S. Treasury securities, obligations of U.S.
Government and federal agency and U.S. Government sponsored enterprises (GSEs),
obligations of states and political subdivisions, mortgage-backed securities
and GSE residential collateralized mortgage obligations. In certain cases where
Level 1 or Level 2 inputs are not available, securities are classified within
Level 3 of the hierarchy. The Corporation has no securities classified within
Level 3.

31

---



Notes to Consolidated Financial Statements(Continued)
(dollar amounts in thousands except share data)

The
following table presents the Corporations assets that are measured at fair
value on a recurring basis and the level within the ASC 820 hierarchy in which
the fair value measurements fall as of December 31, 2010 and 2009:

|                                                                                             |  |            |   |                                                                   |  |                                                 |  |                                              |     |  |  |  |   |         |  |  |  |   |     |  | 
|-------------------------------------------------------------------------------------------- |  | ---------- | - | ----------------------------------------------------------------- |  | ----------------------------------------------- |  | -------------------------------------------- | --- |  |  |  | - | ------- |  |  |  | - | --- |  | 
|                                                                                             |  |            |   | Fair Value Measurements Using                                     |  |                                                 | 
|                                                                                             |  |            |   |                                                                   |  |                                                 | 
|December
 31, 2010                                                                           |  | Fair Value |   | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |  | Significant Other
 Observable Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |    
|                                                                                             |  |            |   |                                                                   |  |                                                 |  |                                              |    
|Available-for-sale:                                                                          |  |            |   |                                                                   |  |                                                 |  |                                              |     |  |  |  |  
|United States Government and Federal agency and U.S. Government sponsored enterprises (GSEs) |  |            | $ | 78,204                                                            |  |                                                 |  | $                                            | -0- |  |  |  | $ | 78,204  |  |  |  | $ | -0- |  | 
|State and Municipal                                                                          |  |            |   | 115,654                                                           |  |                                                 |  |                                              | -0- |  |  |  |   | 115,654 |  |  |  |   | -0- |  | 
|Collateralized mortgage obligations:                                                         |  |            |   |                                                                   |  |                                                 |  |                                              |     |  |  |  |   |         |  |  |  |   |     |  | 
|GSE Residential                                                                              |  |            |   | 54,894                                                            |  |                                                 |  |                                              | -0- |  |  |  |   | 54,894  |  |  |  |   | -0- |  | 
|                                                                                             |  |            |   |                                                                   |  |                                                 |  |                                              |     |  |  |  |   |         |  |  |  |   |     |  | 
|Total                                                                                        |  |            | $ | 248,752                                                           |  |                                                 |  | $                                            | -0- |  |  |  | $ | 248,752 |  |  |  | $ | -0- |  | 
|                                                                                             |  |            |   |                                                                   |  |                                                 |  |                                              |     |  |  |  |   |         |  |  |  |   |     |  | 

|                                                                                               |  |            |   |                                                                   |  |                                                 |  |                                              |     |  |  |  |   |         |  |  |  |   |     |  | 
|---------------------------------------------------------------------------------------------- |  | ---------- | - | ----------------------------------------------------------------- |  | ----------------------------------------------- |  | -------------------------------------------- | --- |  |  |  | - | ------- |  |  |  | - | --- |  | 
|                                                                                               |  |            |   | Fair Value Measurements Using                                     |  |                                                 | 
|                                                                                               |  |            |   |                                                                   |  |                                                 | 
|December
 31, 2009                                                                             |  | Fair Value |   | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |  | Significant Other
 Observable Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |    
|                                                                                               |  |            |   |                                                                   |  |                                                 |  |                                              |    
|Available-for-sale:                                                                            |  |            |   |                                                                   |  |                                                 |  |                                              |     |  |  |  |  
|United States Government and
 Federal agency and U.S. Government
 sponsored enterprises (GSEs) |  |            | $ | 96,313                                                            |  |                                                 |  | $                                            | -0- |  |  |  | $ | 96,313  |  |  |  | $ | -0- |  | 
|State and Municipal                                                                            |  |            |   | 120,078                                                           |  |                                                 |  |                                              | -0- |  |  |  |   | 120,078 |  |  |  |   | -0- |  | 
|Collateralized mortgage obligations:                                                           |  |            |   |                                                                   |  |                                                 |  |                                              |     |  |  |  |   |         |  |  |  |   |     |  | 
|GSE Residential                                                                                |  |            |   | 72,083                                                            |  |                                                 |  |                                              | -0- |  |  |  |   | 72,083  |  |  |  |   | -0- |  | 
|                                                                                               |  |            |   |                                                                   |  |                                                 |  |                                              |     |  |  |  |   |         |  |  |  |   |     |  | 
|Total                                                                                          |  |            | $ | 288,474                                                           |  |                                                 |  | $                                            | -0- |  |  |  | $ | 288,474 |  |  |  | $ | -0- |  | 
|                                                                                               |  |            |   |                                                                   |  |                                                 |  |                                              |     |  |  |  |   |         |  |  |  |   |     |  | 

Following
is a description of the valuation methodologies used for assets measured at
fair value on a non-recurring basis and recognized in the accompanying
Consolidated Balance Sheets, as well as the general classification of such
assets pursuant to the valuation hierarchy.

Impaired
Loans (Collateral Dependent) -Loans for which it is
probable that the Corporation will not collect all principal and interest due
according to contractual terms are measured for impairment. Allowable methods
for determining the amount of impairment include estimating the fair value of
the collateral for collateral dependent loans.

If the
impaired loan is identified as collateral dependent, then the fair value method
of measuring the amount of impairment is utilized. This method requires
obtaining a current independent appraisal of the collateral and applying a
discount factor to the value.           Impaired loans that are collateral dependent are
classified within Level 3 of the fair value hierarchy when impairment is
determined using the fair value method.

Mortgage
Servicing Rights -The fair value used to determine
the valuation allowance is estimated using discounted cash flow models. The
valuation models incorporate assumptions that market participants would use in
estimating future net servicing income, such as the cost to service, the
discount rate, the custodial earnings rate, an inflation rate, ancillary
income, prepayment speeds and default rates and losses. These variables change
from quarter to quarter as market conditions and projected interest rates
change, and may have an adverse impact on the value of the mortgage servicing
rights and may result in a reduction to noninterest income. Due to the nature
of the valuation inputs, mortgage servicing rights are classified within Level
3 of the hierarchy.

Other
Real Estate Owned -Other real estate owned acquired
through loan foreclosure is initially recorded at fair value less costs to sell
when acquired, establishing a new cost basis. The adjustment at the time of
foreclosure is recorded through the allowance for loan losses. Due to the
subjective nature of establishing the fair value when the asset is acquired, the
actual fair value of the other real estate owned or foreclosed asset could
differ from the original estimate and are classified within Level 3 of the fair
value hierarchy. If it is determined the fair value declines subsequent to
foreclosure, a valuation allowance is recorded through non-interest expense.
Operating costs associated with the assets after acquisition are also recorded
as non-interest expense. Gains and losses on the disposition of other real
estate owned and foreclosed assets are netted and posted to other non-interest
expense.

The
following table presents the fair value measurement of assets and liabilities
measured at fair value on a nonrecurring basis and the level within the ASC 820
fair value hierarchy in which the fair value measurements fall at December 31,
2010 and 2009:

|                                      |  |            |   |                                                                   |  |                                                 |  |                                              |  |  |     |  |  |   |        |  | 
|------------------------------------- |  | ---------- | - | ----------------------------------------------------------------- |  | ----------------------------------------------- |  | -------------------------------------------- |  |  | --- |  |  | - | ------ |  | 
|                                      |  |            |   | Fair Value Measurements Using                                     |  |                                                 | 
|                                      |  |            |   |                                                                   |  |                                                 | 
|December
 31, 2010                    |  | Fair Value |   | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |  | Significant Other
 Observable Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) | 
|                                      |  |            |   |                                                                   |  |                                                 |  |                                              | 
|Impaired loans (collateral dependent) |  |            | $ | 30,756                                                            |  |                                                 |  | -0-                                          |  |  | -0- |  |  | $ | 30,756 |  | 
|Mortgage servicing rights             |  |            |   | 3,385                                                             |  |                                                 |  | -0-                                          |  |  | -0- |  |  |   | 3,385  |  | 
|Other real estate owned               |  |            |   | 2,899                                                             |  |                                                 |  | -0-                                          |  |  | -0- |  |  |   | 2,899  |  | 

32

---



|                                       |  |            |   |                                                                   |  |                                                 |  |                                              |  |  |     |  |  |   |        |  | 
|-------------------------------------- |  | ---------- | - | ----------------------------------------------------------------- |  | ----------------------------------------------- |  | -------------------------------------------- |  |  | --- |  |  | - | ------ |  | 
|                                       |  |            |   | Fair Value Measurements Using                                     |  |                                                 | 
|                                       |  |            |   |                                                                   |  |                                                 | 
|December
 31, 2009                     |  | Fair Value |   | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |  | Significant Other
 Observable Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) | 
|                                       |  |            |   |                                                                   |  |                                                 |  |                                              | 
|Impaired
 loans (collateral dependent) |  |            | $ | 14,716                                                            |  |                                                 |  | -0-                                          |  |  | -0- |  |  | $ | 14,716 |  | 
|Mortgage
 servicing rights             |  |            |   | 3,285                                                             |  |                                                 |  | -0-                                          |  |  | -0- |  |  |   | 3,285  |  | 
|Other real
 estate owned               |  |            |   | 17,658                                                            |  |                                                 |  | -0-                                          |  |  | -0- |  |  |   | 17,658 |  | 

ASC 825,
Disclosures about Fair Value of Financial Instruments, requires all entities
to disclose the estimated fair value of their financial instrument assets and
liabilities. For the Corporation, as for most financial institutions, the
majority of its assets and liabilities are considered financial instruments as
defined in ASC 825. Many of the Corporations financial instruments, however,
lack an available trading market as characterized by a willing buyer and
willing seller engaging in an exchange transaction. It is also the Corporations
general practice and intent to hold its financial instruments to maturity and
to not engage in trading or sales activities except for loans held-for-sale and
available-for-sale securities. Therefore, significant estimations and
assumptions, as well as present value calculations, were used by the
Corporation for the purposes of this disclosure.

Estimated
fair values have been determined by the Corporation using the best available
data and an estimation methodology suitable for each category of financial
instruments. For those loans and deposits with floating interest rates, it is
presumed that estimated fair values generally approximate the recorded book
balances. The estimation methodologies used, the estimated fair values and the
recorded book balances at December 31, 2010 and 2009, were as follows:

|                                                             |  |                   |           |                   |   |                 |  |             |           |  |   |           | 
|------------------------------------------------------------ |  | ----------------- | --------- | ----------------- | - | --------------- |  | ----------- | --------- |  | - | --------- | 
|                                                             |  | December 31, 2010 |           | December 31, 2009 |  
|                                                             |  |                   |           |                   |  
|                                                             |  | Carrying
 Value   |           | Fair
 Value       |   | Carrying
 Value |  | Fair
 Value |          
|                                                             |  |                   |           |                   |   |                 |  |             |          
|                                                             |  |                   |           |                   |   |                 |  |             |           |  |   |           | 
|Financial Assets:                                            |  |                   |           |                   |   |                 |  |             |           |  |   |           | 
|Cash and due from banks                                      |  | $                 | 12,992    |                   | $ | 12,992          |  | $           | 15,546    |  | $ | 15,546    | 
|Interest-bearing deposits in financial
 institutions         |  |                   | 30,888    |                   |   | 30,888          |  |             | 55,527    |  |   | 55,527    | 
|Investment securities                                        |  |                   | 260,939   |                   |   | 261,224         |  |             | 301,267   |  |   | 301,805   | 
|Loans, net, including loans held-for-sale                    |  |                   | 679,863   |                   |   | 684,438         |  |             | 789,295   |  |   | 793,674   | 
|Accrued interest receivable                                  |  |                   | 7,482     |                   |   | 7,482           |  |             | 9,267     |  |   | 9,267     | 
|                                                             |  |                   |           |                   |   |                 |  |             |           |  |   |           | 
|Total Financial Assets                                       |  | $                 | 992,164   |                   | $ | 997,024         |  | $           | 1,170,902 |  | $ | 1,175,819 | 
|                                                             |  |                   |           |                   |   |                 |  |             |           |  |   |           | 
|                                                             |  |                   |           |                   |   |                 |  |             |           |  |   |           | 
|Financial Liabilities:                                       |  |                   |           |                   |   |                 |  |             |           |  |   |           | 
|Non-interest-bearing demand deposits                         |  | $                 | 138,683   |                   | $ | 138,683         |  | $           | 136,026   |  | $ | 136,026   | 
|Interest-bearing deposits                                    |  |                   | 824,278   |                   |   | 827,266         |  |             | 939,513   |  |   | 945,637   | 
|Borrowings                                                   |  |                   | 71,559    |                   |   | 71,615          |  |             | 104,848   |  |   | 119,301   | 
|Accrued interest payable                                     |  |                   | 1,315     |                   |   | 1,315           |  |             | 2,999     |  |   | 2,999     | 
|                                                             |  |                   |           |                   |   |                 |  |             |           |  |   |           | 
|Total Financial Liabilities                                  |  | $                 | 1,035,835 |                   | $ | 1,038,879       |  | $           | 1,183,386 |  | $ | 1,203,963 | 
|Unrecognized financial instruments (net of
 contract amount) |  |                   |           |                   |   |                 |  |             |           |  |   |           | 
|Commitments to originate loans                               |  |                   | -0-       |                   |   | -0-             |  |             | -0-       |  |   | -0-       | 
|Lines of credit                                              |  |                   | -0-       |                   |   | -0-             |  |             | -0-       |  |   | -0-       | 
|                                                             |  |                   |           |                   |   |                 |  |             |           |  |   |           | 

Financial
instruments actively traded in a secondary market have been valued using quoted
available market prices. Cash and due from banks, interest-bearing time deposits
in other banks, federal funds sold, loans held-for-sale and interest receivable
are valued at book value, which approximates fair value.

Financial
liability instruments with stated maturities have been valued using a present
value discounted cash flow analysis with a discount rate approximating current
market for similar liabilities. Interest payable is valued at book value, which
approximates fair value.

Financial
liability instruments with no stated maturities have an estimated fair value
equal to both the amount payable on demand and the recorded book balance.

The net
loan portfolio has been valued using a present value discounted cash flow. The
discount rate used in these calculations is the current rate at which similar
loans would be made to borrowers with similar credit ratings, same remaining
maturities and assumed prepayment risk.

The fair
value of commitments to originate loans is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
values of letters of credit and lines of credit are based on fees currently
charged for similar agreements or on the estimated cost to terminate or
otherwise settle the obligations with the counterparties at the reporting date.

Changes in
assumptions or estimation methodologies may have a material effect on these
estimated fair values.

The
Corporations remaining assets and liabilities, which are not considered
financial instruments, have not been valued differently than has been customary
with historical cost accounting. No disclosure of the relationship value of the
Corporations core deposit base is required by ASC 825.

Fair value
estimates are based on existing balance sheet financial instruments, without
attempting to estimate the value of anticipated future business and the value
of assets and liabilities that are not considered financial instruments. For
example, the subsidiary bank has a fiduciary services department that
contributes net fee income annually. The fiduciary services department is not
considered a financial instrument, and its value has not been incorporated into
the fair value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include the mortgage banking
operation, brokerage network, deferred taxes, premises and equipment and
goodwill. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.

33

---



Notes to Consolidated Financial Statements(Continued)(dollar amounts in thousands except share data)

Management
believes that reasonable comparability between financial institutions may not
be likely, due to the wide range of permitted valuation techniques and numerous
estimates which must be made, given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies
also introduces a greater degree of subjectivity to these estimated fair
values.

17. Undistributed Earnings of Subsidiary Bank

National
banking regulations and capital guidelines limit the amount of dividends that
may be paid by banks. At December 31, 2010, the subsidiary bank had $0
available for dividends. Additionally, according to the guidelines, at January
1, 2011, the subsidiary bank had $0 available for dividends. Future dividend
payments by the subsidiary bank will be dependent upon individual regulatory
capital requirements and levels of profitability. Since the Corporation is a
legal entity, separate and distinct from the bank, the dividends of the
Corporation are not subject to such bank regulatory guidelines.

18. Commitments, Contingencies and Credit Risk

The
Corporation generates agribusiness, commercial, mortgage and consumer loans to
customers located primarily in North Central Illinois. The Corporations loans
are generally secured by specific items of collateral including real property,
consumer assets and business assets. Although the Corporation has a diversified
loan portfolio, a substantial portion of its debtors ability to honor their
contracts is dependent upon economic conditions in the agricultural industry.

Foreclosed
assets held for sale include commercial real estate development, residential
real estate and commercial properties. Of the $20,652 held in foreclosed assets
as of December 31, 2010, $12,859 was commercial real estate development; $5,288
was residential real estate; and $2,505 was commercial. The carrying value
reflects managements best estimate of the amount to be realized from the sale
of the property. The amount that the Corporation realizes from the sale of the
property could differ materially in the near term from the carrying value
reflected in these financial statements.           The current protracted economic
decline continues to present financial institutions with circumstances and
challenges, which in some cases have resulted in large and unanticipated
declines in fair values of investments and other assets, constraints on
liquidity and capital and significant credit quality problems, including severe
volatility in the valuation of real estate and other collateral supporting
loans.

As
discussed further in Note 5, the Corporation has concentrations in commercial
real estate and commercial and development real estate. Due to national, state
and local economic conditions, values for commercial and development real
estate have declined significantly, and the market for these properties is
depressed.

The
accompanying financial statements have been prepared using values and
information currently available to the Corporation.

Given
the volatility of current economic conditions, the value of assets and
liabilities recorded in the financial statements could change rapidly,
resulting in material future adjustments in asset values, the allowance for
loan losses and capital that could negatively impact the Corporations ability
to meet regulatory capital requirements and maintain sufficient liquidity.

In
the normal course of business to meet the financing needs of its customers, the
subsidiary bank is party to financial instruments with off-balance sheet risk.
These financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the Consolidated
Balance Sheets. The contract amounts of those instruments reflect the extent of
involvement the subsidiary bank has in particular classes of financial
instruments.

The
subsidiary banks exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional amount
of those instruments. The subsidiary bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
instruments. At December 31, 2010, commitments to extend credit and standby
letters of credit were approximately $118,357 and $1,503, respectively. At
December 31, 2009, commitments to extend credit and standby letters of credit
were approximately $129,142 and $3,970, respectively.           Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The subsidiary bank evaluates each customers creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary,
by the subsidiary bank upon extension of credit is based on managements credit
evaluation of the counterparty. Collateral held varies, but may include real
estate, accounts receivable, inventory, property, plant and equipment and
income-producing properties.

Standby
letters of credit are conditional commitments issued by the subsidiary bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that
involved in extending loan facilities to customers. The subsidiary bank secures
the standby letters of credit with the same collateral used to secure the loan.
The maximum amount of credit that would be extended under standby letters of
credit is equal to the off-balance sheet contract amount. At December 31, 2010
and 2009, the standby letters of credit had terms that expire in one year or
less.

There
are various claims pending against the Corporations subsidiary bank, arising
in the normal course of business. Management believes, based upon consultation
with counsel, that liabilities arising from these proceedings, if any, will not
be material to the Corporations financial position or results of operations.

19. FDIC One-Time Assessment Credit

On
February 27, 2009, the FDIC adopted a final rule modifying the risk-based
assessment system and setting initial base assessment rates beginning April 1,
2009, at 12 to 50 basis points and, due to extraordinary circumstances,
extended the period of the Restoration Plan to seven years. The Corporations
assessment, according to the new formula was 17 basis points in 2009.
Previously, the quarterly assessment rate was 7 basis points. The FDIC has the
ability to increase assessments each quarter, if needed.

