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|                                                                                         
|-----------------------------------------------------------------------------------------
|UNITED STATES                                                                            
|SECURITIES AND EXCHANGE COMMISSION                                                       
|Washington, D.C. 20549                                                                   
|                                                                                         
|                                                                                         
|                                                                                         
|FORM 10-Q                                                                                
|                                                                                         
|                                                                                         
|                                                                                         
|þQUARTERLY
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                                         
|For the Quarterly Period Ended March 31,
 2011                                           
|                                                                                         
|Commission File Number: 0-20050                                                          
|                                                                                         
|                                                                                         
|PRINCETON NATIONAL BANCORP, INC.                                                         
|(Exact name of Registrant as specified in
 its charter.)                                 

|                                                      |                                        
|----------------------------------------------------- | ---------------------------------------
|Delaware                                              | 36-3210283                             
|(State or other jurisdiction of                       | (I.R.S. Employer Identification Number)
|incorporation or organization)                        |                                        
|                                                      |                                        
|606 S. Main St.                                       |                                        
|Princeton, Illinois                                   | 61356                                  
|(Address of principal executive offices)              | (Zip code)                             
|                                                      |                                        
|(815) 875-4444                                       
|(Registrants telephone number, including
 area code)
|                                                     
|                                                     

Indicate
by check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o

Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes o No o

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):

|                           |                      |                          |                             
|-------------------------- | -------------------- | ------------------------ | ----------------------------
|Large
 accelerated filer o | Accelerated
 filer o | Non-accelerated
 filer o | Smaller
 reporting company þ

Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No þ

Indicate
the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date.

|                        |                              
|----------------------- | -----------------------------
|Class                   | Outstanding at April 21, 2011
|Common, par value $5.00 | 3,328,013                    

---

---



Part I: FINANCIAL INFORMATION

The
unaudited consolidated financial statements of Princeton National Bancorp, Inc.
and Subsidiary and managements discussion and analysis of financial condition
and results of operation are presented in the schedules as follows:

| |             |                                                                                       
| | ----------- | --------------------------------------------------------------------------------------
| | Schedule 1: | Condensed
 Consolidated Balance Sheets                                                
| | Schedule 2: | Condensed
 Consolidated Statements of Income                                          
| | Schedule 3: | Condensed
 Consolidated Statements of Changes in Stockholders Equity                 
| | Schedule 4: | Condensed
 Consolidated Statements of Cash Flows                                      
| | Schedule 5: | Notes to Condensed Consolidated Financial Statements                                  
| | Schedule 6: | Managements
 Discussion and Analysis of Financial Condition and Results of Operations
| | Schedule 7: | Controls and
 Procedures                                                              

Part II: OTHER INFORMATION

Item 1A. Risk Factors

Smaller
reporting companies are not required to provide the information required by this
item.

Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds

(a)
None.

Item 4. Reserved.

Item 6. Exhibits

| |      |                                                                                                                                                                              
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1 | Certification
 of Chief Executive Officer required by Rule 13a-14(a).                                                                                                        
| | 31.2 | Certification
 of Chief Financial Officer required by Rule 13a-14(a).                                                                                                        
| | 32.1 | Certification
 of Chief Executive Officer and Chief Financial Officer required by Rule
 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
 Section 1350.

SIGNATURES

Pursuant to
the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.

PRINCETON NATIONAL
BANCORP, INC.

|   |                                     |  |    |                              
|-- | ----------------------------------- |  | -- | -----------------------------
|By | /s/ Thomas
 D. Ogaard 5/6/11        |  | By | /s/ Rodney
 D. Stickle 5/6/11
|   |                                     |  |    |                              
|   | Thomas D.
 Ogaard                   |  |    | Rodney D.
 Stickle, CPA      
|   | President & Chief Executive Officer |  |    | Senior Vice President &      
|   | May 6, 2011                         |  |    | Chief Financial Officer      
|   |                                     |  |    | May 6, 2011                  