On
May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special
assessment on each insured depository institutions assets minus Tier 1 capital
as of June 30, 2009, which was paid on September 30, 2009. This assessment
equated to a one-time cost of $588 and is reflected in the Corporations
income statement for the year ended December 31, 2009.

On
September 29, 2009 the Board of Directors of the FDIC adopted a Notice of Proposed
Rulemaking (NPR) that would require insured institutions to prepay their
estimated quarterly risk-based assessments for the fourth quarter of 2009 and
for all of 2010, 2011 and 2012. The FDIC estimates that the total prepaid
assessments collected would be approximately $45 billion. The FDIC Board also
voted to adopt a uniform three-basis point increase in assessment rates
effective on January 1, 2011 and to extend the restoration period from seven to
eight years.

Under
GAAP accounting rules, unlike special assessments, prepaid assessments would
not immediately affect bank earnings. Each institution would record the entire
amount of its assessment related to future periods as a prepaid expense (an
asset) as of December 31, 2009, the date the payment would be made. The
Corporation paid an assessment of $6,763 for the fourth quarter of 2009 and for
all of 2010, 2011 and 2012.

34

---



As
of December 31, 2009, and each quarter thereafter, each institution would
record an expense (charge to earnings) for its regular quarterly assessment and
an offsetting credit to the prepaid assessment until the asset is exhausted. At
December 31, 2010 and 2009, the Corporation had a remaining prepaid assessment
of $4,243 and $6,332, respectively. This amount is reflected in the Other
Assets in the Consolidated Balance Sheets.

20. Capital Purchase Program/Troubled Asset Relief Program
(TARP)

On
January 23, 2009, the Corporation received $25,083 of equity capital by issuing
to the United States Department of Treasury 25,083 shares of the Corporations
5.00% Series B Non-voting Cumulative Preferred Stock, par value $0.01 per share
with a liquidation preference of $1.000 per share and a ten-year warrant to
purchase up to 155,025 shares of the Corporations common stock, par value
$5.00 per share, at an exercise price of $24.27 per share. The proceeds
received were allocated to the preferred stock and additional paid-in capital
based on their relative fair values. The resulting discount on the preferred stock
is amortized against retained earnings and is reflected in the Corporations
Consolidated Statements of Income as Dividends on preferred shares, resulting
in additional dilution to the Corporations earnings per share. The warrants
would be immediately exercisable, in whole or in part, over a term of 10 years.
The warrants were included in the Corporations diluted average common shares
outstanding (subject to anti-dilution). Both the preferred securities and
warrants were accounted for as additions to the Corporations regulatory Tier 1
and total capital.

The
Series B Preferred stock is not mandatorily redeemable and will pay cumulative
dividends at a rate of 5% per year for the first five years and 9% per year
thereafter. The Corporation can redeem the preferred securities at any time
with Federal Reserve approval. The Series B Preferred stock ranks on equal
priority with the Corporations currently authorized Series A Preferred stock.

Based
on a Black-Scholes options pricing model, the common stock warrants have been
assigned a fair value of $0.97 per warrant, or $150 in the aggregate, as of
January 23, 2009. As a result, $150 has been recorded as the discount on the
preferred stock obtained above and will be accreted as a reduction in net
income available for common stockholders over the next five years at
approximately $28 per year. For purposes of these calculations, the fair value
of the common stock warrants as of January 23, 2009 was estimated using the
Black-Scholes option pricing model and the following assumptions:

| |                             |         | 
| | --------------------------- | ------- | 
| | Risk-free interest rate     | 1.64%   | 
| | Expected life of options    | 5 years | 
| | Expected dividend yield     | 3.00%   | 
| | Expected volatility         | 17.72%  | 
| | Weighted average fair value | $0.97   | 

A
company that participates must adopt certain standards for executive
compensation, including (a) prohibiting golden parachute payments as defined
in the Emergency Economic Stabilization Act of 2008 (EESA) to senior Executive
Officers; (b) requiring recovery of any compensation paid to senior Executive
Officers based on criteria that is later proven to be materially inaccurate;
(c) prohibiting incentive compensation that encourages unnecessary and
excessive risks that threaten the value of the financial institution; and (d)
accepting restrictions on the payment of dividends and the repurchase of common
stock.

On
January 24, 2011, the Corporation notified the U.S. Treasury that it will defer
regularly scheduled dividend payments on the Corporations 25,083 in Series B
Preferred Shares.

35

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Notes to Consolidated Financial Statements(Continued)
(dollar amounts in thousands except share data)

21. Condensed Financial Information of Princeton National
Bancorp, Inc.

The
following condensed financial statements are presented for the Corporation on a
stand alone basis:

Condensed Balance Sheets

|                                                    |  |             |         |      |   |         |  
|--------------------------------------------------- |  | ----------- | ------- | ---- | - | ------- | -
|                                                    |  | December 31 |        
|                                                    |  | 2010        |         | 2009 |  
|Assets                                              |  |             |         |      |   |         |  
|Cash                                                |  | $           | 31      |      | $ | 840     |  
|Interest-bearing deposits
 in subsidiary bank       |  |             | 18      |      |   | 554     |  
|Other assets                                        |  |             | 1,718   |      |   | 1,058   |  
|Investment in subsidiary
 bank                      |  |             | 80,157  |      |   | 97,425  |  
|                                                    |  |             |         |      |   |         |  
|Total

assets                                       |  |             | 81,924  |      |   | 99,877  |  
|                                                    |  |             |         |      |   |         |  
|Liabilities                                         |  |             |         |      |   |         |  
|Borrowings                                          |  | $           | 25,000  |      | $ | 25,000  |  
|Other liabilities                                   |  |             | 63      |      |   | 217     |  
|                                                    |  |             |         |      |   |         |  
|Total

liabilities                                  |  |             | 25,063  |      |   | 25,217  |  
|                                                    |  |             |         |      |   |         |  
|Stockholders Equity                                |  |             |         |      |   |         |  
|Preferred stock                                     |  |             | 24,986  |      |   | 24,958  |  
|Common stock                                        |  |             | 22,391  |      |   | 22,391  |  
|Common stock warrants                               |  |             | 150     |      |   | 150     |  
|Surplus                                             |  |             | 18,275  |      |   | 18,423  |  
|Retained earnings                                   |  |             | 11,589  |      |   | 29,851  |  
|Accumulated other
 comprehensive income, net of tax |  |             | 3,064   |      |   | 2,816   |  
|Less: cost of treasury
 shares                      |  |             | (23,594 | )    |   | (23,929 | )
|                                                    |  |             |         |      |   |         |  
|Total stockholders

equity                         |  |             | 56,861  |      |   | 74,660  |  
|                                                    |  |             |         |      |   |         |  
|Total liabilities and

stockholders equity         |  | $           | 81,924  |      | $ | 99,877  |  
|                                                    |  |             |         |      |   |         |  

Condensed Statements of Income

|                                                                                          |  |                                 |         |      |   |         |   |   |       |  
|----------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- | - | ------- | - | - | ----- | -
|                                                                                          |  | For the Years Ended December 31 |        
|                                                                                          |  | 2010                            |         | 2009 |   | 2008    |  
|Income                                                                                    |  |                                 |         |      |   |         |   |   |       |  
|Dividends received from subsidiary

bank                                                  |  | $                               | 1,500   |      | $ | 5,200   |   | $ | 5,600 |  
|Interest income                                                                           |  |                                 | 3       |      |   | 54      |   |   | 5     |  
|Other income                                                                              |  |                                 | 18      |      |   | 44      |   |   | 43    |  
|                                                                                          |  |                                 |         |      |   |         |   |   |       |  
|Total

income                                                                             |  |                                 | 1,521   |      |   | 5,298   |   |   | 5,648 |  
|                                                                                          |  |                                 |         |      |   |         |   |   |       |  
|Expenses                                                                                  |  |                                 |         |      |   |         |   |   |       |  
|Interest expense                                                                          |  |                                 | 1,142   |      |   | 1,517   |   |   | 2,100 |  
|Amortization and depreciation                                                             |  |                                 | 5       |      |   | 5       |   |   | 7     |  
|Other expenses                                                                            |  |                                 | 300     |      |   | 521     |   |   | 253   |  
|                                                                                          |  |                                 |         |      |   |         |   |   |       |  
|Total

expenses                                                                           |  |                                 | 1,447   |      |   | 2,043   |   |   | 2,360 |  
|                                                                                          |  |                                 |         |      |   |         |   |   |       |  
|Income before income taxes and equity in

undistributed income (loss)
 of subsidiary bank |  |                                 | 74      |      |   | 3,255   |   |   | 3,288 |  
|Applicable income tax benefit                                                             |  |                                 | (552    | )    |   | (699    | ) |   | (892  | )
|                                                                                          |  |                                 |         |      |   |         |   |   |       |  
|Income before equity in undistributed income of

subsidiary bank                          |  |                                 | 626     |      |   | 3,954   |   |   | 4,180 |  
|Equity in undistributed income (loss) of subsidiary

bank                                 |  |                                 | (17,605 | )    |   | (25,080 | ) |   | 3,146 |  
|                                                                                          |  |                                 |         |      |   |         |   |   |       |  
|Net income

(loss)                                                                        |  |                                 | (16,979 | )    |   | (21,126 | ) |   | 7,326 |  
|                                                                                          |  |                                 |         |      |   |         |   |   |       |  
|Dividends on preferred shares                                                             |  |                                 | 1,255   |      |   | 1,178   |   |   | -0-   |  
|Accretion of preferred stock discount                                                     |  |                                 | 28      |      |   | 25      |   |   | -0-   |  
|                                                                                          |  |                                 |         |      |   |         |   |   |       |  
|Net income (loss) available

to common stockholders                                       |  | $                               | (18,262 | )    | $ | (22,329 | ) | $ | 7,326 |  
|                                                                                          |  |                                 |         |      |   |         |   |   |       |  

36

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Condensed Statements of Cash Flows

|                                                                                           |  |                                 |         |      |   |         |   |   |        |  
|------------------------------------------------------------------------------------------ |  | ------------------------------- | ------- | ---- | - | ------- | - | - | ------ | -
|                                                                                           |  | For the Years Ended December 31 |        
|                                                                                           |  | 2010                            |         | 2009 |   | 2008    |  
|Operating activities:                                                                      |  |                                 |         |      |   |         |   |   |        |  
|Net income (loss)                                                                          |  | $                               | (16,979 | )    | $ | (21,126 | ) | $ | 7,326  |  
|Adjustments to reconcile net

income (loss) to net cash provided by
 operating activities: |  |                                 |         |      |   |         |   |   |        |  
|Equity in undistributed (income)

loss of subsidiary bank                                  |  |                                 | 17,605  |      |   | 25,080  |   |   | (3,146 | )
|Amortization of other intangible

assets                                                   |  |                                 | 5       |      |   | 5       |   |   | 7      |  
|Increase in other

assets                                                                  |  |                                 | (665    | )    |   | (8,481  | ) |   | (1,882 | )
|(Decrease) increase in other

liabilities                                                  |  |                                 | (154    | )    |   | (683    | ) |   | 747    |  
|                                                                                           |  |                                 |         |      |   |         |   |   |        |  
|Net
 cash provided by (used in) operating activities                                       |  |                                 | (188    | )    |   | (5,205  | ) |   | 3,052  |  
|                                                                                           |  |                                 |         |      |   |         |   |   |        |  
|                                                                                           |  |                                 |         |      |   |         |   |   |        |  
|Financing activities:                                                                      |  |                                 |         |      |   |         |   |   |        |  
|Net increase (decrease) in

borrowings                                                     |  |                                 | -0-     |      |   | (16,050 | ) |   | 1,500  |  
|Proceeds from issuance of

preferred stock and common stock warrants,
 net of expenses     |  |                                 | -0-     |      |   | 25,020  |   |   | -0-    |  
|Dividends paid on preferred

stock                                                         |  |                                 | (1,255  | )    |   | (1,017  | ) |   | -0-    |  
|Dividends paid on common

stock                                                            |  |                                 | -0-     |      |   | (2,311  | ) |   | (3,696 | )
|Sale of treasury

stock                                                                    |  |                                 | 55      |      |   | 114     |   |   | 124    |  
|Purchase of treasury

stock                                                                |  |                                 | -0-     |      |   | -0-     |   |   | (553   | )
|Award of nonvested common

stock out of treasury stock                                     |  |                                 | 43      |      |   | -0-     |   |   | -0-    |  
|Exercise of stock options and

issuance of treasury stock                                  |  |                                 | -0-     |      |   | -0-     |   |   | 101    |  
|                                                                                           |  |                                 |         |      |   |         |   |   |        |  
|Net
 cash provided by (used in) financing activities                                       |  |                                 | (1,157  | )    |   | 5,756   |   |   | (2,524 | )
|                                                                                           |  |                                 |         |      |   |         |   |   |        |  
|Increase (decrease) in cash and cash

equivalents                                          |  |                                 | (1,345  | )    |   | 551     |   |   | 528    |  
|Cash and cash equivalents at beginning of

year                                            |  |                                 | 1,394   |      |   | 843     |   |   | 315    |  
|                                                                                           |  |                                 |         |      |   |         |   |   |        |  
|Cash and cash equivalents at end of

year                                                  |  | $                               | 49      |      | $ | 1,394   |   | $ | 843    |  
|                                                                                           |  |                                 |         |      |   |         |   |   |        |  

37

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Managements Discussion and Analysis of 
Financial Condition and Results of Operations(dollar amounts
in thousands except share data)

The
following discussion and analysis provides information about the Corporations
financial condition and results of operations for the years ended December 31,
2010, 2009, and 2008. This discussion and analysis should be read in
conjunction with the Corporations Consolidated Financial Statements and the
Notes thereto included in this report.

Overview

The
Corporation reported a net loss available to common stockholders of $(18,262)
for 2010, a decrease in net loss of $4,067 (or 18.2%) when compared to a net
loss of $(22,329) in 2009. Earnings in 2010 were negatively impacted by an
increase in the provision for loan losses ($40,550 in 2010 versus $11,062 in
2009) and an increase in other real estate owned expenses ($2,586 in 2010
versus $1,064 in 2009). Partially offsetting these expenses was an increase in
net interest income of $2,677, or 7.7%. Earnings in 2009 were significantly impacted
by the impairment of goodwill of $24,521. The following represents the
Corporations net income (loss) available to common stockholders, earnings
(loss) per share and provision for loan loss expense for each quarter of 2010:

|            |  |                                                       |   |                           |   |                             |  |   |       |   |  |  |   |        |  | 
|----------- |  | ----------------------------------------------------- | - | ------------------------- | - | --------------------------- |  | - | ----- | - |  |  | - | ------ |  | 
|            |  | Net Income (Loss)
 Available to Common 
 Stockholders |   | Earnings (Loss) per Share |   | Provision for 
 Loan Losses | 
|            |  |                                                       |   |                           |   |                             | 
|1st Quarter |  |                                                       | $ | (62                       | ) |                             |  | $ | (0.02 | ) |  |  | $ | 3,925  |  | 
|2nd Quarter |  |                                                       |   | 99                        |   |                             |  |   | 0.03  |   |  |  |   | 2,650  |  | 
|3rd Quarter |  |                                                       |   | (2,232                    | ) |                             |  |   | (0.67 | ) |  |  |   | 6,725  |  | 
|4th Quarter |  |                                                       |   | (16,067                   | ) |                             |  |   | (4.86 | ) |  |  |   | 27,250 |  | 

During
the fourth quarter of 2010, $16,076 in loan charge-offs were recorded due to
the receipt of updated appraisals reflecting the current deterioration in the
collateral value of commercial real estate and commercial real estate
development properties, primarily in the northern and eastern markets. In
estimating the adequacy of the allowance for loan losses, management utilizes a
twelve-quarter loan loss history as one component in assessing the probability
of inherent future losses, which includes higher weighting of the most recent
data. Thus, fourth quarter 2010 loan charge-offs increased the historical
losses contained in the twelve quarter loan loss history and significantly
increased the general reserve portion of the allowance for loan losses. These
charge-offs, combined with the continued credit deterioration in the northern
and eastern markets, resulted in the large fourth quarter provision for loan
losses.

Updated
collateral assessments, particularly in the areas noted, were negatively
impacted by economic conditions which, though improving, have not yet
stabilized and continue to be influenced by the volume of troubled commercial
and residential real estate properties on the market. This situation remains
dynamic and, though overall improvement is expected, further deterioration
could occur in the future in isolated circumstances. Management considers the
balance of the allowance for loan losses adequate to meet probable losses as of
December 31, 2010.

Non-interest
income declined to 0.99% of average total assets for 2010, compared to 1.06% in
2009. Most categories were down year over year, reflecting an industry trend of
lower service charge income. Gains from the sales of available for sale
securities decreased by $1,059 due to (1) a decrease in the number of
securities sold, and (2) a decrease in the level of gain realized from
portfolio management and restructuring transactions.

Total
non-interest expense as a percentage of average assets increased to 3.21% in
2010 from 2.80% in 2009, excluding the 2009 goodwill impairment loss of
$24,521. Excluding the increase in other real estate owned and loan collection
expenses in 2010 over 2009 of $1,632, and a 2010 write down of land held for
sale of $110, total non-interest expense as a percentage of average assets
increased to 3.06%.

In
2010, the Corporations asset size declined by $164,867 (or 13.1%), ending the
year at $1,096,471 in total assets. With loan demand remaining tempered during
2010, the Corporation implemented a strategic reduction of the balance sheet.
This was accomplished by using the proceeds of investment security sales to
fund the redemption of higher rate public deposits and borrowings. This
resulted in a decrease in the investment portfolio of $40,328, a decrease in
time deposits of $130,262, and a decrease in the Corporations liquidity of
$27,193. Additionally, the Corporations borrowings in the form of Federal Home
Loan Bank advances decreased by $22,500.

Total
stockholders equity decreased by $17,799 from $74,660 in 2009 to a 2010
balance of $56,861. This decrease was substantially due to the $(18,262) net
loss available to common stockholders discussed above.

On March 15, 2010, the
Bank entered into a written agreement (the Agreement) with the OCC. The
Agreement sets forth the Banks commitments to: (i) review and take action as
necessary regarding its allowance for loan and lease losses; (ii) improve the
Banks asset quality through the development of workout plans for criticized
assets and the assessment of credit risk; and (iii) revise the Banks credit
risk rating management information system. The Bank has taken steps to address
the issues raised in the Agreement and intends to fully comply with the
requirements set forth in the Agreement.

On
February 28, 2011, as required by the Corporations primary regulator, the
Federal Reserve Bank, a resolution of the Corporations Board of Directors was
passed requiring that the Corporation obtain written approval from the
Federal Reserve Bank prior to any of the following: the declaration or payment
of dividends; any increase in debt; any distribution of interest, principal, or
other sum associated with subordinated debentures or trust preferred
securities; and the redemption of Corporation stock.

|     |  |                      |           |                  |  |                      |    |                  |        |                                                       |  |                  |    |   |         |   |  |         |  
|---- |  | -------------------- | --------- | ---------------- |  | -------------------- | -- | ---------------- | ------ | ----------------------------------------------------- |  | ---------------- | -- | - | ------- | - |  | ------- | -
|     |  | Assets at 
 Year-End |           | Percent 
 Change |  | Equity at 
 Year-End |    | Percent 
 Change |        | Net Income (Loss)
 Available to 
 Common Stockholders |  | Percent 
 Change |   
|     |  |                      |           |                  |  |                      |    |                  |        |                                                       |  |                  |   
|2010 |  | $                    | 1,096,471 |                  |  | (13.07               | )% | $                | 56,861 |                                                       |  | (23.84           | )% | $ | (18,262 | ) |  | 18.21   | %
|2009 |  |                      | 1,261,338 |                  |  | 8.44                 |    |                  | 74,660 |                                                       |  | 3.02             |    |   | (22,329 | ) |  | (404.79 | )
|2008 |  |                      | 1,163,130 |                  |  | 7.63                 |    |                  | 72,471 |                                                       |  | 5.63             |    |   | 7,326   |   |  | 8.21    |  

38

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Critical Accounting Policies and Use of Significant Estimates

The
Corporation has established various accounting policies that govern the
application of U.S. generally accepted accounting principles in the preparation
of the Corporations financial statements. The significant accounting policies
of the Corporation are described in the footnotes to the Consolidated Financial
Statements. Certain accounting policies involve significant judgments and
assumptions by management that have a material impact on the carrying value of
certain assets and liabilities; management considers such accounting policies
to be critical accounting policies. The judgments and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of the
judgments and assumptions made by management, actual results could differ from
these judgments and assumptions, which could have a material impact on the
carrying values of assets and liabilities and the results of operations of the
Corporation.

Allowance for

Loan Losses - The Corporation
believes the allowance for loan losses is the critical accounting policy that
requires the most significant judgments and assumptions used in the preparation
of its Consolidated Financial Statements. We determine probable incurred losses
inherent in our loan portfolio and establish an allowance for those losses by
considering factors including historical loss rates, expected cash flows and
estimated collateral values. In assessing these factors, we use organizational
history and experience with credit decisions and related outcomes. The
allowance for loan losses represents our best estimate of losses inherent in
the existing loan portfolio. The allowance for loan losses is increased by the
provision for loan losses charged to expense and reduced by loans charged off,
net of recoveries. We evaluate our allowance for loan losses quarterly. If our
underlying assumptions later prove to be inaccurate based on subsequent loss
evaluations, the allowance for loan losses is adjusted.

We
estimate the appropriate level of allowance for loan losses by separately
evaluating impaired and non-impaired loans. A specific allowance is assigned to
an impaired loan when expected cash flows or collateral do not justify the
carrying amount of the loan. The methodology used to assign an allowance to a
non-impaired loan is more subjective. Generally, the allowance assigned to
non-impaired loans is determined by applying historical loss rates to existing
loans with similar risk characteristics, adjusted for qualitative factors
including the volume and severity of identified classified loans, changes in
economic conditions, changes in credit policies or underwriting standards, and
changes in the level of credit risk associated with specific industries and
markets. Because the economic and business climate in any given industry or
market, and its impact on any given borrower, can change rapidly, the risk
profile of the loan portfolio is continually assessed and adjusted when
appropriate. Notwithstanding these procedures, there still exists the
possibility that our assessment could prove to be incorrect and that an
immediate adjustment to the allowance for loan losses would be required.

Other Real Estate

Owned - Other real estate
owned acquired through loan foreclosure is initially recorded at fair value
less costs to sell when acquired, establishing a new cost basis. The adjustment
at the time of foreclosure is recorded through the allowance for loan losses.
Due to the subjective nature of establishing the fair value when the asset is
acquired, the actual fair value of the other real estate owned or foreclosed
asset could differ from the original estimate. If it is determined that fair
value declines subsequent to foreclosure, a valuation allowance is recorded
through non-interest expense. Operating costs associated with the assets after
acquisition are also recorded as non-interest expense. Gains and losses on the
disposition of other real estate owned and foreclosed assets are netted and
posted to other non-interest expense.

Deferred Income

Tax Assets/Liabilities -
Our net deferred income tax asset arises from differences in the dates that
items of income and expense enter into our reported income and taxable income.
Deferred tax assets and liabilities are established for these items as they
arise. From an accounting standpoint, deferred tax assets are reviewed to
determine if they are realizable based on the historical level of our taxable
income, estimates of our future taxable income and the reversals of deferred
tax liabilities. In most cases, the realization of the deferred tax asset is
based on our future profitability. If we experience net operating losses for
tax purposes, the realization of deferred tax assets is evaluated for a
potential valuation reserve.

Additionally,
the Corporation reviews its uncertain tax positions annually under ASC Topic
740, Accounting for Uncertainty in Income Taxes. An uncertain tax position is
recognized as a benefit only if it is more likely than not that the tax
position would be sustained in a tax examination, with a tax examination being
presumed to occur. The amount actually recognized is the largest amount of tax
benefit that is greater than 50% likely to be recognized on examination. For
tax positions not meeting the more likely than not test, no tax benefit is
recorded. A significant amount of judgment is applied to determine both whether
the tax position meets the more likely than not test as well as to determine
the largest amount of tax benefit that is greater than 50% likely to be
recognized. Differences between the position taken by management and that of
taxing authorities could result in a reduction of a tax benefit or increase to
tax liability, which could adversely affect future income tax expense.

Impairment of

Intangible Assets - Core
deposit and customer relationships, which are intangible assets with a finite
life, are recorded on our balance sheets. These intangible assets were
capitalized as a result of past acquisitions and are being amortized over their
estimated useful lives of up to 15 years. Core deposit intangible assets with
finite lives will be tested for impairment when changes in events or
circumstances indicate that its carrying amount may not be recoverable. Core
deposit intangible assets were tested for impairment during 2010 and 2009, and
no impairment was deemed necessary.

As
a result of our acquisition activity, goodwill, an intangible asset with an
indefinite life, was reflected on our balance sheet in prior periods. Goodwill
was evaluated for impairment annually, unless there were factors present that
indicated a potential impairment, in which case, the goodwill impairment test
was performed more frequently than annually. Accordingly, as the Corporations
stock price at December 31, 2009 decreased below book value, a goodwill
impairment test was performed and full impairment was deemed necessary (see
Note 7  Goodwill in the Notes to Consolidated Financial Statements).

Mortgaging

Service Rights (MSRs) - MSR fair
values are very sensitive to movements in interest rates as expected future net
servicing income depends on the projected outstanding principal balances of the
underlying loans, which can be greatly reduced by prepayments. Prepayments
usually increase when mortgage interest rates decline and decrease when
mortgage interest rates rise. For discussion regarding the impairment of MSRs,
see Note 8  Intangible Assets in the Notes to Consolidated Financial
Statements.

Fair Value

Measurements - The fair value of
a financial instrument is defined as the amount at which the instrument could
be exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. The Corporation estimates the fair value of a
financial instrument using a variety of valuation methods. Where financial
instruments are actively traded and have quoted market prices, quoted market
prices are used for fair value. When the financial instruments are not actively
traded, other observable market inputs, such as quoted prices of securities
with similar characteristics, may be used, if available, to determine fair
value. When observable market prices do not exist, the Corporation estimates
fair value. The Corporations valuation methods consider factors such as
liquidity and concentration concerns. Other factors such as model assumptions,
market dislocations and unexpected correlations can affect estimates of fair
value. Imprecision in estimating these factors can impact the amount of revenue
or loss recorded.

39

---



Managements Discussion and Analysis of
Financial Condition and Results of Operations(Continued)
(dollar amounts in thousands except share data)

ASC
820, Fair Value Measurements, establishes a framework for measuring the fair
value of financial instruments that considers the attributes specific to
particular assets or liabilities and establishes a three-level hierarchy for
determining fair value based on the transparency of inputs to each valuation as
of the fair value measurement date. The three levels are defined as follows:

| |           |                                                                                                                                                                                                                                                                                                                                           
| | --------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Level 1 - | quoted
 prices (unadjusted) for identical assets or liabilities in active markets.                                                                                                                                                                                                                                                        
| |           |                                                                                                                                                                                                                                                                                                                                           
| | Level 2 - | inputs
 include quoted prices for similar assets and liabilities in active markets,
 quoted prices of identical or similar assets or liabilities in markets that
 are not active, and inputs that are observable for the asset or liability,
 either directly or indirectly, for substantially the full term of the
 financial instrument.
| |           |                                                                                                                                                                                                                                                                                                                                           
| | Level 3 - | inputs
 that are unobservable and significant to the fair value measurement.                                                                                                                                                                                                                                                              

At
the end of each quarter, the Corporation assesses the valuation hierarchy for
each asset or liability measured. From time to time, assets or liabilities may
be transferred within hierarchy levels due to changes in availability of
observable market inputs to measure fair value at the measurement date.
Transfers into or out of hierarchy levels are based upon the fair value at the
beginning of the reporting period. A more detailed description of the fair
values measured at each level of the fair value hierarchy can be found in Note
16 - Fair Value of Financial Instruments in the Notes to Consolidated
Financial Statements.

Analysis of Results of Operations

Net Income (Loss).The Corporation recorded
a net loss available to common stockholders of $(18,262), or $(5.52) per basic
and diluted loss per common share, in 2010. This represented an improvement
over the net loss available to common stockholders reported in 2009 of
$(22,329), or $(6.76) per basic and diluted earnings (loss) per common share.
The loss experienced in 2010 is primarily due to an increase in loan loss
provisioning expense during the year and increased costs incurred in the
collection of problem loans and management of other real estate owned
properties. The heightened provision level of $40,550 was significantly
impacted by the level of deterioration in the valuation of collateral
supporting problem loans. The Corporation experienced an increase of $2,677, or
7.7%, in net interest income from $34,651 in 2009 to $37,328 in 2010 due to a
continued focus on interest cost reduction in the current low rate environment.

Net
income (loss) available to common stockholders for 2009 decreased by $29,655
(or 404.8%) to $(22,329) (or $(6.76) per basic and diluted earnings (loss) per
share available to common stockholders), from $7,326 (or $2.22 per basic
earnings per share available to common stockholders and $2.21 per diluted
earnings per share available to common stockholders) in 2008. The lower results
are due in part to the impairment of goodwill of $24,521, an increase in
provision for loan losses of $8,094 and an increase in federal deposit
insurance assessments of $1,739. These were partially offset by a $3,130 improvement
in net interest income and a $1,651 increase in non-interest income.

For a more
detailed review of net interest income, non-interest income and non-interest
expense please refer to those sections contained in this Managements
Discussion and Analysis.

Net Interest Income. The Corporation
experienced a $1,924 improvement in net interest income, on a
taxable-equivalent basis, during 2010, increasing to $39,449 from $37,525 in
2009, representing an improvement of 5.1%. This positive change was made
possible through continued emphasis on reducing the Corporations cost of funds
in the current low interest rate environment. Average interest-earning assets
decreased $99,940 (9.1%) during 2010 to $992,306 from $1,092,246 in 2009. This
decrease was due in part to the Corporations strategy to shrink the balance
sheet. Implementation of this strategy resulted in the sale of investment
securities to fund the redemption of higher-rate public deposits. The average
balance of investment securities decreased by $50,817, or 16.9%, to $249,777 in
2010 from $300,594 in 2009. Net loans decreased $56,710 or 7.6% in 2010 due to
limited customer demand, loans charged-off and reclassification of loans to
other real estate owned. Efforts in 2010 to maintain a higher level of
liquidity resulted in an increase in average interest-bearing deposits of
$7,592 or 15.9%.

Average
interest-bearing liabilities decreased by $81,535 or 7.9% to $948,247, while
the interest expense paid for those liabilities decreased significantly by
$9,847 or 44.6% from $22,085 in 2009 to $12,238 in 2010. This interest cost
reduction was due to tightly controlled pricing and the reduction of other
borrowings, along with scheduled repricing during the continued historic low
interest rate environment. The resulting net yield on average interest-earning
assets for 2010 increased significantly to 3.98% from 3.44% in 2009 primarily
due to reduction in interest costs on redemption of higher rate public
deposits.

The
following table sets forth details of average balances, interest income and
expense, and resulting rates for the past three years, reported on a taxable
equivalent basis using a tax rate of 34%:

|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|--------------------------------------------------------------- |  | -------------------------------- | --------- | -------- | - | ------------ |  | ---------------- | ---- | -------- | - | ------------ |  | ---------------- | ------ | -------- |  | ------------ | - | - | --------- |  | - | ------ |  |  | ---- | -
|                                                                |  | For the Years Ending December 31 |          
|                                                                |  |                                  |          
|                                                                |  | 2010                             |           | 2009     |   | 2008         | 
|                                                                |  | Average
 Balance                 |           | Interest |   | Yield/
 Cost |  | Average
 Balance |      | Interest |   | Yield/
 Cost |  | Average
 Balance |        | Interest |  | Yield/
 Cost |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Average Interest-Earning Assets                                 |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Interest-bearing deposits                                       |  | $                                | 55,352    |          | $ | 139          |  |                  | 0.25 | %        | $ | 47,760       |  | $                | 114    |          |  | 0.24         | % | $ | 2,785     |  | $ | 55     |  |  | 1.97 | %
|Taxable investment securities                                   |  |                                  | 151,930   |          |   | 6,290        |  |                  | 4.14 |          |   | 176,871      |  |                  | 7,607  |          |  | 4.30         |   |   | 143,108   |  |   | 6,834  |  |  | 4.78 |  
|Tax-exempt investment securities (a)                            |  |                                  | 97,847    |          |   | 5,798        |  |                  | 5.93 |          |   | 123,723      |  |                  | 8,025  |          |  | 6.49         |   |   | 94,926    |  |   | 6,284  |  |  | 6.62 |  
|Federal funds sold                                              |  |                                  | -0-       |          |   | -0-          |  |                  | 0.00 |          |   | 5            |  |                  | -0-    |          |  | 0.00         |   |   | 5,316     |  |   | 71     |  |  | 1.34 |  
|Net loans (a) (b)                                               |  |                                  | 687,177   |          |   | 39,460       |  |                  | 5.74 |          |   | 743,887      |  |                  | 43,864 |          |  | 5.90         |   |   | 734,672   |  |   | 47,796 |  |  | 6.51 |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Total interest-earning assets                                   |  |                                  | 992,306   |          |   | 51,687       |  |                  | 5.21 |          |   | 1,092,246    |  |                  | 59,610 |          |  | 5.46         |   |   | 980,807   |  |   | 61,040 |  |  | 6.22 |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Average non-interest-earning assets                             |  |                                  | 165,319   |          |   |              |  |                  |      |          |   | 156,998      |  |                  |        |          |  |              |   |   | 126,526   |  |   |        |  |  |      |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Total average assets                                            |  | $                                | 1,157,625 |          |   |              |  |                  |      |          | $ | 1,249,244    |  |                  |        |          |  |              |   | $ | 1,107,333 |  |   |        |  |  |      |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Average Interest-Bearing Liabilities                            |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Interest-bearing demand deposits                                |  | $                                | 375,537   |          |   | 2,972        |  |                  | 0.79 | %        | $ | 301,035      |  |                  | 3,734  |          |  | 1.24         | % | $ | 253,982   |  |   | 3,647  |  |  | 1.44 | %
|Savings deposits                                                |  |                                  | 73,196    |          |   | 62           |  |                  | 0.08 |          |   | 66,040       |  |                  | 55     |          |  | 0.08         |   |   | 61,815    |  |   | 67     |  |  | 0.11 |  
|Time deposits                                                   |  |                                  | 415,127   |          |   | 7,351        |  |                  | 1.77 |          |   | 563,901      |  |                  | 15,431 |          |  | 2.74         |   |   | 506,663   |  |   | 20,068 |  |  | 3.96 |  
|Interest-bearing demand notes issued to the U.S. Treasury       |  |                                  | 957       |          |   | -0-          |  |                  | 0.00 |          |   | 924          |  |                  | -0-    |          |  | 0.00         |   |   | 1,099     |  |   | 15     |  |  | 1.36 |  
|Federal funds purchased and customer repurchase agreements      |  |                                  | 36,981    |          |   | 279          |  |                  | 0.75 |          |   | 38,175       |  |                  | 424    |          |  | 1.11         |   |   | 41,584    |  |   | 757    |  |  | 1.82 |  
|Advances from Federal Home Loan Bank                            |  |                                  | 21,449    |          |   | 432          |  |                  | 2.01 |          |   | 32,332       |  |                  | 924    |          |  | 2.86         |   |   | 19,362    |  |   | 647    |  |  | 3.34 |  
|Trust preferred securities                                      |  |                                  | 25,000    |          |   | 1,142        |  |                  | 4.57 |          |   | 25,000       |  |                  | 1,420  |          |  | 5.68         |   |   | 25,000    |  |   | 1,420  |  |  | 5.68 |  
|Note payable                                                    |  |                                  | -0-       |          |   | -0-          |  |                  | 0.00 |          |   | 2,375        |  |                  | 97     |          |  | 4.08         |   |   | 15,296    |  |   | 680    |  |  | 4.45 |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Total interest-bearing liabilities                              |  |                                  | 948,247   |          |   | 12,238       |  |                  | 1.29 |          |   | 1,029,782    |  |                  | 22,085 |          |  | 2.14         |   |   | 924,801   |  |   | 27,301 |  |  | 2.95 |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Net taxable equivalent yield on average interest-earning assets |  |                                  |           |          | $ | 39,449       |  |                  | 3.98 | %        |   |              |  | $                | 37,525 |          |  | 3.44         | % |   |           |  | $ | 33,739 |  |  | 3.44 | %
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Average non-interest-bearing liabilities                        |  |                                  | 132,696   |          |   |              |  |                  |      |          |   | 121,578      |  |                  |        |          |  |              |   |   | 113,348   |  |   |        |  |  |      |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Average stockholders equity                                    |  |                                  | 76,682    |          |   |              |  |                  |      |          |   | 97,884       |  |                  |        |          |  |              |   |   | 69,184    |  |   |        |  |  |      |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Total average liabilities and stockholders equity              |  | $                                | 1,157,625 |          |   |              |  |                  |      |          | $ | 1,249,244    |  |                  |        |          |  |              |   | $ | 1,107,333 |  |   |        |  |  |      |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  

|    |                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Interest income on
 non-taxable investment securities and non-taxable loans includes the effects
 of taxable-equivalent adjustments, using a tax rate of 34% in adjusting
 interest on tax-exempt securities and tax-exempt loans to a taxable equivalent
 basis. The amount of taxable equivalent adjustments were $2,121 in 2010,
 $2,874 in 2009 and $2,218 in 2008.
|    |                                                                                                                                                                                                                                                                                                                                                                        
|(b) | Includes $59 in 2010,
 $(167) in 2009 and $32 in 2008 attributable to interest from non-accrual
 loans.                                                                                                                                                                                                                                                                

40

---



The
following table reconciles taxable-equivalent net interest income (as shown
above) to net interest income as reported on the Consolidated Statements of
Income:

|                                          |  |      |        |      |   |        |  |   |        | 
|----------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                                          |  | 2010 |        | 2009 |   | 2008   | 
|                                          |  |      |        |      |   |        | 
|Net interest income as
 stated            |  | $    | 37,328 |      | $ | 34,651 |  | $ | 31,521 | 
|Taxable-equivalent adjustment-investments |  |      | 1,971  |      |   | 2,729  |  |   | 2,137  | 
|Taxable-equivalent adjustment-loans       |  |      | 150    |      |   | 145    |  |   | 81     | 
|                                          |  |      |        |      |   |        |  |   |        | 
|Taxable-equivalent net
 interest income   |  | $    | 39,449 |      | $ | 37,525 |  | $ | 33,739 | 
|                                          |  |      |        |      |   |        |  |   |        | 

The
following table reconciles the net yield on average interest-earning assets to
the net yield on average interest-earning assets on a taxable-equivalent basis:

|                                                         |  |      |      |      |  |      |   |  |      |  
|-------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | - |  | ---- | -
|                                                         |  | 2010 |      | 2009 |  | 2008 |  
|                                                         |  |      |      |      |  |      |  
|Net yield on
 interest-earning assets                    |  |      | 3.76 | %    |  | 3.17 | % |  | 3.21 | %
|Taxable equivalent adjustment-investments                |  |      | 0.20 |      |  | 0.25 |   |  | 0.22 |  
|Taxable equivalent adjustment-loans                      |  |      | 0.02 |      |  | 0.02 |   |  | 0.01 |  
|                                                         |  |      |      |      |  |      |   |  |      |  
|Taxable equivalent net
 yield on interest-earning assets |  |      | 3.98 | %    |  | 3.44 | % |  | 3.44 | %
|                                                         |  |      |      |      |  |      |   |  |      |  

The
Corporation experienced a $3,786 improvement in net interest income, on a
taxable-equivalent basis, during 2009, increasing to $37,525 from $33,739 in
2008, representing an improvement of 11.2%. This positive change was made
possible through growth in the balance sheet and, more importantly, continued
emphasis on reducing the Corporations cost of funds in the lower interest rate
environment. Average interest-earning assets during 2009 increased to
$1,092,246 from $980,807 in 2008, representing growth of $111,439 (or 11.4%).
As loan demand weakened in 2009, the asset mix of the balance sheet shifted
more to investments with the average balance of investment securities
increasing by $62,560 (or 26.3%), while the average balance of net loans
increased just $9,215 (or 1.3%). In addition, the average balance of
interest-bearing deposits increased $44,975 (or 1,614.9%) in 2009, as a result
of the Corporations successful efforts to build liquidity into the balance
sheet.