2

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Schedule 1

|                                       | 
|-------------------------------------- | 
|Princeton National Bancorp, Inc.      
|Condensed Consolidated Balance
 Sheets

|                                                                                                                                         |  |                          |           |                   |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | --------- | ----------------- | - | --------- | -
|(dollars in thousands except
 share data)                                                                                                |  | March 31,2011(unaudited) |           | December 31,
2010 |  
|ASSETS                                                                                                                                   |  |                          |           |                   |   |           |  
|Cash and due from banks                                                                                                                  |  | $                        | 15,059    |                   | $ | 12,992    |  
|Interest-bearing deposits with financial institutions                                                                                    |  |                          | 41,152    |                   |   | 30,888    |  
|Total cash and cash
 equivalents                                                                                                         |  |                          | 56,211    |                   |   | 43,880    |  
|                                                                                                                                         |  |                          |           |                   |   |           |  
|Loans held-for-sale, at lower of cost or market                                                                                          |  |                          | 3,240     |                   |   | 5,515     |  
|                                                                                                                                         |  |                          |           |                   |   |           |  
|Investment securities:                                                                                                                   |  |                          |           |                   |   |           |  
|Available-for-sale, at fair
 value                                                                                                       |  |                          | 242,452   |                   |   | 248,752   |  
|Held-to-maturity, at amortized
 cost (fair value of $11,711 and $12,472)                                                                 |  |                          | 11,425    |                   |   | 12,187    |  
|Total investment securities                                                                                                              |  |                          | 253,877   |                   |   | 260,939   |  
|                                                                                                                                         |  |                          |           |                   |   |           |  
|Loans:                                                                                                                                   |  |                          |           |                   |   |           |  
|Loans, net of unearned
 interest                                                                                                         |  |                          | 688,313   |                   |   | 704,074   |  
|Allowance for loan losses                                                                                                                |  |                          | (29,907   | )                 |   | (29,726   | )
|Net loans                                                                                                                                |  |                          | 658,406   |                   |   | 674,348   |  
|                                                                                                                                         |  |                          |           |                   |   |           |  
|Premises and equipment, net of accumulated depreciation                                                                                  |  |                          | 26,576    |                   |   | 26,901    |  
|Land held for sale, at lower of cost or market                                                                                           |  |                          | 2,244     |                   |   | 2,244     |  
|Federal Reserve and Federal Home Loan Bank stock                                                                                         |  |                          | 4,498     |                   |   | 4,498     |  
|Bank-owned life insurance                                                                                                                |  |                          | 23,646    |                   |   | 23,416    |  
|Accrued interest receivable                                                                                                              |  |                          | 6,159     |                   |   | 7,482     |  
|Other real estate owned                                                                                                                  |  |                          | 20,572    |                   |   | 20,652    |  
|Deferred income taxes                                                                                                                    |  |                          | 11,817    |                   |   | 10,512    |  
|Intangible assets, net of accumulated amortization                                                                                       |  |                          | 2,337     |                   |   | 2,531     |  
|Other assets                                                                                                                             |  |                          | 11,151    |                   |   | 13,553    |  
|                                                                                                                                         |  |                          |           |                   |   |           |  
|TOTAL ASSETS                                                                                                                             |  | $                        | 1,080,734 |                   | $ | 1,096,471 |  
|                                                                                                                                         |  |                          |           |                   |   |           |  
|LIABILITIES                                                                                                                              |  |                          |           |                   |   |           |  