However,
on the liability side, although average interest-bearing liabilities increased
by $105,000 (10.4%) to $1,029,782, the interest expense paid for those
liabilities decreased from $27,301 in 2008 to $22,085 in 2009, a reduction of
$5,216 (or 19.1%). This was due to controlled pricing and the efficient use of
other borrowings, along with normal repricing from the low interest-rate
environment. The net yield on interest-earning assets for 2009 remained at the
same rate of 3.44% from 2008.

41

---



Managements Discussion and Analysis of
Financial Condition and Results of Operations(Continued)
(dollar amounts in thousands except share data)

The
following table describes changes in net interest income attributable to
changes in the volume of interest-earning assets and interest-bearing liabilities
compared to changes in interest rates:

|                                                             |  |                        |        |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |        |   |   |        |  
|------------------------------------------------------------ |  | ---------------------- | ------ | --------------------- | - | --------------------- | - | --------- | ------ | ------- | - | ----- | - | --------- | ------ | ------- | - | ------ | - | - | ----- | - | - | ------ | - | - | ------ | -
|                                                             |  | Year ended December 31 |       
|                                                             |  |                        |       
|                                                             |  | 2010 compared to 2009  |        | 2009 compared to 2008 |   | 2008 compared to 2007 |  
|                                                             |  | Volume(a)              |        | Rate(a)               |   | Net                   |   | Volume(a) |        | Rate(a) |   | Net   |   | Volume(a) |        | Rate(a) |   | Net    |  
|                                                             |  |                        |        |                       |   |                       |  
|Interest from interest-earning assets                        |  |                        |        |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |        |   |   |        |  
|                                                            
|Interest-bearing time deposits                               |  | $                      | 19     |                       | $ | 6                     |   | $         | 25     |         | $ | 498   |   | $         | (439   | )       | $ | 59     |   | $ | 11    |   | $ | (78    | ) | $ | (67    | )
|Taxable investment securities                                |  |                        | (1,053 | )                     |   | (264                  | ) |           | (1,317 | )       |   | 1,532 |   |           | (759   | )       |   | 773    |   |   | (422  | ) |   | 434    |   |   | 12     |  
|Tax-exempt investment securities (b)                         |  |                        | (1,606 | )                     |   | (621                  | ) |           | (2,227 | )       |   | 1,887 |   |           | (146   | )       |   | 1,741  |   |   | 342   |   |   | (576   | ) |   | (234   | )
|Federal funds sold                                           |  |                        | -0-    |                       |   | -0-                   |   |           | -0-    |         |   | (35   | ) |           | (36    | )       |   | (71    | ) |   | (44   | ) |   | (217   | ) |   | (261   | )
|Net loans (c)                                                |  |                        | (3,300 | )                     |   | (1,104                | ) |           | (4,404 | )       |   | 571   |   |           | (4,503 | )       |   | (3,932 | ) |   | 4,752 |   |   | (7,028 | ) |   | (2,276 | )
|                                                             |  |                        |        |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |        |   |   |        |  
|Total income from interest-earning assets                    |  |                        | (5,940 | )                     |   | (1,983                | ) |           | (7,923 | )       |   | 4,453 |   |           | (5,883 | )       |   | (1,430 | ) |   | 4,639 |   |   | (7,465 | ) |   | (2,826 | )
|                                                             |  |                        |        |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |        |   |   |        |  
|                                                             |  |                        |        |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |        |   |   |        |  
|Expense of interest-bearing liabilities                      |  |                        |        |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |        |   |   |        |  
|                                                             |  |                        |        |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |        |   |   |        |  
|Interest-bearing demand deposits                             |  |                        | 757    |                       |   | (1,519                | ) |           | (762   | )       |   | 630   |   |           | (543   | )       |   | 87     |   |   | 323   |   |   | (3,243 | ) |   | (2,920 | )
|Savings deposits                                             |  |                        | 6      |                       |   | 1                     |   |           | 7      |         |   | 4     |   |           | (16    | )       |   | (12    | ) |   | (4    | ) |   | (178   | ) |   | (182   | )
|Time deposits                                                |  |                        | (3,353 | )                     |   | (4,727                | ) |           | (8,080 | )       |   | 1,917 |   |           | (6,554 | )       |   | (4,637 | ) |   | 1,102 |   |   | (4,543 | ) |   | (3,441 | )
|Interest-bearing demand notes issued to the U.S. Treasury    |  |                        | -0-    |                       |   | -0-                   |   |           | -0-    |         |   | (1    | ) |           | (14    | )       |   | (15    | ) |   | 2     |   |   | (36    | ) |   | (34    | )
|Federal funds purchased and securities repurchase agreements |  |                        | (11    | )                     |   | (134                  | ) |           | (145   | )       |   | (50   | ) |           | (283   | )       |   | (333   | ) |   | 220   |   |   | (1,019 | ) |   | (799   | )
|Advances from Federal Home Loan Bank                         |  |                        | (265   | )                     |   | (227                  | ) |           | (492   | )       |   | 402   |   |           | (125   | )       |   | 277    |   |   | 532   |   |   | (251   | ) |   | 281    |  
|Trust preferred securities                                   |  |                        | -0-    |                       |   | (278                  | ) |           | (278   | )       |   | -0-   |   |           | -0-    |         |   | -0-    |   |   | -0-   |   |   | -0-    |   |   | -0-    |  
|Note payable                                                 |  |                        | (49    | )                     |   | (48                   | ) |           | (97    | )       |   | (551  | ) |           | (32    | )       |   | (583   | ) |   | 234   |   |   | (343   | ) |   | (109   | )
|                                                             |  |                        |        |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |        |   |   |        |  
|Total expense from interest-bearing liabilities              |  |                        | (2,915 | )                     |   | (6,932                | ) |           | (9,847 | )       |   | 2,351 |   |           | (7,567 | )       |   | (5,216 | ) |   | 2,409 |   |   | (9,613 | ) |   | (7,204 | )
|                                                             |  |                        |        |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |        |   |   |        |  
|                                                             |  |                        |        |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |        |   |   |        |  
|Net difference                                               |  | $                      | (3,025 | )                     | $ | 4,949                 |   | $         | 1,924  |         | $ | 2,102 |   | $         | 1,684  |         | $ | 3,786  |   | $ | 2,230 |   | $ | 2,148  |   | $ | 4,378  |  
|                                                             |  |                        |        |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |        |   |   |        |  

|    |                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The
 change in interest due both to rate and volume has been allocated equally.                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                          
|(b) | Interest
 income on non-taxable investment securities and non-taxable loans includes
 the effects of taxable-equivalent adjustments using a tax rate of 34% in
 adjusting interest on tax-exempt securities and tax-exempt loans to a
 taxable-equivalent basis. The amount of taxable-equivalent adjustments were
 $2,121 in 2010, $2,874 in 2009 and $2,218 in 2008.                   
|    |                                                                                                                                                                                                                                                                                                                                                                                          
|(c) | Includes
 loan fees of $294 in 2010, $734 in 2009 and $996 in 2008. Interest income on
 loans includes the effect of taxable-equivalent adjustments for non-taxable
 loans using a tax rate of 34% in adjusting interest on tax-exempt loans to a
 taxable-equivalent basis. Includes non-accrual loans, with year-end balances
 of $72,404 in 2010, $42,593 in 2009 and $30,383 in 2008.

Non-interest Income.Total non-interest
income decreased in 2010 by $1,752, or 13.2%, to $11,492 from the 2009 total of
$13,244. The largest decrease occurred due to a reduction in net gains realized
from the sales of investment securities. The Corporation realized $722 in net
gains from the sales of investment securities in 2010, compared to $1,781 in
2009, a decrease of $1,059 or 59.5%. This was largely due to the level of sales
in 2009 of short-term securities to reposition cash flows in the portfolio.
Service charges on deposits decreased by $266, or 6.7%, due largely to a
decrease in the number of customer overdrafts. Trust and farm management fees
decreased by $186, or 13.9%, due to a decline in estate settlement fees and a
restructuring of fee levels. The remaining categories of non-interest income
showed either slight increases or decreases over the prior year.

The
following table provides non-interest income by category, total non-interest
income and non-interest income to average total assets for the periods
indicated:

|                                               |  |                                 |        |      |   |        |   |   |        |  
|---------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                               |  | For the Years ended December 31 |       
|                                               |  |                                 |       
|                                               |  | 2010                            |        | 2009 |   | 2008   |  
|                                               |  |                                 |        |      |   |        |   |   |        |  
|Trust and farm management fees                 |  | $                               | 1,148  |      | $ | 1,334  |   | $ | 1,530  |  
|Service charges on deposit accounts            |  |                                 | 3,695  |      |   | 3,961  |   |   | 4,408  |  
|Other service charges                          |  |                                 | 1,913  |      |   | 1,954  |   |   | 2,137  |  
|Gain on sales of securities available-for-sale |  |                                 | 722    |      |   | 1,781  |   |   | 405    |  
|Brokerage fee income                           |  |                                 | 754    |      |   | 857    |   |   | 913    |  
|Mortgage banking income                        |  |                                 | 2,273  |      |   | 2,277  |   |   | 1,069  |  
|Bank-owned life insurance income               |  |                                 | 910    |      |   | 941    |   |   | 874    |  
|Other operating income                         |  |                                 | 77     |      |   | 139    |   |   | 257    |  
|                                               |  |                                 |        |      |   |        |   |   |        |  
|Total non-interest income                      |  | $                               | 11,492 |      | $ | 13,244 |   | $ | 11,593 |  
|                                               |  |                                 |        |      |   |        |   |   |        |  
|Non-interest income to average total assets    |  |                                 | 0.99   | %    |   | 1.06   | % |   | 1.05   | %

42

---



Total
non-interest income increased in 2009 by $1,651, or 14.2%, to $13,244 from the
2008 total of $11,593. The Corporation recorded $1,781 in net gains from the
sales of investment securities in 2009, compared to $405 in 2008, an increase
of $1,376 or 339.8%. This was due largely to sales of shorter-term securities
to reposition cash flows in the portfolio. Significant earnings improvement was
seen in the category of mortgage banking income, which increased by $1,208 or
113.0%, due to increased loan production as well as servicing income from a
larger portfolio. Service charges on deposits decreased by $447, (or 10.1%) due
largely to a decrease in the number of overdrafts. The remaining categories of
non-interest income showed either slight increases or decreases over the prior
year.

Non-interest Expense.Total non-interest
expense decreased to $37,153 in 2010 from $59,559 in 2009 (a decrease of
$22,406 or 37.6%). This change was primarily the result of the goodwill
impairment loss of $24,521 recorded in 2009. See Note 7 - Goodwill in the
Notes to the Consolidated Financial Statements. Other real estate owned expense
increased by $1,522, or 143.0%, from $1,064 in 2009 to $2,586 in 2010, due to
an increase in the balance of other real estate owned property and an increase
in losses on sales or writedowns of other real estate owned from 2009 to 2010.
Loan collection expenses increased by $110, or 18.9%, from 2009 to 2010. The
Corporation also incurred a write-down on a parcel of land held for sale of
$110 in 2010. As a percentage of average total assets, non-interest expense
declined to 3.21% in 2010 from 4.77% in 2009, due to 2009 including the
goodwill impairment loss.

The following table provides non-interest expense and
non-interest expense to average total assets for the periods indicated:

|                                             |  |                                 |        |      |   |        |   |   |        |  
|-------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                             |  | For the Years ended December 31 |       
|                                             |  |                                 |       
|                                             |  | 2010                            |        | 2009 |   | 2008   |  
|                                             |  |                                 |        |      |   |        |  
|Salaries and employee benefits               |  | $                               | 18,211 |      | $ | 18,011 |   | $ | 17,692 |  
|Occupancy                                    |  |                                 | 2,635  |      |   | 1,903  |   |   | 1,890  |  
|Equipment expense                            |  |                                 | 3,117  |      |   | 3,071  |   |   | 2,996  |  
|Federal insurance assessments                |  |                                 | 2,519  |      |   | 2,584  |   |   | 845    |  
|Goodwill impairment losses                   |  |                                 | -0-    |      |   | 24.521 |   |   | -0-    |  
|Intangible assets amortization               |  |                                 | 807    |      |   | 816    |   |   | 714    |  
|Data processing                              |  |                                 | 1,327  |      |   | 1,290  |   |   | 1,151  |  
|Marketing                                    |  |                                 | 696    |      |   | 751    |   |   | 742    |  
|Postage                                      |  |                                 | 537    |      |   | 544    |   |   | 547    |  
|Property taxes                               |  |                                 | 717    |      |   | 695    |   |   | 669    |  
|Supplies                                     |  |                                 | 408    |      |   | 386    |   |   | 347    |  
|Other real estate owned expense              |  |                                 | 2,586  |      |   | 1,064  |   |   | 203    |  
|Loan collection expenses                     |  |                                 | 691    |      |   | 581    |   |   | 218    |  
|Write-down of land held for sale             |  |                                 | 110    |      |   | -0-    |   |   | -0-    |  
|Other operating expense                      |  |                                 | 2,792  |      |   | 3,342  |   |   | 3,109  |  
|                                             |  |                                 |        |      |   |        |   |   |        |  
|Total non-interest expense                   |  | $                               | 37,153 |      | $ | 59,559 |   | $ | 31,123 |  
|                                             |  |                                 |        |      |   |        |   |   |        |  
|Non-interest expense to average total assets |  |                                 | 3.21   | %    |   | 4.77   | % |   | 2.81   | %

Total
non-interest expense increased to $59,559 in 2009 from $31,123 in 2008 (an
increase of $28,436 or 91.4%). The majority of the increase resulted from the
goodwill impairment loss recorded in the fourth quarter, along with the
increases in Federal deposit insurance assessments and other real estate owned
expenses, which increased by $1,739 (205.8%) and $861 (424.1%), respectively.
See Note 7 - Goodwill in the Notes to Consolidated Financial Statements.
Federal insurance assessments increased to $2,584 in 2009 from $845 in 2008 due
to the special assessment as well as an increase in the quarterly multiplier
rate and an increase in the balance of deposit liabilities. Other real estate owned
expenses increased to $1,064 in 2009 from $203 in 2008, due to an increase in
the balance of other real estate owned property from 2008 to 2009. In addition,
the categories of salaries and employee benefits and other operating expense
increased by $319 (or 1.8%) and $233 (or 7.5%), respectively, from 2008 to
2009. Due primarily to the goodwill impairment loss, non-interest expense as a
percentage of average total assets increased to 4.77% in 2009, compared to
2.81% in 2008. Without the goodwill impairment loss, non-interest expense as a
percentage of average assets would have decreased slightly to 2.80% in 2009.

Income Taxes.The income tax benefit in
2010 was $11,904 and $1,600 in 2009, while income tax expense was $1,697 in
2008. The income tax benefit in 2010 was generated from a pre-tax loss of
$(28,883), largely from loan charge-offs, coupled with tax-free income of
$4,263 from tax-exempt loans, investments and bank-owned life insurance. In
2009, the income tax benefit was generated from lower pre-tax earnings of
$1,795, without regard to the goodwill impairment loss, in conjunction with
tax-free income of $6,237 from tax-exempt loans, investment securities and
bank-owned life insurance. The effective tax rates were (41.2%), (8.9%) and 18.8%
for the respective years then ended.

At
year-end 2010, after weighing all positive and negative evidence, the
Corporation concluded that it was more than likely than not that the deferred
tax asset would be realized, and no valuation allowance was required.
Management concluded that the positive weight of its historic profitability
prior to the current economic environment and the non-recurring goodwill
impairment loss in 2009, and managements projections that sufficient taxable
income would be generated within the carryforward periods allowed by current
federal and state tax regulations, was greater than the negative weight
represented by issues concerning the Corporations asset quality in the current
economic environment.

43

---



Managements Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
(dollar amounts in thousands except share data)

Analysis of Financial Condition

Loans. The Corporations loan portfolio
largely reflects the profile of the communities in which it operates. The
Corporation essentially offers four types of loans: commercial, agricultural,
real estate and consumer installment. The Corporation has no foreign loans. The
following table summarizes the Corporations loan portfolio:

|                                   |  |             |           |             |  |        |   |             |           |        |  |             |   |        |           |             |  |        |   |             |           |  |  |       |   |   |           |  |       |   | 
|---------------------------------- |  | ----------- | --------- | ----------- |  | ------ | - | ----------- | --------- | ------ |  | ----------- | - | ------ | --------- | ----------- |  | ------ | - | ----------- | --------- |  |  | ----- | - | - | --------- |  | ----- | - | 
|                                   |  | December 31 |          
|                                   |  |             |          
|                                   |  | 2010        |           | 2009        |  | 2008   |   | 2007        |           | 2006   | 
|                                   |  | Amount      |           | % of
 Total |  | Amount |   | % of
 Total |           | Amount |  | % of
 Total |   | Amount |           | % of
 Total |  | Amount |   | % of
 Total |          
|                                   |  |             |           |             |  |        |   |             |           |        |  |             |   |        |           |             |  |        |   |             |          
|                                  
|Commercial                         |  | $           | 138,325   |             |  | 19.6   | % | $           | 163,761   |        |  | 20.5        | % | $      | 151,520   |             |  | 19.1   | % | $           | 113,359   |  |  | 15.6  | % | $ | 90,186    |  | 14.3  | % | 
|Agricultural                       |  |             | 78,086    |             |  | 11.1   |   |             | 77,060    |        |  | 9.7         |   |        | 79,536    |             |  | 10.1   |   |             | 85,571    |  |  | 11.8  |   |   | 83,610    |  | 13.3  |   | 
|Agricultural real estate           |  |             | 46,361    |             |  | 6.6    |   |             | 61,348    |        |  | 7.7         |   |        | 64,212    |             |  | 8.1    |   |             | 61,158    |  |  | 8.4   |   |   | 61,511    |  | 9.8   |   | 
|Commercial real estate             |  |             | 205,301   |             |  | 29.2   |   |             | 214,767   |        |  | 26.9        |   |        | 197,215   |             |  | 24.9   |   |             | 172,866   |  |  | 23.9  |   |   | 140,687   |  | 22.3  |   | 
|Commercial real estate development |  |             | 88,402    |             |  | 12.6   |   |             | 102,633   |        |  | 12.9        |   |        | 107,526   |             |  | 13.6   |   |             | 107,499   |  |  | 14.8  |   |   | 91,754    |  | 14.6  |   | 
|Residential real estate            |  |             | 90,869    |             |  | 12.9   |   |             | 108,096   |        |  | 13.5        |   |        | 115,703   |             |  | 14.6   |   |             | 111,848   |  |  | 15.4  |   |   | 105,652   |  | 16.8  |   | 
|                                   |  |             |           |             |  |        |   |             |           |        |  |             |   |        |           |             |  |        |   |             |           |  |  |       |   |   |           |  |       |   | 
|Total Real Estate                  |  |             | 430,933   |             |  | 61.2   |   |             | 486,844   |        |  | 61.0        |   |        | 484,657   |             |  | 61.3   |   |             | 453,371   |  |  | 62.6  |   |   | 399,604   |  | 63.4  |   | 
|                                   |  |             |           |             |  |        |   |             |           |        |  |             |   |        |           |             |  |        |   |             |           |  |  |       |   |   |           |  |       |   | 
|Consumer                           |  |             | 56,730    |             |  | 8.1    |   |             | 70,409    |        |  | 8.8         |   |        | 75,125    |             |  | 9.5    |   |             | 72,346    |  |  | 10.0  |   |   | 56,071    |  | 8.9   |   | 
|                                   |  |             |           |             |  |        |   |             |           |        |  |             |   |        |           |             |  |        |   |             |           |  |  |       |   |   |           |  |       |   | 
|Total loans                        |  | $           | 704,074   |             |  | 100.0  | % | $           | 798,074   |        |  | 100.0       | % | $      | 790,837   |             |  | 100.0  | % | $           | 722,647   |  |  | 100.0 | % | $ | 629,472   |  | 100.0 | % | 
|                                   |  |             |           |             |  |        |   |             |           |        |  |             |   |        |           |             |  |        |   |             |           |  |  |       |   |   |           |  |       |   | 
|                                   |  |             |           |             |  |        |   |             |           |        |  |             |   |        |           |             |  |        |   |             |           |  |  |       |   |   |           |  |       |   | 
|Total assets                       |  | $           | 1,096,471 |             |  |        |   | $           | 1,261,338 |        |  |             |   | $      | 1,163,130 |             |  |        |   | $           | 1,080,702 |  |  |       |   | $ | 1,031,959 |  |       |   | 
|Loans to total assets              |  |             |           |             |  | 64.2   | % |             |           |        |  | 63.3        | % |        |           |             |  | 68.0   | % |             |           |  |  | 67.1  | % |   |           |  | 61.0  | % | 

Total
loans decreased $94,000 (or 11.8%) in 2010 as compared to an increase of $7,237
(or 0.9%) in 2009. There were no acquisitions in 2010. The decrease reflects
the Corporations 2010 capital management objectives, as well as the dual
effects of the present economic environment in which business and consumer
borrowers have reduced demand and capacity for new indebtedness and borrower
financial deterioration resulting in a higher level of loans charged off and
transferred to other real estate owned.

Commercial
loans decreased $25,436 (or 18.4%) in 2010, which compares to an increase of
$12,241 (or 8.1%) in 2009. The competitive environment has lessened as many
financial institutions are restricting lending activities.

Loans
to agricultural operations increased $1,026 (or 1.3%) in 2010, which compared
to a decrease of $2,476 (or 3.1%) in 2009. Short-term agricultural loans are
seasonal in nature with paydown from grain sales occurring near the beginning and
end of each year. Rapid growth in the bio-fuels industry (primarily ethanol)
and rising worldwide food demand have dramatically influenced corn prices since
the latter part of 2006. Rising corn prices have influenced soybean prices as
the two commodities compete for planted acreage. Corn and soybeans are the two
primary crops of the Corporations market area. Selling prices were again
strong in 2010, particularly the second half of the year, resulting in another
year of high profitability for most of the Corporations agricultural
customers. The balance sheet of local agriculture remains strong, both in terms
of equity and liquidity. Agriculture remains the largest single loan industry
concentration of the Corporation. The highly experienced agricultural staff
continues to effectively manage risk and seek opportunities in this portfolio.
Agricultural loans as a percentage of total loans were 11.1% at year-end 2010,
compared to 9.7% at year-end 2009.

Total
real estate loans decreased $55,911 (or 11.5%) in 2010 compared to an increase
of $2,187 (or 0.5%) in 2009. Residential real estate loans with fixed rates of
more than 5 years are generally sold into the secondary market. The Corporation
retains the servicing of sold loans, maintaining the local relationship with
customers and generating servicing fee income. With home mortgage rates in 2010
at their lowest level in over 50 years, many borrowers refinanced adjustable
rate loans into fixed rate loans that were sold. Total home mortgage closings were
$130,000 in 2010, $45,000 below the record level of $175,000 in 2009.

Consumer
installment loans decreased $13,679 (or 19.4%) in 2010 from 2009. This follows
a decrease of $4,716 (or 6.3%) in 2009. Home equity lending comprises over two
thirds of the installment portfolio.

Although
the risk of non-payment for any reason exists with respect to all loans,
certain other more specific risks are associated with each type of loan. The
primary risks associated with commercial loans are quality of the borrowers
management and the impact of national economic factors. Development and
construction loans have primary risks associated with demand for housing and
other construction projects. As these businesses are capital intensive, when
demand for product weakens, revenues are reduced while fixed costs such as debt
service remain. With respect to agricultural loans, the primary risks are
weather and, like commercial loans, the quality of the borrowers management.
Risks associated with real estate loans include concentrations of loans in a
loan type, such as commercial or agricultural, and fluctuating land values.
Non-owner occupied commercial real estate loans have risks related to occupancy
and lease rates during economic downturns. Installment loans also have risks
associated with concentrations of loans in a single type of loan. Installment
loans additionally carry the risk of a borrowers unemployment as a result of
deteriorating economic conditions. With the exception of agricultural lending,
the current economic environment has increased the risk level in the subsidiary
banks loan portfolio.

The
Corporations strategy with respect to addressing and managing these types of
risks, whether loan demand is weak or strong, is for the subsidiary bank to
follow its loan policies and sound underwriting practices, which include: (i)
granting loans on a sound and collectible basis, (ii) investing funds
profitably for the benefit of the stockholders and the protection of
depositors, (iii) serving the legitimate needs of the community and the
subsidiary banks general market area while obtaining a balance between maximum
yield and minimum risk, (iv) ensuring that primary and secondary sources of
repayment are adequate in relation to the amount of the loan, (v) administering
loan policies through a Directors Loan Committee, an Executive Loan Committee
and Officer approvals, (vi) developing and maintaining adequate diversification
of the loan portfolio as a whole and of the loans within each loan category and
(vii) ensuring that each loan is properly documented and, if appropriate,
secured or guaranteed by government agencies, and that insurance coverage is
adequate, especially with respect to certain agricultural loans because of the
risk of poor weather. In the present difficult economic environment, bank staff
actively work with borrowers to achieve the best resolutions possible.

44

---



Non-performing
Loans and Other Real Estate Owned. Non-performing loans consist of non-accrual
loans, loans past due 90 days on which interest is still accruing, and loans
modified in troubled debt restructurings (restructured loans). Non-performing
loans amounted to 13.83% of total loans at year-end 2010 compared to 7.35% at
year-end 2009. The increase reflects a higher level of stress in the commercial
real estate industry. The primary components of the non-accrual total are in
two industries. One is the commercial real estate development industry,
primarily in the Corporations northern and eastern market areas.
Non-performing commercial real estate development loans comprise approximately
46.4% of the Corporations total non-performing loans as of December 31, 2010.
Due to dramatic declines in residential real estate sales activity, certain
builders and developers have encountered difficulty in servicing their debt,
eventually leading to non-performing status. The other primary component of
non-performing loans is commercial real estate loans, which comprise
approximately 31.9% of the year-end 2010 non-performing total. These are
comprised of owner-occupied facilities and leased facilities and are located
throughout the Corporations market area. The balance of non-performing loans
is comprised primarily of residential real estate and home equity credits. The
Corporation has been proactive in obtaining updated appraisals for
non-performing loans secured by real estate. The continued downward pressure on
real estate values, particularly development properties, has prompted
charge-offs and the recording of specific reserves for potential loss on loans
secured by real estate. Management believes this situation has peaked at
year-end 2010.

Restructured
loans at the end of 2010 were $23,386 compared to $13,941 at year-end 2009.
These are loans to borrowers that are experiencing varying levels of financial
stress but are expected to recover. To assist the borrowers, the Corporation
has provided some concession in loan terms, most commonly extending the loan
amortization or adjusting the interest rate. In the present economic
environment, the vast majority of non-performing loans are secured by real
estate. At the time a loan is restructured, the Corporation considers the
repayment history of the loan and the value of the collateral. If the principal
or interest is due and has remained unpaid for 90 days of more and the loan is
not well-secured, the loan is placed on nonaccrual status. If the principal and
interest payments are current and the loan is well-secured, the restructured
loan continues to accrue interest. Once a loan is placed on nonaccrual status,
the borrower is required to make current principal and interest payments based
on the modified terms for a period of at least 6 months before returning the
loan to accrual status.

As
of December 31, 2010 and 2009, $14,368 and $5,084, respectively, in
restructured loans were in accrual status. When the loan is restructured, the
Loan Officer is required to document the basis for the restructure, obtain
current and complete credit and cash flow information and identify a specific
repayment plan that would retire the debt. This information is provided to the
Credit Analysis department which prepares a thorough credit presentation. The
credit presentation includes the modified terms of the loan, a collateral
analysis and a cash flow analysis based on the modified terms of the loan. The
credit presentation is presented to the Directors Loan Committee for approval.

Problem
credits are closely monitored by the lending staff, credit administration division
and special assets group, which was newly formed in 2010. In addition, an
independent loan review staff provides further assistance in identifying
problem situations. Loans over 90 days past due are normally either charged off
or placed on a non-accrual status. Problem credits have a life cycle. They
either improve or they move through a workout/liquidation process. The workout
process often includes reclassification to non-accrual status, unless the loan
is well secured and in the process of collection. Collateral securing
non-accrual real estate loans that are not resolved by borrowers becomes other
real estate owned via foreclosure or receipt of a deed in lieu of foreclosure.
The Corporation actively markets other real estate owned properties for sale.

The
Corporation formed a special assets group in 2010 to focus on the management of
the other real estate owned workout process. Total other real estate owned as
of December 31, 2010 was $20,652. The Corporation had $17,658 in other real estate
owned as of December 31, 2009. Over 40% of the December 31, 2010 total is one
industrial development property located in the Corporations northern region.
The Corporation is actively marketing the property by parcel or as a bulk sale.
Most of all improvements are complete on the property. Two distribution centers
are presently located in the industrial park. Additional roadways may be built
depending on how end users choose parcel configuration. A third distribution
center is under construction as of December 31, 2010 on a portion of the parcel
that was sold in 2010. The selling price per acre was significantly above the
Corporations carrying value of the property. As with non-performing loans, the
Corporation is proactive in obtaining appraisals to support the carrying value
of other real estate owned property on the Consolidated Balance Sheets. The
following table provides information on the Corporations non-performing loans
and other real estate owned since 2006:

|                                                               |  |             |         |      |   |        |   |      |        |      |   |       |   |   |       |  
|-------------------------------------------------------------- |  | ----------- | ------- | ---- | - | ------ | - | ---- | ------ | ---- | - | ----- | - | - | ----- | -
|                                                               |  | December 31 |        
|                                                               |  |             |        
|                                                               |  | 2010        |         | 2009 |   | 2008   |   | 2007 |        | 2006 |  
|Non-accrual                                                    |  | $           | 72,404  |      | $ | 42,593 |   | $    | 30,383 |      | $ | 7,361 |   | $ | 3,893 |  
|90 days past due and accruing                                  |  |             | 1,561   |      |   | 2,087  |   |      | 2,655  |      |   | 73    |   |   | 33    |  
|Restructured                                                   |  |             | 23,386  |      |   | 13,941 |   |      | -0-    |      |   | -0-   |   |   | -0-   |  
|                                                               |  |             |         |      |   |        |   |      |        |      |   |       |   |   |       |  
|Total non-performing loans                                     |  | $           | 97,351  |      | $ | 58,621 |   | $    | 33,038 |      | $ | 7,434 |   | $ | 3,926 |  
|Other real estate owned                                        |  |             | 20,652  |      |   | 17,658 |   |      | 2,487  |      |   | 833   |   |   | -0-   |  
|Total non-performing assets                                    |  | $           | 118,003 |      | $ | 76,279 |   | $    | 35,525 |      | $ | 8,267 |   | $ | 3,926 |  
|                                                               |  |             |         |      |   |        |   |      |        |      |   |       |   |   |       |  
|                                                               |  |             |         |      |   |        |   |      |        |      |   |       |   |   |       |  
|Non-performing loans to total loans (net of unearned interest) |  |             | 13.83   | %    |   | 7.35   | % |      | 4.18   | %    |   | 1.03  | % |   | 0.62  | %
|Non-performing assets to total assets                          |  |             | 10.76   | %    |   | 6.05   | % |      | 3.05   | %    |   | 0.76  | % |   | 0.38  | %

Impaired
loans consist of non-accrual loans, loans past due 90 days on which interest is
still accruing and restructured loans. Of the $97,351 in impaired loans at
December 31, 2010, the Corporation relied on third party appraisals for $96,726
of the impaired loans. Approximately, $82,946 or 85.29% of the impaired loans
had current third party appraisals which were relied upon. These appraisals
were completed within 12 months of December 31, 2010. The appraisals for the
remaining $14,405 in impaired loans in which third party appraisals were
obtained had not been updated as the fair value in the last appraisal received
and the current estimated value were in significant excess of the outstanding
debt. The average loan to fair value for the $14,405 was approximately 73.9%.
Collateral values which are not based on current appraisals are discounted 10%
to 20% in the collateral evaluation in addition to the already required 10%
discount. The initial 10% discount is due to the anticipated selling costs of
the collateral. The additional discount is based on several factors. These
factors include the Loan Officers review of the collateral and its current
condition, the Corporations knowledge of the current economic environment in
the collaterals market, and the Corporations past experience with real estate
in the area. The date of the appraisal is also considered in conjunction with
the economic environment and the decline in the real estate market since the
appraisal was obtained. The increase in the general reserve portion of the
allowance for loan losses, which was significantly impacted by the increased
level of fourth quarter 2010 loan losses, is adequate to provide for the
potential exposure on loans with non-current appraisals.

45

---



Managements Discussion and Analysis of
Financial Condition and Results of Operations(Continued)
(dollar amounts in thousands except share data)

The
following table provides a loan-to-value ratio distribution for the $14,405 in
impaired loans with appraisals over twelve months old as of December 31, 2010:

|              |    |        |   |       | 
|------------- | -- | ------ | - | ----- | 
|Loan-to-Value |    | Amount |  
|0
 - 50       | %  |        | $ | 880   | 
|50
 - 60      | %  |        |   | 348   | 
|60
 - 70      | %  |        |   | 3,291 | 
|70
 - 80      | %  |        |   | 554   | 
|80
 - 90      | %  |        |   | 7,262 | 
|90            | %+ |        | $ | 2,070 | 

Once
a loan is deemed an impaired loan, the Loan Officer completes a Problem Asset
Workout Summary, which includes a detailed review of the collateral. If the
estimated current collateral value is in significant excess of the outstanding
debt, a new appraisal is not ordered. If the collateral value is not in
significant excess of the outstanding debt, the Loan Officer will determine if
a new appraisal should be ordered based on their knowledge of the current
market in the collaterals area. If the Corporation determines that full
collection of the principal of the debt owed is not likely, a new appraisal is
ordered. If the estimated fair value represented in the new appraisal is less
than the outstanding debt, a charge-off is recorded equal to the difference
between the discounted collateral value and the outstanding debt.

The
determination of a specific allowance or charge-off is reviewed by the
Corporation on a monthly basis. During 2010, the Corporation recorded partial
charge-offs totaling $13,097 of the impaired loans with an outstanding balance
of $23,155. The charge-offs were considered warranted as the loans were
considered collateral dependent and the discounted collateral value was not
sufficient to cover the outstanding debt.

Through
December 31, 2009, there were charge-offs of $1,221 on impaired loans of $5,679
out of the total impaired loans of $44,116 as of December 31, 2009. Specific
valuation allowances of $234 were recorded on the $5,679 of impaired loans as
of December 31, 2009 and $3,007 was charged off on these loans in 2010. On the
total impaired loans of $44,116 as of December 31, 2009, $10,267 has been
charged off in 2010. Therefore, through December 31, 2010, the total amount of
charge-offs on the December 31, 2009 impaired loans was $11,488. The
charge-offs were based on the fair values in the most recently obtained
independent appraisals. The fair values in the appraisals on impaired loans
were discounted by 10% to 20% to obtain the estimated value based on the Loan
Officers review of the collateral and its current condition, the Corporations
knowledge of the current economic environment and the Corporations past
experience with real estate in the area. The date of the appraisal is also
considered in conjunction with the economic environment and the decline in the
real estate market since the appraisal was obtained. This was in addition to
the 10% discount on the collateral as already required by the Corporation. The
fair value from the appraisal was discounted to determine a reasonable amount
that would be received in the liquidation of the collateral.

The
Corporation requires appraisals on real estate if the loan is over $250,000 or
if the collateral is commercial real estate at the time of origination of the
loan. If the appraisal is not within one year of the reporting period, the loan
officer provides an additional discount on the collateral based on the Loan
Officers review of the collateral and its current condition, the Corporations
knowledge of the current economic environment in the collaterals market and
the Corporations past experience with real estate in the area. The date of the
appraisal is also considered in conjunction with the economic environment and
the decline in the real estate market since the appraisal was obtained. This
additional discount is usually 10% to 20%. If the loan is below $250,000 and is
not commercial real estate, an internal valuation of the collateral may be
used, but must be completed by a staff member who has no involvement in the
credit decision. Underlying collateral consisting of vehicles, equipment or
other assets is valued using information provided by the borrower. The Loan
Officer must confirm the existence of the assets and provide adequate discounts
on the value of the collateral when determining its adequacy to cover the loan.

Problem
Asset Workout Summaries are reviewed by the Risk Management department and
utilized in the preparation of the allowance for loan losses calculation.
Summaries include a collateral analysis detailing a description of the
collateral, the date of the appraisal and the discounts on the collateral. If
the discounted collateral is sufficient to cover the outstanding loan balance,
no specific valuation allowance is placed on the loan.