|Deposits:                                                                                                                                |  |                          |           |                   |   |           |  
|Demand                                                                                                                                   |  | $                        | 135,210   |                   | $ | 138,683   |  
|Interest-bearing demand                                                                                                                  |  |                          | 379,584   |                   |   | 383,126   |  
|Savings                                                                                                                                  |  |                          | 83,191    |                   |   | 74,817    |  
|Time                                                                                                                                     |  |                          | 352,682   |                   |   | 366,335   |  
|                                                                                                                                         |  |                          |           |                   |   |           |  
|Total deposits                                                                                                                           |  |                          | 950,667   |                   |   | 962,961   |  
|                                                                                                                                         |  |                          |           |                   |   |           |  
|Borrowings:                                                                                                                              |  |                          |           |                   |   |           |  
|Customer repurchase agreements                                                                                                           |  |                          | 35,666    |                   |   | 35,806    |  
|Interest-bearing demand notes
 issued to the U.S. Treasury                                                                               |  |                          | 1,064     |                   |   | 1,753     |  
|Advances from the Federal Home
 Loan Bank                                                                                                |  |                          | 5,000     |                   |   | 9,000     |  
|Trust preferred securities                                                                                                               |  |                          | 25,000    |                   |   | 25,000    |  
|                                                                                                                                         |  |                          |           |                   |   |           |  
|Total borrowings                                                                                                                         |  |                          | 66,730    |                   |   | 71,559    |  
|                                                                                                                                         |  |                          |           |                   |   |           |  
|Other liabilities                                                                                                                        |  |                          | 5,671     |                   |   | 5,090     |  
|                                                                                                                                         |  |                          |           |                   |   |           |  
|TOTAL LIABILITIES                                                                                                                        |  |                          | 1,023,068 |                   |   | 1,039,610 |  
|                                                                                                                                         |  |                          |           |                   |   |           |  
|STOCKHOLDERS EQUITY                                                                                                                     |  |                          |           |                   |   |           |  
|Preferred stock: no par value,
 100,000 shares authorized:
 25,083 shares issued and outstanding at March 31, 2011 and December 31, 2010 |  |                          | 24,993    |                   |   | 24,986    |  
|Common stock: $5 par value,
 7,000,000 shares authorized:
 4,478,295 shares issued at March 31, 2011 and December 31, 2010               |  |                          | 22,391    |                   |   | 22,391    |  
|Common stock warrants                                                                                                                    |  |                          | 150       |                   |   | 150       |  
|Surplus                                                                                                                                  |  |                          | 18,279    |                   |   | 18,275    |  
|Retained earnings                                                                                                                        |  |                          | 13,317    |                   |   | 11,589    |  
|Accumulated other comprehensive
 income, net of tax                                                                                      |  |                          | 2,095     |                   |   | 3,064     |  
|Less: cost of 1,150,282 and
 1,152,354 treasury shares at March 31, 2011 and December 31, 2010                                           |  |                          | (23,559   | )                 |   | (23,594   | )
|                                                                                                                                         |  |                          |           |                   |   |           |  
|TOTAL
 STOCKHOLDERS EQUITY                                                                                                              |  |                          | 57,666    |                   |   | 56,861    |  
|                                                                                                                                         |  |                          |           |                   |   |           |  
|TOTAL
 LIABILITIES AND STOCKHOLDERS EQUITY                                                                                              |  | $                        | 1,080,734 |                   | $ | 1,096,471 |  
|                                                                                                                                         |  |                          |           |                   |   |           |  
|See
 accompanying notes to unaudited condensed consolidated financial statements.                                                        |  |                          |           |                   |   |           |  

3

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Schedule 2

|                                                       
|-------------------------------------------------------
|Princeton National Bancorp, Inc.                       
|Condensed Consolidated Statements of Income (unaudited)

|                                                                                  |  |                                 |           |                                   |    |           |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | --------- | --------------------------------- | -- | --------- | -
|(dollars
 in thousands except share data)                                         |  | THREE MONTHSENDEDMarch 31, 2011 |           | THREE
MONTHS
ENDED
March 31, 2010 |   
|                                                                                 
|Interest Income:                                                                  |  |                                 |           |                                   |    |           |  
|Interest and fees on loans                                                        |  | $                               | 8,859     |                                   | $  | 10,585    |  
|Interest and dividends on investment
 securities:                                 |  |                                 |           |                                   |    |           |  
|Taxable                                                                           |  |                                 | 1,516     |                                   |    | 1,867     |  
|Tax-exempt                                                                        |  |                                 | 898       |                                   |    | 976       |  
|Interest on interest-bearing deposits in
 other banks                             |  |                                 | 21        |                                   |    | 32        |  
|Total interest income                                                             |  |                                 | 11,294    |                                   |    | 13,460    |  
|                                                                                  |  |                                 |           |                                   |    |           |  
|Interest Expense:                                                                 |  |                                 |           |                                   |    |           |  
|Interest on deposits                                                              |  |                                 | 1,738     |                                   |    | 3,372     |  
|Interest on borrowings                                                            |  |                                 | 199       |                                   |    | 605       |  
|Total interest expense                                                            |  |                                 | 1,937     |                                   |    | 3,977     |  
|                                                                                  |  |                                 |           |                                   |    |           |  
|Net interest income                                                               |  |                                 | 9,357     |                                   |    | 9,483     |  
|                                                                                  |  |                                 |           |                                   |    |           |  
|Provision
 for loan losses                                                        |  |                                 | 1,875     |                                   |    | 3,925     |  
|                                                                                  |  |                                 |           |                                   |    |           |  
|Net interest income after provision for loan losses                               |  |                                 | 7,482     |                                   |    | 5,558     |  
|                                                                                  |  |                                 |           |                                   |    |           |  
|Non-interest income:                                                              |  |                                 |           |                                   |    |           |  
|Trust and farm management fees                                                    |  |                                 | 290       |                                   |    | 264       |  
|Service charges on deposit accounts                                               |  |                                 | 943       |                                   |    | 891       |  
|Other service charges                                                             |  |                                 | 405       |                                   |    | 459       |  
|Gain on sales of securities
 available-for-sale                                   |  |                                 | 1,084     |                                   |    | 642       |  
|Brokerage fee income                                                              |  |                                 | 139       |                                   |    | 189       |  
|Mortgage banking income, net                                                      |  |                                 | 451       |                                   |    | 496       |  
|Bank-owned life insurance income                                                  |  |                                 | 221       |                                   |    | 229       |  
|Other operating income                                                            |  |                                 | 67        |                                   |    | 22        |  
|Total non-interest income                                                         |  |                                 | 3,600     |                                   |    | 3,192     |  
|                                                                                  |  |                                 |           |                                   |    |           |  
|Non-interest expense:                                                             |  |                                 |           |                                   |    |           |  
|Salaries and employee benefits                                                    |  |                                 | 4,616     |                                   |    | 4,413     |  
|Occupancy                                                                         |  |                                 | 689       |                                   |    | 700       |  
|Equipment expense                                                                 |  |                                 | 781       |                                   |    | 767       |  
|Federal insurance assessments                                                     |  |                                 | 640       |                                   |    | 698       |  
|Intangible assets amortization                                                    |  |                                 | 194       |                                   |    | 201       |  
|Data processing                                                                   |  |                                 | 366       |                                   |    | 312       |  
|Marketing                                                                         |  |                                 | 155       |                                   |    | 176       |  
|Other real estate expenses, net                                                   |  |                                 | 582       |                                   |    | 735       |  
|Loan collection expenses                                                          |  |                                 | 163       |                                   |    | 205       |  
|Other operating expense                                                           |  |                                 | 1,249     |                                   |    | 1,079     |  
|Total non-interest expense                                                        |  |                                 | 9,435     |                                   |    | 9,286     |  
|                                                                                  |  |                                 |           |                                   |    |           |  
|Income (loss) before income taxes                                                 |  |                                 | 1,647     |                                   |    | (536      | )
|Income tax
 benefit                                                               |  |                                 | (88       | )                                 |    | (795      | )
|                                                                                  |  |                                 |           |                                   |    |           |  
|Net income                                                                        |  |                                 | 1,735     |                                   |    | 259       |  
|                                                                                  |  |                                 |           |                                   |    |           |  
|Dividends on
 preferred shares                                                    |  |                                 | 0         |                                   |    | 314       |  
|Accretion of
 preferred stock discount                                            |  |                                 | 7         |                                   |    | 7         |  
|                                                                                  |  |                                 |           |                                   |    |           |  
|Net income (loss) available to common stockholders                                |  | $                               | 1,728     |                                   | ($ | 62        | )
|                                                                                  |  |                                 |           |                                   |    |           |  
|Earnings (loss) per share available to common stockholders:                       |  |                                 |           |                                   |    |           |  
|Basic net income (loss) per common share
 available to common stockholders        |  | $                               | 0.52      |                                   | ($ | 0.02      | )
|Diluted net income (loss) per common share
 available to common stockholders      |  | $                               | 0.52      |                                   | ($ | 0.02      | )
|                                                                                  |  |                                 |           |                                   |    |           |  
|Basic
 weighted average shares outstanding                                        |  |                                 | 3,325,964 |                                   |    | 3,306,762 |  
|Diluted
 weighted average shares outstanding                                      |  |                                 | 3,329,409 |                                   |    | 3,306,762 |  
|                                                                                  |  |                                 |           |                                   |    |           |  
|See
 accompanying notes to unaudited condensed consolidated financial statements. |  |                                 |           |                                   |    |           |  