46

---



Allowance for Possible Loan Losses. The
allowance shown in the following table represents the allowance available to
absorb losses within the entire portfolio:

|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|----------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                    |  | For the Years Ended December 31 |        
|                                                                                    |  |                                 |        
|                                                                                    |  | 2010                            |         | 2009 |   | 2008    |   | 2007 |         | 2006 |  
|Amount of loans outstanding at end of year (net of unearned interest)               |  | $                               | 704,074 |      | $ | 798,074 |   | $    | 790,837 |      | $ | 722,647 |   | $ | 629,472 |  
|Average amount of loans outstanding for the year (net of unearned
 interest)        |  | $                               | 687,177 |      | $ | 743,887 |   | $    | 734,672 |      | $ | 666,853 |   | $ | 585,382 |  
|Allowance for loan losses at beginning of year                                      |  | $                               | 12,075  |      | $ | 5,064   |   | $    | 3,248   |      | $ | 3,053   |   | $ | 3,109   |  
|Charge-offs:                                                                        |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Agricultural                                                                        |  |                                 | 68      |      |   | 21      |   |      | -0-     |      |   | -0-     |   |   | 162     |  
|Commercial                                                                          |  |                                 | 19,525  |      |   | 2,516   |   |      | 797     |      |   | 373     |   |   | 227     |  
|Real estate-mortgage                                                                |  |                                 | 2,266   |      |   | 511     |   |      | 91      |      |   | 2       |   |   | 21      |  
|Installment                                                                         |  |                                 | 1,307   |      |   | 1,208   |   |      | 446     |      |   | 269     |   |   | 194     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total charge-offs                                                                   |  |                                 | 23,166  |      |   | 4,256   |   |      | 1,334   |      |   | 664     |   |   | 604     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Recoveries:                                                                         |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Agricultural                                                                        |  |                                 | -0-     |      |   | -0-     |   |      | -0-     |      |   | 1       |   |   | -0-     |  
|Commercial                                                                          |  |                                 | 45      |      |   | 42      |   |      | 37      |      |   | 29      |   |   | 90      |  
|Real estate-mortgage                                                                |  |                                 | -0-     |      |   | -0-     |   |      | -0-     |      |   | 17      |   |   | 5       |  
|Installment                                                                         |  |                                 | 222     |      |   | 163     |   |      | 145     |      |   | 172     |   |   | 168     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total recoveries                                                                    |  |                                 | 267     |      |   | 205     |   |      | 182     |      |   | 219     |   |   | 263     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Net loans charged off                                                               |  |                                 | 22,899  |      |   | 4,051   |   |      | 1,152   |      |   | 445     |   |   | 341     |  
|Provision for loan losses                                                           |  |                                 | 40,550  |      |   | 11,062  |   |      | 2,968   |      |   | 640     |   |   | 285     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Allowance for loan losses at end of year                                            |  | $                               | 29,726  |      | $ | 12,075  |   | $    | 5,064   |      | $ | 3,248   |   | $ | 3,053   |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Net loans charged off to average loans                                              |  |                                 | 3.33    | %    |   | 0.54    | % |      | 0.16    | %    |   | 0.07    | % |   | 0.06    | %
|Allowance for loan losses to non-performing loans                                   |  |                                 | 30.53   | %    |   | 20.60   | % |      | 15.33   | %    |   | 43.69   | % |   | 77.76   | %
|Allowance for loan losses to total loans at end of year (net of
 unearned interest) |  |                                 | 4.22    | %    |   | 1.51    | % |      | 0.64    | %    |   | 0.45    | % |   | 0.49    | %

The
allowance for loan losses is considered by management to be a critical
accounting policy. The allowance for loan losses is increased by provisions
charged to operating expense and decreased by charge-offs, net of recoveries.
The allowance is based on factors that include the overall composition of the
loan portfolio, types of loans, past loss experience, loan delinquencies,
potential substandard and doubtful loans, and such other factors that, in
managements best judgment, deserve evaluation in estimating possible loan
losses. The adequacy of the allowance for possible loan losses is monitored
monthly during the ongoing, systematic review of the loan portfolio by the Loan
Review staff of the Risk Management Department, Senior Lending Officers, Chief
Credit Officer, Chief Operating Officer, Chief Financial Officer, Risk Manager
and Chief Executive Officer of the subsidiary bank. The results of these
reviews are reported to the Board of Directors of the subsidiary bank on a
monthly basis. Monitoring and addressing problem loan situations are primarily
the responsibility of the subsidiary banks staff, management and its Board of
Directors.

More
specifically, the Corporation calculates the appropriate level of the allowance
for loan losses on a monthly basis using base charge-offs for each loan type,
substandard loans and potential losses with respect to specific loans. In
addition to managements assessment of the portfolio, the Corporation and the
subsidiary bank are examined periodically by regulatory agencies. Although the
regulatory agencies do not determine whether the subsidiary banks allowance
for loan losses is adequate, such agencies do review the procedures and
policies followed by management of the subsidiary bank in establishing the
allowance.

Given
the current state of the economy, management has assessed the impact of the
recession on each category of loans and adjusted historical loss factors for
more recent economic trends. Management utilizes a twelve quarter history as
one component in assessing the probability of inherent future losses, while
including additional weighting of the most recent historical data. Given the
decline in economic conditions over the past year, management has also
increased its allocation to various loan categories for economic factors. Some
of the economic factors include the potential for reduced cash flow for
commercial operating loans from reduction in sales or increased operating
costs, decreased occupancy rates for commercial buildings, reduced levels of
home sales for commercial and land developments, reduced values in real estate
or other collateral, the decline in and uncertainty regarding grain prices and
increased operating costs for farmers, and increased levels of unemployment and
bankruptcy impacting consumers ability to pay. Each of these economic
uncertainties was taken into consideration in developing the appropriate level
of reserve.

The
Corporations allowance for loan losses has two components. The first component
is based upon individual review of nonperforming, substandard or other loans
identified as a risk for loss and deemed impaired. This includes our
nonperforming loans, which consist of nonaccrual loans, loans past due over 90
days and troubled debt restructurings, loans designated as impaired as defined
by accounting and regulatory guidance and loans evaluated for potential loss on
an individual basis.

The
second component is based upon expected, but unidentified, losses inherent in
our loan portfolio. The second component is determined utilizing the
Corporations most recent twelve quarter net charge-off history which is then
adjusted for qualitative and quantitative factors. These reserve percentages
are reviewed on a quarterly basis by an Allowance Review Committee which is
comprised of members of management, including lending, accounting and risk
management. The qualitative and quantitative factors considered include
economic conditions, changes in underwriting practices, changes in the value of
collateral, changes in the portfolio volume, staff experience, past due and
nonaccrual loans, loan review oversight, concentrations of loans and
competition.

The
allowance for loan losses of $29,726 and $12,075, respectively, was 4.22% and
1.51% of total loans as of December 31, 2010 and December 31, 2009. The
Corporations net losses as a percentage of loans was 3.33% and 0.54% for the
years ended 2010 and 2009, respectively. The Corporations net losses
experienced and the level of the required allowance for loan losses continue to
grow due to the continued deterioration in the economic environment, especially
relative to commercial real estate and commercial real estate development loans
in its northern and eastern markets in Grundy, Kane and DuPage counties.

47

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Managements Discussion and Analysis of
Financial Condition and Results of Operations(Continued)(dollar amounts in thousands except share data)

During
the fourth quarter of 2010, $16,076 in loan charge-offs were recorded due to
the receipt of updated appraisals reflecting the current deterioration in the
collateral value of commercial real estate and commercial real estate
development properties primarily in the northern and eastern markets. In
estimating the adequacy of the allowance for loan losses, management utilizes
a twelve-quarter loan loss history as one component in assessing the
probability of inherent future losses, while including higher weighting of the
most recent data. Thus, fourth quarter 2010 loan charge-offs increased the historical
losses contained in the twelve quarter loan loss history and significantly
increased the general reserve portion of the allowance for loan losses. These
charge-offs, combined with the continued credit deterioration in the northern
and eastern markets, resulted in the large fourth quarter provision for loan
losses, resulting in a total of $40,550 provision for loan losses for 2010. In
conjunction with recorded charge-offs and recoveries for 2010, this resulted in
an increase in the ratio of the allowance for loan losses to loans net of
unearned interest as of December 31, 2010 to 4.22% compared to 1.51% as of
December 31, 2009.

The
allowance for loan losses as a percentage of non-performing loans has increased
from 20.6% as of December 31, 2009 to 30.5% as of December 31, 2010. The
allowance for loan losses calculation takes into consideration continuing
economic declines and resulting increases in non-performing loans in the
quantitative and qualitative factors used to adjust the reserve percentages on
loans not specifically reserved for in the calculation.

There
are $12,245 in specific loan loss reserves for the non-performing loans as of
December 31, 2010, compared to $4,472 one year ago. Although non-performing
loans have increased, the balance is comprised of loans that management
believes will not result in significant additional losses not reserved in the
allowance for loan losses as of December 31, 2010. Management considers the
allowance for loan losses adequate to meet probable losses as of December 31,
2010.

Investment Securities. The objective of the
investment portfolio is to provide the subsidiary bank with an adequate source
of earnings and liquidity. The following table provides information on the
carrying value of investment securities as of the dates indicated:

|                                                                                              |  |             |         |  |   |         | 
|--------------------------------------------------------------------------------------------- |  | ----------- | ------- |  | - | ------- | 
|                                                                                              |  | December 31 |        
|                                                                                              |  |             |        
|                                                                                              |  |             | 2010    |  |   | 2009    | 
|                                                                                              |  |             |         |  |   |         | 
|United States Government and federal agency and U.S. Government
 sponsored enterprises (GSEs) |  | $           | 78,203  |  | $ | 96,313  | 
|State and Municipal                                                                           |  |             | 127,841 |  |   | 132,871 | 
|Collateralized mortgage obligations:                                                          |  |             |         |  |   |         | 
|GSE Residential                                                                               |  |             | 54,895  |  |   | 72,083  | 
|                                                                                              |  |             |         |  |   |         | 
|Total                                                                                         |  | $           | 260,939 |  | $ | 301,267 | 
|                                                                                              |  |             |         |  |   |         | 

Investment
securities totaled $260,939 on December 31, 2010, a decrease of $40,328 (or
13.4%) from the December 31, 2009 total of $301,267. The decrease was due to
securities sold to meet funding requirements due to the redemption of
higher-cost public deposits. These term deposits were redeemed as part of a
general strategy to shrink the asset size of the Bank, thereby improving
capital ratios. Each category of securities decreased, but the majority of the
decrease was in the U.S. Government Agency and GSE securities category and
collateralized mortgage obligations. Because the reduction of the municipal
bond category was less, this caused the investment mix of the overall portfolio
to shift higher in relation to the percentage of municipal bonds. U.S.
Government Agencies and GSEs declined to 30.0% of the total portfolio in 2010,
down from 32.0% in 2009, and collateralized mortgage obligations decreased to
21.0%, down from 24.2% in 2009. Municipal bond holdings increased in 2010 from
44.1% in 2009 to 49.0%. A portion of this change occurred due to continued
value created in the tax-free market and purchases of taxable municipal bonds
arising out of the continued issuance of Build America Bonds. Certain
investment restructuring strategies executed during the year to improve the
overall performance of the portfolio resulted in the repositioning of cash flows
and the capture of $722 of gains on shorter-term securities. There were no
positions in Fannie Mae or Freddie Mac preferred stock, collateralized deposit
obligations, asset-backed securities or sub-prime mortgage securities held in
the securities portfolio in 2010, 2009 or 2008.

Investment
securities totaled $301,267 on December 31, 2009, an increase of $50,152 (or
20.0%) from the December 31, 2008 total of $251,115. The increase was due to
securities purchased to meet pledging requirements for new deposits, as well as
the investment of excess liquidity from deposit growth with a lack of loan
demand. Every category of securities increased, but the investment mix changed
only slightly. U.S. Government Agencies and mortgage-backed securities decreased
to 55.9% of the total portfolio, down from 58.6% a year ago. Municipal bond
holdings increased from 41.4% to 44.1%. This change occurred due to the
tightening of yield spreads in the agency market, the value created in the
tax-free market, and increased purchases of taxable municipal bonds arising out
of the new issuance of Build America Bonds. Several investment restructuring
strategies executed during the year to improve the overall performance of the
portfolio resulted in the repositioning of cash flows and the capture of $1,781
of gains on short-term securities. It should also be noted that the investment
portfolio has never contained any sub-prime mortgage securities, nor any Fannie
Mae or Freddie Mac preferred stock.

Deposits. Total deposits decreased in 2010
by approximately $112,578, a 10.5% reduction from 2009. Time deposits were
$130,262 lower, a 26.2% decrease from the prior year, largely due to a
restructuring of the balance sheet, including redemption of higher rate public
deposits. Interest-bearing demand accounts increased $8,502, a 2.3% increase
from 2009. Non-interest bearing demand accounts showed an increase of $2,657,
or 1.95%, from 2009. Savings accounts represented an increase of $6,525 or
9.6%, due to customers moving to fixed rate investments. The average rate for
overall deposits decreased 0.71% in 2010 as a result of certificates of deposit
maturing and repricing as well as liquid accounts pricing lowering. These
deposit balance changes reflect a continuing trend of customers shifting
deposits to FDIC-insured investments over the last several years. We have
experienced growth in many of the markets served by the subsidiary bank and
continue to have no brokered deposits other than $16,196 of CDARS
relationships.

Over
the last three years, the subsidiary bank has seen deposits increase 8.0%. The
increase in consumer deposits reflects our continued focus on investing in
offices in high growth areas and continued emphasis on officers calling on
customers and potential customers through our officer call program to develop
core deposit relationships. This growth also reflects the well-trained staff
that looks to assist customers by identifying needs and providing sound
solutions. There continues to be considerable interest in alternative delivery
mechanisms, such as electronic methods which include ATMs, Internet Banking
with Bill Payment, Remote Deposit Capture and Telebanker as a convenient means
for customers to better manage their money, maximize return and have peace of
mind by dealing safely and securely with only one financial institution. Due to
the diversity within our various market areas, such delivery mechanisms provide
a solid foundation for continued future growth.

48

---



The
following table sets forth the classification of deposits with year-end
balances and the average rates paid for the periods indicated.

|                            |  |                                 |         |      |      |         |  |      |           |         |      |      |  |   |         |  |      |   | 
|--------------------------- |  | ------------------------------- | ------- | ---- | ---- | ------- |  | ---- | --------- | ------- | ---- | ---- |  | - | ------- |  | ---- | - | 
|                            |  | For the Years Ended December 31 |        
|                            |  |                                 |        
|                            |  | 2010                            |         | 2009 |      | 2008    | 
|                            |  | Balance                         |         | Rate |      | Balance |  | Rate |           | Balance |      | Rate | 
|                            |  |                                 |         |      |      |         |  |      |           |         |      |      | 
|Non-interest bearing demand |  | $                               | 138,683 |      | n/a  |         |  | $    | 136,026   |         | n/a  |      |  | $ | 110,559 |  | n/a  |   | 
|Interest-bearing demand     |  |                                 | 383,126 |      | 0.79 | %       |  |      | 374,624   |         | 1.24 | %    |  |   | 246,714 |  | 1.44 | % | 
|Savings                     |  |                                 | 74,817  |      | 0.08 |         |  |      | 68,292    |         | 0.08 |      |  |   | 61,089  |  | 0.11 |   | 
|Time deposits               |  |                                 | 366,335 |      | 1.77 |         |  |      | 496,597   |         | 2.74 |      |  |   | 543,770 |  | 3.96 |   | 
|                            |  |                                 |         |      |      |         |  |      |           |         |      |      |  |   |         |  |      |   | 
|Total                       |  | $                               | 962,961 |      | 0.99 | %       |  | $    | 1,075,539 |         | 1.70 | %    |  | $ | 962,132 |  | 2.61 | % | 
|                            |  |                                 |         |      |      |         |  |      |           |         |      |      |  |   |         |  |      |   | 

The
following table summarizes time deposits in amounts of $100 or more by time
remaining until maturity as of December 31, 2010. These time deposits are made
by individuals, corporations and public entities.

|                                      |  |   |         | 
|------------------------------------- |  | - | ------- | 
|Three months or less                  |  | $ | 34,273  | 
|Over three months through
 six months |  |   | 16,253  | 
|Over six months through one
 year     |  |   | 66,849  | 
|Over one year                         |  |   | 17,407  | 
|                                      |  |   |         | 
|Total                                 |  | $ | 134,782 | 
|                                      |  |   |         | 

Liquidity. Liquidity is measured by a
financial institutions ability to raise funds through deposits, borrowed
funds, capital or the sale of assets. Additional sources of liquidity, including
cash flow from both the repayment of loans and the securitization of assets,
are also considered in determining whether liquidity is satisfactory. The funds
are used to maintain reserve requirements, fund loans, purchase treasury shares
and meet deposit withdrawals and operational requirements. Liquidity is
obtained through growth of core funds (defined as core deposits, 50% of
non-public entity certificates of deposit over $100 and repurchase agreements
issued to commercial customers), liquid assets and accessibility to the money
and capital markets. The Corporation and the subsidiary bank have access to
short-term funds through the Federal Home Loan Bank of Chicago and the Federal
Reserve Bank, which can also provide longer-term borrowings to help meet
liquidity requirements.

The
ratio of temporary investments and other short-term available funds (those
investments maturing within one year, plus twelve months projected payments on
mortgage-backed securities and collateralized mortgage obligations, and cash
and due from banks balances) to volatile liabilities (50% of non-public entity
certificates of deposit over $100, repurchase agreements issued to public
entities, treasury tax and loan deposits, short-term borrowings from banks, and
deposits of public entities) was 43.1% at December 31, 2010 and 41.5% at
December 31, 2009. Core deposits (demand deposits, interest-bearing checking
accounts, savings deposits and certificates of deposit less than $100) were
87.4% of total deposits at December 31, 2010 and 83.2% at December 31, 2009.
Money market accounts of approximately $252,000 and $240,000 at December 31,
2010 and 2009, respectively, are classified by the Corporation as core
deposits.

In
2010, the Corporation experienced a net decrease of $27,193 in cash and cash
equivalents. This decrease was due in part to the use of excess liquidity to
redeem higher rate public deposits in an effort to restructure the balance
sheet. As a result of this restructuring, deposits decreased $112,578 making up
the majority of the $147,024 in liquidity used by financing activities.
Investing activities, consisting of a $60,052 decrease in new loans and a
$39,911 decrease in the investment portfolio, provided the Corporation with
$105,663 in liquidity.

In
2009, with the struggling economy, an effort was made to increase liquidity.
Accordingly, the Corporation experienced a net increase of $50,812 in cash and
cash equivalents. Financing activities, consisting mostly of an increase in
deposits of $113,408, provided the Corporation with $122,040. Additionally,
operating activities provided the Corporation with $4,897. Offsetting these
provisions, the Corporation used $76,125 in investing activities, consisting of
an increase in the investment portfolio of $47,640 and an increase of $27,873
in net loans. Cash and cash equivalents of $71,073 at December 31, 2009, along
with established lines of credit, are deemed more than adequate to meet
short-term liquidity needs.

On
January 24, 2011, the Corporation notified the U.S. Treasury that it will defer
regularly scheduled dividend payments on the Corporations 25,083 in Series B
Preferred Shares, and the Corporation provided notice to Bank of America, N.A.,
as successor Trustee by merger, of the Corporations $25,000 in junior
subordinated debt securities due 2035 (the Corporation Capital Trust I) that
the Corporation is exercising its right to defer interest payments for a period
of twenty (20) consecutive quarterly interest payment periods beginning with
the next interest payment period of March 15, 2011, unless the Corporation
subsequently gives notice that it has elected to shorten such deferral period.
By taking these actions, the Corporation expects to save approximately $1,700
in annual cash payments, based on current rates.

The
long-term liquidity needs of the Corporation will be driven by the changing
needs of its customers and the ability to offset strategies of its competitors.
The Corporations equity base, coupled with common stock available for
issuance, a low level of debt and available borrowing sources provide multiple
options for funding future liquidity needs, including contingency funding in
the event of periods of unexpected reduction of liquidity.

Asset-Liability Management. The Corporation
actively manages its assets and liabilities through coordinating the levels of
interest rate sensitive assets and liabilities to minimize changes in net
interest income, despite changes in market interest rates. The Corporation
defines interest rate sensitive assets and liabilities as any instruments that
can be repriced within 180 days, either because the instrument will mature
during the period or because it carries a variable interest rate. Changes in
net interest income occur when interest rates on loans and investments change
in a different time period from changes in interest rates on interest-bearing
liabilities. Additional changes occur when the mix and volume of
interest-earning assets and interest-bearing liabilities change. The interest
rate sensitivity gap represents the total dollar amount of the difference
between rate sensitive assets and rate sensitive liabilities within a given
time period (GAP). A GAP ratio is determined by dividing rate sensitive assets
by rate sensitive liabilities. A ratio of 1.0 indicates a perfectly matched
position, in which case the effect on net interest income due to interest rate
movements would be zero.

The
Corporations strategy with respect to asset-liability management is to
maximize net interest income while limiting the Corporations exposure to risks
associated with volatile interest rates. The subsidiary banks Funds Management
Committee is responsible for monitoring the GAP position. As a general rule,
the subsidiary banks policy is to maintain GAP as a percent of total assets
within a range from +20% to -20% in any given time period. Based on the
simulation of various rising or falling interest rate scenarios in comparison
to one considered to be the most likely interest rate scenario (base model),
management seeks to operate with net interest income within a range of +/-10%
and with net income within a range of +/- 25% during any twelve-month period.
The Corporation also performs an interest rate risk analysis, on a monthly
basis, on the assets and liabilities of the subsidiary bank. This analysis
applies an immediate shift (interest-rate shock) in interest rates of up to
+300 basis points and -300 basis points to the assets and liabilities to
determine the impact on the net interest income and net income of the
subsidiary bank, when compared to a flat rate scenario. This analysis does not
take into account any other balance sheet management plans that would most
likely be implemented should such rapid interest rate movement occur.

49

---



Managements Discussion and Analysis of
Financial Condition and Results of Operations(Continued)
(dollar amounts in thousands except share data)

The
following table shows the estimated changes to net interest income (on a
taxable-equivalent basis) from the base scenario as of December 31, 2010 and
2009 (note the 200 and 300 basis point decline scenarios were not calculated
due to many deposit products being unable to decline to that level):

|                        |  |   |                               |  |             |   |      |   |             |  |        |   |  | 
|----------------------- |  | - | ----------------------------- |  | ----------- | - | ---- | - | ----------- |  | ------ | - |  | 
|Change in               |  |   | Estimated Net Interest Income | 
|Interest
 Rate          |  |   | 2010                          |  | % of change |   | 2009 |   | % of change | 
|                        |  |   |                               |  |             |   |      |   |             | 
|300 basis point rise    |  | $ | 38,720                        |  | -6.90       | % |      | $ | 34,663      |  | -14.56 | % | 
|200 basis point rise    |  |   | 39,331                        |  | -5.43       |   |      |   | 36,226      |  | -10.71 |   | 
|100 basis point rise    |  |   | 40,314                        |  | -3.07       |   |      |   | 38,258      |  | -5.70  |   | 
|Base scenario           |  |   | 41,591                        |  |            |   |      |   | 40,570      |  |       |   | 
|100 basis point decline |  |   | 39,819                        |  | -4.26       |   |      |   | 39,864      |  | -1.74  |   | 

Contractual Obligations, Commercial Commitments and
Off-Balance Sheet Arrangements. As disclosed in the Notes to
Consolidated Financial Statements, the Corporation has certain obligations and
commitments to make future payments under contracts. At December 31, 2010, the
aggregate contracted obligations (excluding bank deposits) and commercial
commitments are as follows:

|                                                          |  |       |         |                    |   |           |  |           |        |              |   |       |  |   |     |    
|--------------------------------------------------------- |  | ----- | ------- | ------------------ | - | --------- |  | --------- | ------ | ------------ | - | ----- |  | - | --- | ---
|                                                          |  | Total |         | Less Than 
 1 Year |   | 1-3 Years |  | 3-5 Years |        | Over 5 Years |  
|                                                          |  |       |         |                    |   |           |  |           |        |              |  
|Contractual Obligations:                                  |  |       |         |                    |   |           |  |           |        |              |   |       |  |   |     |    
|Time Deposits                                             |  | $     | 366,335 |                    | $ | 316,816   |  | $         | 45,005 |              | $ | 4,495 |  | $ | 19  |    
|Customer repurchase agreements                            |  |       | 35,806  |                    |   | 35,806    |  |           | -0-    |              |   | -0-   |  |   | -0- |    
|Interest-bearing demand notes issued to the U.S. Treasury |  |       | 1,753   |                    |   | 1,753     |  |           | -0-    |              |   | -0-   |  |   | -0- |    
|Advances from the Federal Home Loan Bank                  |  |       | 9,000   |                    |   | 9,000     |  |           | -0-    |              |   | -0-   |  |   | -0- |    
|Federal funds purchased                                   |  |       | -0-     |                    |   | -0-       |  |           | -0-    |              |   | -0-   |  |   | -0- |    
|Trust preferred securities                                |  |       | 25,000  |                    |   | 25,000    |  |           | -0-    |              |   | -0-   |  |   | -0- |    
|Post-retirement health insurance                          |  |       | 936     |                    |   | 67        |  |           | 125    |              |   | 198   |  |   | 546 | (1)
|                                                          |  |       |         |                    |   |           |  |           |        |              |   |       |  |   |     |    
|Total                                                     |  | $     | 438,830 |                    | $ | 388,442   |  | $         | 45,130 |              | $ | 4,693 |  | $ | 565 |    
|                                                          |  |       |         |                    |   |           |  |           |        |              |   |       |  |   |     |    
|                                                          |  |       |         |                    |   |           |  |           |        |              |   |       |  |   |     |    
|Off-Balance Sheet Arrangements:                           |  |       |         |                    |   |           |  |           |        |              |   |       |  |   |     |    
|Commitments to lend                                       |  | $     | 118,357 |                    | $ | 118,357   |  | $         | -0-    |              | $ | -0-   |  | $ | -0- |    
|Standby letters of credit                                 |  |       | 1,503   |                    |   | 1,503     |  |           | -0-    |              |   | -0-   |  |   | -0- |    
|                                                          |  |       |         |                    |   |           |  |           |        |              |   |       |  |   |     |    
|Total                                                     |  | $     | 119,860 |                    | $ | 119,860   |  | $         | -0-    |              | $ | -0-   |  | $ | -0- |    
|                                                          |  |       |         |                    |   |           |  |           |        |              |   |       |  |   |     |    

(1)
For the years 2016 through 2020.

See
Note 18 of the Consolidated Financial Statements for additional discussion on
contractual obligations, commercial commitments and off-balance sheet
arrangements.

The
following table sets forth the Corporations interest rate repricing gaps for
selected maturity periods at December 31, 2010:

|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |              |   |   |         |  |   |         | 
|--------------------------------------------------------- |  | --------------------- | -------- | -------- | - | -------- | - | -------- | -------- | ---------- | - | -------- | - | ---------- | ------------ | - | - | ------- |  | - | ------- | 
|                                                          |  | Rate Sensitive Within |         
|                                                          |  |                       |         
|                                                          |  | 1 year                |          | 1-2 yrs. |   | 2-3 yrs. |   | 3-5 yrs. |          | Thereafter |   | Total    |   | Fair Value |             
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |             
|Interest-earning assets:                                  |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |              |   |   |         |  |   |         | 
|Interest-bearing deposits                                 |  | $                     | 30,888   |          | $ | -0-      |   | $        | -0-      |            | $ | -0-      |   | $          | -0-          |   | $ | 30,888  |  | $ | 30,888  | 
|Taxable investment securities                             |  |                       | 10,183   |          |   | 29,084   |   |          | 33,362   |            |   | 34,829   |   |            | 52,656       |   |   | 160,114 |  |   | 164,064 | 
|Tax-exempt investment securities                          |  |                       | 2,973    |          |   | 3,688    |   |          | 2,828    |            |   | 12,712   |   |            | 73,092       |   |   | 95,293  |  |   | 97,160  | 
|Loans                                                     |  |                       | 354,425  |          |   | 90,694   |   |          | 82,392   |            |   | 63,663   |   |            | 88,689       |   |   | 679,863 |  |   | 684,438 | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |              |   |   |         |  |   |         | 
|Total rate sensitive assets (RSA)                       |  | $                     | 398,469  |          | $ | 123,466  |   | $        | 118,582  |            | $ | 111,204  |   | $          | 214,437      |   | $ | 966,158 |  | $ | 976,550 | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |              |   |   |         |  |   |         | 
|Interest-bearing liabilities:                             |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |              |   |   |         |  |   |         | 
|Interest-bearing demand deposits                          |  | $                     | 383,126  |          | $ | -0-      |   | $        | -0-      |            | $ | -0-      |   | $          | -0-          |   | $ | 383,126 |  | $ | 383,126 | 
|Savings deposits                                          |  |                       | 74,817   |          |   | -0-      |   |          | -0-      |            |   | -0-      |   |            | -0-          |   |   | 74,817  |  |   | 74,817  | 
|Time deposits                                             |  |                       | 316,816  |          |   | 42,055   |   |          | 2,950    |            |   | 4,495    |   |            | 19           |   |   | 366,335 |  |   | 369,323 | 
|Customer repurchase agreements                            |  |                       | 35,806   |          |   | -0-      |   |          | -0-      |            |   | -0-      |   |            | -0-          |   |   | 35,806  |  |   | 35,806  | 
|Advances from Federal Home Loan Bank                      |  |                       | 9,000    |          |   | -0-      |   |          | -0-      |            |   | -0-      |   |            | -0-          |   |   | 9,000   |  |   | 9,055   | 
|Federal funds purchased                                   |  |                       | -0-      |          |   | -0-      |   |          | -0-      |            |   | -0-      |   |            | -0-          |   |   | -0-     |  |   | -0-     | 
|Interest-bearing demand notes issued to the U.S. Treasury |  |                       | 1,753    |          |   | -0-      |   |          | -0-      |            |   | -0-      |   |            | -0-          |   |   | 1,753   |  |   | 1,753   | 
|Trust preferred securities                                |  |                       | 25,000   |          |   | -0-      |   |          | -0-      |            |   | -0-      |   |            | -0-          |   |   | 25,000  |  |   | 25,000  | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |              |   |   |         |  |   |         | 
|Total rate sensitive liabilities (RSL)                  |  | $                     | 846,318  |          | $ | 42,055   |   | $        | 2,950    |            | $ | 4,495    |   | $          | 19           |   | $ | 895,837 |  | $ | 898,880 | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |              |   |   |         |  |   |         | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |              |   |   |         |  |   |         | 
|Interest rate sensitivity GAP (RSA less RSL)              |  | $                     | (447,849 | )        | $ | 81,411   |   | $        | 115,632  |            | $ | 106,709  |   | $          | 214,418      |   |   |         |  |   |         | 
|Cumulative GAP                                            |  | $                     | (447,849 | )        | $ | (366,439 | ) | $        | (250,807 | )          | $ | (144,098 | ) | $          | 70,320       |   |   |         |  |   |         | 
|RSA/RSL                                                   |  |                       | 47.08    | %        |   | 293.58   | % |          | 4,019.73 | %          |   | 2,473.95 | % |            | 1,128,615.79 | % |   |         |  |   |         | 
|Cumulative RSA/RSL                                        |  |                       | 47.08    | %        |   | 58.75    | % |          | 71.86    | %          |   | 83.91    | % |            | 107.85       | % |   |         |  |   |         | 

50

---



In the
table above, interest-bearing demand deposits and savings deposits are included
as rate sensitive in the amounts reflected in the 0-3 month time frame, as such
interest-bearing liabilities are subject to immediate withdrawal.

Management
of the Corporation considers $65,500 (one-half) of the interest-bearing
checking account balances and $126,000 (one-half) of the money market account
balances (both being the components of interest-bearing demand deposits) and
all savings deposits as core, or non-rate sensitive deposits, primarily since
interest-bearing demand and savings deposits historically have not been rate
sensitive. As a general rule, the subsidiary banks policy is to maintain RSA
as a percent of RSL within a range of +70% to +120% within a six-month time
period.

At December
31, 2010, savings deposits totaled approximately $74,800. If the $74,800 in
savings deposits, the $65,500 of interest-bearing checking account balances and
the $126,000 in money market account balances reflected in the less than one
year time frame are excluded from the rate sensitivity above (consistent with
the consideration mentioned in the paragraph above), then rate sensitive
liabilities would be approximately $579,900 decreasing the negative gap to
approximately $181,500. RSA as a percent of RSL would be 68.7%.

Effects
of Inflation.The Consolidated Financial Statements
and related consolidated financial data presented herein have been prepared in
accordance with accounting principles generally accepted in the United States
of America and practices within the banking industry which require the
measurement of financial condition and operating results in terms of historical
dollars, without considering the changes in the relative purchasing power of
money over time due to inflation. Unlike most industrial companies, virtually
all the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant impact on a
financial institutions performance than the effects of general levels of
inflation.

Investment
Maturities and Yields.The following table sets forth
the contractual maturities of the amortized cost of investment securities at
December 31, 2010, and the taxable equivalent yields of such securities:

|                                                                                              |  |                        |        |                                        |  |                         |   |                              |         |        |  |       |   |        |         |       |  |      |   |   |     |  |  |   | 
|--------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | -------------------------------------- |  | ----------------------- | - | ---------------------------- | ------- | ------ |  | ----- | - | ------ | ------- | ----- |  | ---- | - | - | --- |  |  | - | 
|                                                                                              |  | Due
 within 
 one year |        | Due
 after one but 
 within five years |  | Due
 after 
 five years |   | Other 
 (no stated maturity) |        
|                                                                                              |  |                        |        |                                        |  |                         |   |                              |        
|                                                                                              |  | Amount                 |        | Yield                                  |  | Amount                  |   | Yield                        |         | Amount |  | Yield |   | Amount |         | Yield | 
|United States Government and federal agency
 and U.S. Government sponsored enterprises (GSEs) |  | $                      | 7      |                                        |  | 4.36                    | % | $                            | 48,876  |        |  | 3.30  | % | $      | 28,283  |       |  | 3.40 | % | $ | -0- |  |  |  | 
|State and Municipal                                                                           |  |                        | 2,973  |                                        |  | 3.52                    |   |                              | 25,168  |        |  | 5.42  |   |        | 97,354  |       |  | 5.80 |   |   | -0- |  |  |  | 
|Collateralized mortgage obligations:                                                          |  |                        |        |                                        |  |                         |   |                              |         |        |  |       |   |        |         |       |  |      |   |   |     |  |  |   | 
|GSE residential                                                                               |  |                        | 10,176 |                                        |  | 3.02                    |   |                              | 42,459  |        |  | 3.77  |   |        | 111     |       |  | 6.97 |   |   | -0- |  |  |  | 
|                                                                                              |  |                        |        |                                        |  |                         |   |                              |         |        |  |       |   |        |         |       |  |      |   |   |     |  |  |   | 
|Total                                                                                         |  | $                      | 13,156 |                                        |  | 3.13                    | % | $                            | 116,503 |        |  | 3.93  | % | $      | 125,748 |       |  | 5.27 | % | $ | -0- |  |  |  | 
|                                                                                              |  |                        |        |                                        |  |                         |   |                              |         |        |  |       |   |        |         |       |  |      |   |   |     |  |  |   | 

Loan
Maturities.The following table sets forth scheduled
loan repayments on agricultural, commercial and real estate construction loans
at December 31, 2010:

|                          |  |                       |         |                                       |   |                        |  |             |       |       |   |        |  |   |         | 
|------------------------- |  | --------------------- | ------- | ------------------------------------- | - | ---------------------- |  | ----------- | ----- | ----- | - | ------ |  | - | ------- | 
|                          |  | Due within 
 one year |         | Due after one but 
 within five years |   | Due after 
 five years |  | Non-accrual |       | Total |  
|                          |  |                       |         |                                       |   |                        |  |             |       |       |  
|Agricultural              |  | $                     | 69,528  |                                       | $ | 6,549                  |  | $           | 99    |       | $ | 1,910  |  | $ | 78,086  | 
|Commercial                |  |                       | 73,783  |                                       |   | 41,969                 |  |             | 6,762 |       |   | 8,665  |  |   | 131,179 | 
|Real
 Estate-Construction |  |                       | 53,565  |                                       |   | 4,731                  |  |             | -0-   |       |   | 37,091 |  |   | 95,387  | 
|                          |  |                       |         |                                       |   |                        |  |             |       |       |   |        |  |   |         | 
|Total                     |  | $                     | 196,876 |                                       | $ | 53,249                 |  | $           | 6,861 |       | $ | 47,666 |  | $ | 304,652 | 
|                          |  |                       |         |                                       |   |                        |  |             |       |       |   |        |  |   |         | 

Of the
loans shown above, the following table sets forth loans due after one year
which have predetermined (fixed) interest rates or adjustable (variable)
interest rates at December 31, 2010:

|                    |  |            |        |               |   |       |  |   |        | 
|------------------- |  | ---------- | ------ | ------------- | - | ----- |  | - | ------ | 
|                    |  | Fixed rate |        | Variable rate |   | Total | 
|                    |  |            |        |               |   |       | 
|Due after
 one year |  | $          | 51,526 |               | $ | 8,584 |  | $ | 60,110 | 

Allocation
of Allowance for Loan Losses.The subsidiary bank has
allocated the allowance for loan losses to provide for the possibility of
losses being incurred within the categories of loans set forth in the table
below. The allocation of the allowance during 2010 is found in Note 5 - Loans
and the Allowance for Loan and Lease Losses in the Notes to Consolidated
Financial Statements. The allocation of the allowance and the ratio of loans
within each category to total loans at December 31, 2010, 2009, 2008 and 2007
are as follows:

|             |  |                   |        |                                                       |  |                   |   |                                                       |        |                   |  |                                                       |   |                   |       |                                                       |  |       |   |   |       |  |  |       |  
|------------ |  | ----------------- | ------ | ----------------------------------------------------- |  | ----------------- | - | ----------------------------------------------------- | ------ | ----------------- |  | ----------------------------------------------------- | - | ----------------- | ----- | ----------------------------------------------------- |  | ----- | - | - | ----- |  |  | ----- | -
|             |  | December 31       |       
|             |  |                   |       
|             |  | 2010              |        | 2009                                                  |  | 2008              |   | 2007                                                  |       
|             |  | Allowance
 amount |        | Percent
 of loans
 in each
 category
 to total
 loans |  | Allowance
 amount |   | Percent
 of loans
 in each
 category
 to total
 loans |        | Allowance
 amount |  | Percent
 of loans
 in each
 category
 to total
 loans |   | Allowance
 amount |       | Percent
 of loans
 in each
 category
 to total
 loans | 
|             |  |                   |        |                                                       |  |                   |   |                                                       |        |                   |  |                                                       |   |                   |       |                                                       | 
|Commercial   |  | $                 | 4,435  |                                                       |  | 19.6              | % | $                                                     | 181    |                   |  | 20.5                                                  | % | $                 | 2,469 |                                                       |  | 19.1  | % | $ | 1,188 |  |  | 15.6  | %
|Agricultural |  |                   | 99     |                                                       |  | 11.1              |   |                                                       | 129    |                   |  | 9.7                                                   |   |                   | 235   |                                                       |  | 10.1  |   |   | 580   |  |  | 11.8  |  
|Real estate  |  |                   | 23,559 |                                                       |  | 61.2              |   |                                                       | 10,283 |                   |  | 61.0                                                  |   |                   | 1,284 |                                                       |  | 61.3  |   |   | 743   |  |  | 62.6  |  
|Consumer     |  |                   | 1,595  |                                                       |  | 8.1               |   |                                                       | 1,059  |                   |  | 8.8                                                   |   |                   | 890   |                                                       |  | 9.5   |   |   | 486   |  |  | 10.0  |  
|Unallocated  |  |                   | 38     |                                                       |  | n/a               |   |                                                       | 423    |                   |  | n/a                                                   |   |                   | 186   |                                                       |  | n/a   |   |   | 251   |  |  | n/a   |  
|             |  |                   |        |                                                       |  |                   |   |                                                       |        |                   |  |                                                       |   |                   |       |                                                       |  |       |   |   |       |  |  |       |  
|Total        |  | $                 | 29,726 |                                                       |  | 100.0             | % | $                                                     | 12,075 |                   |  | 100.0                                                 | % | $                 | 5,064 |                                                       |  | 100.0 | % | $ | 3,248 |  |  | 100.0 | %
|             |  |                   |        |                                                       |  |                   |   |                                                       |        |                   |  |                                                       |   |                   |       |                                                       |  |       |   |   |       |  |  |       |  

51

---



Quarterly Results of Operations(dollars in thousands
except share data)

The following
table sets forth certain unaudited income and expense and share data on a
quarterly basis for the three-month periods indicated:

|                                                                           |  |                              |        |         |   |         |   |         |        |   |   |         |  
|-------------------------------------------------------------------------- |  | ---------------------------- | ------ | ------- | - | ------- | - | ------- | ------ | - | - | ------- | -
|                                                                           |  | Year Ended December 31, 2010 |       
|                                                                           |  |                              |       
|                                                                           |  | 1st Qtr                      |        | 2nd Qtr |   | 3rd Qtr |   | 4th Qtr |       
|                                                                           |  |                              |        |         |   |         |   |         |        |   |   |         |  
|Interest income                                                            |  | $                            | 13,460 |         | $ | 12,373  |   | $       | 12,042 |   | $ | 11,691  |  
|Interest expense                                                           |  |                              | 3,977  |         |   | 3,188   |   |         | 2,797  |   |   | 2,276   |  
|                                                                           |  |                              |        |         |   |         |   |         |        |   |   |         |  
|Net interest income                                                        |  |                              | 9,483  |         |   | 9,185   |   |         | 9,245  |   |   | 9,415   |  
|Provision for loan losses                                                  |  |                              | 3,925  |         |   | 2,650   |   |         | 6,725  |   |   | 27,250  |  
|                                                                           |  |                              |        |         |   |         |   |         |        |   |   |         |  
|Net interest income after provision for
 loan losses                       |  |                              | 5,558  |         |   | 6,535   |   |         | 2,520  |   |   | (17,835 | )
|Non-interest income                                                        |  |                              | 3,192  |         |   | 2,029   |   |         | 2,474  |   |   | 3,797   |  
|Non-interest expense                                                       |  |                              | 9,286  |         |   | 8,816   |   |         | 9,047  |   |   | 10,004  |  
|                                                                           |  |                              |        |         |   |         |   |         |        |   |   |         |  
|Income (loss) before income taxes                                          |  |                              | (536   | )       |   | (252    | ) |         | (4,053 | ) |   | (24,042 | )
|Income tax (benefit)                                                       |  |                              | (795   | )       |   | (672    | ) |         | (2,142 | ) |   | (8,295  | )
|                                                                           |  |                              |        |         |   |         |   |         |        |   |   |         |  
|Net income (loss)                                                          |  |                              | 259    |         |   | 420     |   |         | (1,911 | ) |   | (15,747 | )
|Preferred stock dividends                                                  |  |                              | 314    |         |   | 314     |   |         | 314    |   |   | 313     |  
|Accretion of preferred stock discount                                      |  |                              | 7      |         |   | 7       |   |         | 7      |   |   | 7       |  
|                                                                           |  |                              |        |         |   |         |   |         |        |   |   |         |  
|Net income (loss) available to common
 stockholders                        |  | $                            | (62    | )       | $ | 99      |   | $       | (2,232 | ) | $ | (16,067 | )
|                                                                           |  |                              |        |         |   |         |   |         |        |   |   |         |  
|                                                                           |  |                              |        |         |   |         |   |         |        |   |   |         |  
|Earnings (loss) per share:                                                 |  |                              |        |         |   |         |   |         |        |   |   |         |  
|Basic net income (loss) per common share
 available to common stockholders |  | $                            | (0.02  | )       | $ | 0.03    |   | $       | (0.67  | ) | $ | (4.86   | )
|Diluted income (loss) per common share
 available to common stockholders   |  | $                            | (0.02  | )       | $ | 0.03    |   | $       | (0.67  | ) | $ | (4.86   | )
|Cash dividends declared per share                                          |  | $                            | -0-    |         | $ | -0-     |   | $       | -0-    |   | $ | -0-     |  

|                                                                         |  |                              |        |         |   |         |  |         |        |   |   |         |  
|------------------------------------------------------------------------ |  | ---------------------------- | ------ | ------- | - | ------- |  | ------- | ------ | - | - | ------- | -
|                                                                         |  | Year Ended December 31, 2009 |       
|                                                                         |  |                              |       
|                                                                         |  | 1st Qtr                      |        | 2nd Qtr |   | 3rd Qtr |  | 4th Qtr |       
|                                                                         |  |                              |        |         |   |         |  |         |        |   |   |         |  
|Interest income                                                          |  | $                            | 14,322 |         | $ | 14,418  |  | $       | 14,424 |   | $ | 13,572  |  
|Interest expense                                                         |  |                              | 5,928  |         |   | 5,789   |  |         | 5,541  |   |   | 4,827   |  
|                                                                         |  |                              |        |         |   |         |  |         |        |   |   |         |  
|Net interest income                                                      |  |                              | 8,394  |         |   | 8,629   |  |         | 8,883  |   |   | 8,745   |  
|Provision for loan losses                                                |  |                              | 1,170  |         |   | 1,465   |  |         | 2,410  |   |   | 6,017   |  
|                                                                         |  |                              |        |         |   |         |  |         |        |   |   |         |  
|Net interest income after provision for
 loan losses                     |  |                              | 7,224  |         |   | 7,164   |  |         | 6,473  |   |   | 2,728   |  
|Non-interest income                                                      |  |                              | 2,544  |         |   | 3,731   |  |         | 2,772  |   |   | 4,197   |  
|Non-interest expense                                                     |  |                              | 8,716  |         |   | 8,715   |  |         | 9,001  |   |   | 33,128  |  
|                                                                         |  |                              |        |         |   |         |  |         |        |   |   |         |  
|Income (loss) before income taxes                                        |  |                              | 1,052  |         |   | 2,180   |  |         | 244    |   |   | (26,203 | )
|Income tax expense                                                       |  |                              | (104   | )       |   | 282     |  |         | (516   | ) |   | (1,263  | )
|                                                                         |  |                              |        |         |   |         |  |         |        |   |   |         |  
|Net income (loss)                                                        |  |                              | 1,156  |         |   | 1,898   |  |         | 760    |   |   | 24,940  |  
|Preferred stock dividends                                                |  |                              | 237    |         |   | 317     |  |         | 313    |   |   | 311     |  
|Accretion of preferred stock discount                                    |  |                              | 5      |         |   | 6       |  |         | 7      |   |   | 7       |  
|                                                                         |  |                              |        |         |   |         |  |         |        |   |   |         |  
|Net income (loss) available to common
 stockholders                      |  | $                            | 914    |         | $ | 1,575   |  | $       | 440    |   | $ | (25,258 | )
|                                                                         |  |                              |        |         |   |         |  |         |        |   |   |         |  
|Earnings per share:                                                      |  |                              |        |         |   |         |  |         |        |   |   |         |  
|Basic income (loss) per common share
 available to common stockholders   |  | $                            | 0.28   |         | $ | 0.48    |  | $       | 0.13   |   | $ | (7.65   | )
|Diluted income (loss) per common share
 available to common stockholders |  | $                            | 0.28   |         | $ | 0.48    |  | $       | 0.13   |   | $ | (7.65   | )
|Cash dividends declared per share                                        |  | $                            | 0.28   |         | $ | 0.14    |  | $       | 0.14   |   | $ | 0.14    |  

52

---



Selected Consolidated Financial Information
(dollars in thousands except share data)

|                                                                                    |  |                                 |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|----------------------------------------------------------------------------------- |  | ------------------------------- | --------- | ---- | - | --------- | -- | ---- | --------- | ---- | - | --------- | - | - | --------- | -
|                                                                                    |  | For the Years Ended December 31 |          
|                                                                                    |  |                                 |          
|                                                                                    |  | 2010                            |           | 2009 |   | 2008      |    | 2007 |           | 2006 |  
|                                                                                    |  |                                 |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Summary of Income                                                                   |  |                                 |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Interest income                                                                     |  | $                               | 49,566    |      | $ | 56,736    |    | $    | 58,822    |      | $ | 61,559    |   | $ | 53,526    |  
|Interest expense                                                                    |  |                                 | 12,238    |      |   | 22,085    |    |      | 27,301    |      |   | 34,505    |   |   | 27,630    |  
|Net interest income                                                                 |  |                                 | 37,328    |      |   | 34,651    |    |      | 31,521    |      |   | 27,054    |   |   | 25,896    |  
|Provision for loan losses                                                           |  |                                 | 40,550    |      |   | 11,062    |    |      | 2,968     |      |   | 640       |   |   | 285       |  
|Non-interest income                                                                 |  |                                 | 11,492    |      |   | 13,244    |    |      | 11,593    |      |   | 11,298    |   |   | 10,245    |  
|Non-interest expense                                                                |  |                                 | 37,153    |      |   | 59,559    |    |      | 31,123    |      |   | 29,565    |   |   | 28,335    |  
|Income (loss) before income taxes                                                   |  |                                 | (28,883   | )    |   | (22,726   | )  |      | 9,023     |      |   | 8,147     |   |   | 7,521     |  
|Income tax expense (benefit)                                                        |  |                                 | (11,904   | )    |   | (1,600    | )  |      | 1,697     |      |   | 1,377     |   |   | 1,033     |  
|Net income (loss)                                                                   |  |                                 | (16,979   | )    |   | (21,126   | )  |      | 7,326     |      |   | 6,770     |   |   | 6,488     |  
|Dividends on preferred shares                                                       |  |                                 | 1,255     |      |   | 1,178     |    |      | -0-       |      |   | -0-       |   |   | -0-       |  
|Accretion of preferred stock discount                                               |  |                                 | 28        |      |   | 25        |    |      | -0-       |      |   | -0-       |   |   | -0-       |  
|Net income (loss) available to common stockholders                                  |  |                                 | (18,262   | )    |   | (22,329   | )  |      | 7,326     |      |   | 6,770     |   |   | 6,488     |  
|                                                                                    |  |                                 |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Per Share Data                                                                      |  |                                 |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Basic earnings (loss) per share available to common stockholders                    |  | $                               | (5.52     | )    | $ | (6.76     | )  | $    | 2.22      |      | $ | 2.04      |   | $ | 1.93      |  
|Diluted earnings (loss) per share available to common stockholders                  |  |                                 | (5.52     | )    |   | (6.76     | )  |      | 2.21      |      |   | 2.03      |   |   | 1.91      |  
|Common Book value (at end of period)                                                |  |                                 | 9.58      |      |   | 15.03     |    |      | 21.97     |      |   | 20.74     |   |   | 19.50     |  
|Cash dividends declared                                                             |  |                                 | 0.00      |      |   | 0.70      |    |      | 1.12      |      |   | 1.08      |   |   | 1.05      |  
|Dividend payout ratio                                                               |  |                                 | n/a       |      |   | n/a       |    |      | 50.5      | %    |   | 53.1      | % |   | 54.6      | %
|                                                                                    |  |                                 |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Selected Balances (at end of year)                                                  |  |                                 |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Total assets                                                                        |  | $                               | 1,096,471 |      | $ | 1,261,338 |    | $    | 1,163,130 |      | $ | 1,080,702 |   | $ | 1,031,959 |  
|Earning assets                                                                      |  |                                 | 914,119   |      |   | 1,097,992 |    |      | 1,013,521 |      |   | 949,534   |   |   | 904,504   |  
|Investments                                                                         |  |                                 | 260,939   |      |   | 301,267   |    |      | 251,115   |      |   | 228,575   |   |   | 267,916   |  
|Gross loans                                                                         |  |                                 | 709,589   |      |   | 801,370   |    |      | 792,992   |      |   | 723,575   |   |   | 633,984   |  
|Allowance for loan losses                                                           |  |                                 | 29,726    |      |   | 12,075    |    |      | 5,064     |      |   | 3,248     |   |   | 3,053     |  
|Deposits                                                                            |  |                                 | 962,961   |      |   | 1,075,539 |    |      | 962,132   |      |   | 891,407   |   |   | 881,899   |  
|Borrowings                                                                          |  |                                 | 71,559    |      |   | 104,848   |    |      | 118,016   |      |   | 109,089   |   |   | 74,147    |  
|Stockholders equity                                                                |  |                                 | 56,861    |      |   | 74,660    |    |      | 72,471    |      |   | 68,607    |   |   | 65,355    |  
|                                                                                    |  |                                 |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Selected Financial Ratios                                                           |  |                                 |           |      |   |           |    |      |           |      |   |           |   |   |           |  
|Net income (loss) available to common stockholders to average
 stockholders equity |  |                                 | (23.82    | )%   |   | (22.81    | )% |      | 10.59     | %    |   | 10.32     | % |   | 10.07     | %
|Net income (loss) available to common stockholders to average assets                |  |                                 | (1.58     | )    |   | (1.79     | )  |      | 0.66      |      |   | 0.65      |   |   | 0.68      |  
|Average stockholders equity to average assets                                      |  |                                 | 6.62      |      |   | 7.84      |    |      | 6.25      |      |   | 6.33      |   |   | 6.70      |  
|Average earning assets to average assets                                            |  |                                 | 85.72     |      |   | 87.43     |    |      | 88.57     |      |   | 88.61     |   |   | 88.73     |  
|Non-performing loans to total loans at end of year (net of unearned
 interest)      |  |                                 | 13.83     |      |   | 7.35      |    |      | 4.18      |      |   | 1.03      |   |   | 0.62      |  
|Tier 1 capital to average adjusted assets                                           |  |                                 | 5.76      |      |   | 7.48      |    |      | 6.22      |      |   | 6.33      |   |   | 6.67      |  
|Risk-based capital to risk-weighted assets                                          |  |                                 | 9.68      |      |   | 11.50     |    |      | 8.30      |      |   | 8.44      |   |   | 9.18      |  
|Net loans charged-off to average loans                                              |  |                                 | 3.33      |      |   | 0.54      |    |      | 0.16      |      |   | 0.07      |   |   | 0.06      |  
|Allowance for loan losses to total loans at end of year (net of
 unearned interest) |  |                                 | 4.22      |      |   | 1.51      |    |      | 0.64      |      |   | 0.45      |   |   | 0.49      |  
|Average interest-bearing deposits to average deposits                               |  |                                 | 87.13     |      |   | 89.36     |    |      | 89.02     |      |   | 89.01     |   |   | 88.27     |  
|Average non-interest-bearing deposits to average deposits                           |  |                                 | 12.87     |      |   | 10.64     |    |      | 10.98     |      |   | 10.99     |   |   | 11.73     |  

53

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Market Information

MARKET INFORMATION Citizens
First National Bank acts as the transfer agent for Princeton National Bancorp,
Inc. All transfer requests or inquiries should be directed to the following: Lou Ann BirkeyVice President - Investor
 Relations & Corporate SecretaryPrinceton National Bancorp,
 Inc.606 South Main St.Princeton, IL 61356PHONE: 815-872-6131 or
 815-872-6134E-MAIL:
 pnbc@citizens1st.com The
table below indicates the high and low prices and the dividends declared per
share for PNBC common stock during the periods indicated: 2010
 
 High
 
 Low
 
 Cash
 Dividend
 Declared
 
 2009
 
 High
 
 Low
 
 Cash
 Dividend DeclaredFirst Quarter
 

 $
 11.50
 
 $
 8.01
 
 $
 0.00
 
 First Quarter
 
 $
 23.06
 
 $
 12.30
 
 $
 0.28Second Quarter
 
 
 10.00
 
 
 5.50
 
 
 0.00
 
 Second Quarter
 
 
 15.75
 
 
 13.49
 
 
 0.14Third Quarter
 
 
 6.50
 
 
 4.65
 
 
 0.00
 
 Third Quarter
 
 
 18.94
 
 
 13.39
 
 
 0.14Fourth Quarter
 
 

 5.50
 
 
 2.73
 
 
 0.00
 
 Fourth Quarter
 
 
 15.99
 
 
 9.70
 
 
 0.14 On
December 31, 2010, PNBC had 758 registered holders of record of its common
stock. The
holders of the Common Stock are entitled to receive such dividends as are
declared by the Board of Directors of the Corporation, which considers payment
of dividends quarterly. The ability of the Corporation to pay dividends is
dependent upon receipt of dividends from the Bank. In determining cash
dividends, the Board of Directors considers the earnings, capital requirements,
debt servicing requirements, financial ratio guidelines established by the
Board, the financial condition of the Corporation and other relevant factors.
The Banks ability to pay dividends to the Corporation is subject to regulatory
restrictions. See Note 17 - Undistributed Earnings of Subsidiary Bank in the
Notes to Consolidated Financial Statements. The
timing and amount of dividends will depend upon the earnings, capital
requirements, and financial condition of the Corporation and the subsidiary
bank, as well as the general economic conditions and other relevant factors
affecting the Corporation and the subsidiary bank. In 2010, a decision was made
to suspend dividends to bolster capital levels. See Managements Discussion
and Analysis of Financial Condition and Results of Operations.


| |                                                                                                                                                                           |  |  |  |                                                                                                                                                          | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |                                                                                                                                                                           |  |  |  |                                                                                                                                                          | 
| | Annual
 Report on Form 10-K and Investor Information                                                                                                                      |  |  |  | Annual
 Meeting of Stockholders                                                                                                                          | 
| |                                                                                                                                                                           |  |  |  |                                                                                                                                                          | 
| | A
 copy of Princeton National Bancorp, Inc.s Annual Report on Form 10-K to be
 filed with the Securities & Exchange Commission, is available without
 charge by writing: |  |  |  | The
 annual meeting of the stockholders of Princeton National Bancorp, Inc. will be
 held at 10:00 AM, Tuesday, May 10, 2011, at the following location: | 
| |                                                                                                                                                                           |  |  |  |                                                                                                                                                          | 
| | Lou
 Ann Birkey                                                                                                                                                           |  |  |  | The
 Galleria Convention Center                                                                                                                          | 
| | Vice
 President - Investor Relations & Corporate Secretary                                                                                                                |  |  |  | 1659
 North Main St.                                                                                                                                     | 
| | Princeton
 National Bancorp, Inc.                                                                                                                                         |  |  |  | Princeton,
 IL 61356                                                                                                                                     | 
| | 606
 South Main St.                                                                                                                                                       |  |  |  |                                                                                                                                                          | 
| | Princeton,
 IL 61356                                                                                                                                                      |  |  |  | Stockholders
 are invited to attend.                                                                                                                     | 
| |                                                                                                                                                                           |  |  |  |                                                                                                                                                          | 
| | or E-MAIL us at pnbc@citizens1st.com                                                                                                                                      |  |  |  |                                                                                                                                                          | 
| |                                                                                                                                                                           |  |  |  |                                                                                                                                                          | 

54

---



Common Stock Price Performance Graph

The
following Common Stock price performance graph compares the monthly change in
the Corporations cumulative total stockholder returns on its Common Stock,
assuming the Common Stock was purchased on December 31, 2005 and sold on
December 31, 2010, with the cumulative total return of stocks included in the
Russell 3000, the NASDAQ Bank Index and the SNL Midwest Bank Stock Index for
the same period. The amounts shown assume the reinvestment of dividends.

(LINE GRAPH)

|                                  |  |               |  |          |  |          |  |          |  |          |  |         
|--------------------------------- |  | ------------- |  | -------- |  | -------- |  | -------- |  | -------- |  | --------
|                                  |  | Period Ending
|                                  |  |              
|Index                             |  | 12/31/05      |  | 12/31/06 |  | 12/31/07 |  | 12/31/08 |  | 12/31/09 |  | 12/31/10
|                                  |  |               |  |          |  |          |  |          |  |          |  |         
|Princeton National Bancorp,
 Inc. |  | 100.00        |  | 101.04   |  | 78.11    |  | 74.45    |  | 38.23    |  | 12.87   
|Russell 3000                      |  | 100.00        |  | 115.71   |  | 121.66   |  | 76.27    |  | 97.89    |  | 114.46  
|SNL Midwest Bank Index            |  | 100.00        |  | 115.59   |  | 90.09    |  | 59.27    |  | 50.23    |  | 62.38   
|NASDAQ Bank                       |  | 100.00        |  | 113.82   |  | 91.16    |  | 71.52    |  | 59.87    |  | 68.34   

The
Corporations Common Stock began trading on the NASDAQ Stock Market under the
symbol PNBC on May 8, 1992. On December 31, 2010, the closing bid price for the
Common Stock as quoted on NASDAQ Online was $3.64.

55

---