4

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Schedule 3

Princeton National Bancorp, Inc.Condensed Consolidated Statements of Changes
in Stockholders Equity (unaudited)

|(dollars in thousands except share data)                                      |  |                  |        |               |   |                         |  |         |     |                    |   |                                                               |   |                 |        |       |   |       |   |    |        |   |   |        |  
|----------------------------------------------------------------------------- |  | ---------------- | ------ | ------------- | - | ----------------------- |  | ------- | --- | ------------------ | - | ------------------------------------------------------------- | - | --------------- | ------ | ----- | - | ----- | - | -- | ------ | - | - | ------ | -
|For the Three Months Ended
 March 31, 2011                                    |  | Preferred
 Stock |        | Common
 Stock |   | Common
 Stock
 Warrants |  | Surplus |     | Retained
 Earnings |   | Accumulated
 Other
 Comprehensive
 Income,
 net of tax effect |   | Treasury
 Stock |        | Total |  
|                                                                              |  |                  |        |               |   |                         |  |         |     |                    |   |                                                               |   |                 |        |       |   |       |   |    |        |   |   |        |  
|Balance,
 January 1, 2011                                                     |  | $                | 24,986 |               | $ | 22,391                  |  | $       | 150 |                    | $ | 18,275                                                        |   | $               | 11,589 |       | $ | 3,064 |   | ($ | 23,594 | ) | $ | 56,861 |  
|                                                                              |  |                  |        |               |   |                         |  |         |     |                    |   |                                                               |   |                 |        |       |   |       |   |    |        |   |   |        |  
|Net income                                                                    |  |                  |        |               |   |                         |  |         |     |                    |   |                                                               |   |                 | 1,735  |       |   |       |   |    |        |   |   | 1,735  |  
|Accretion on preferred stock discount                                         |  |                  | 7      |               |   |                         |  |         |     |                    |   |                                                               |   |                 | (7     | )     |   |       |   |    |        |   |   | 0      |  
|Sale of 2,072 shares of treasury common
 stock                                |  |                  |        |               |   |                         |  |         |     |                    |   | (25                                                           | ) |                 |        |       |   |       |   |    | 35     |   |   | 10     |  
|Amortization of unearned compensation
 expense                                |  |                  |        |               |   |                         |  |         |     |                    |   | 29                                                            |   |                 |        |       |   |       |   |    |        |   |   | 29     |  
|Other comprehensive income, net of ($613)
 tax effect                         |  |                  |        |               |   |                         |  |         |     |                    |   |                                                               |   |                 |        |       |   | (969  | ) |    |        |   |   | (969   | )
|Balance, March 31, 2011                                                       |  | $                | 24,993 |               | $ | 22,391                  |  | $       | 150 |                    | $ | 18,279                                                        |   | $               | 13,317 |       | $ | 2,095 |   | ($ | 23,559 | ) | $ | 57,666 |  
|                                                                              |  |                  |        |               |   |                         |  |         |     |                    |   |                                                               |   |                 |        |       |   |       |   |    |        |   |   |        |  
|For the Three Months Ended March 31, 2010                                     |  |                  |        |               |   |                         |  |         |     |                    |   |                                                               |   |                 |        |       |   |       |   |    |        |   |   |        |  
|                                                                              |  |                  |        |               |   |                         |  |         |     |                    |   |                                                               |   |                 |        |       |   |       |   |    |        |   |   |        |  
|Balance, January 1, 2010                                                      |  | $                | 24,958 |               | $ | 22,391                  |  | $       | 150 |                    | $ | 18,423                                                        |   | $               | 29,851 |       | $ | 2,816 |   | ($ | 23,929 | ) | $ | 74,660 |  
|                                                                              |  |                  |        |               |   |                         |  |         |     |                    |   |                                                               |   |                 |        |       |   |       |   |    |        |   |   |        |  
|Net income                                                                    |  |                  |        |               |   |                         |  |         |     |                    |   |                                                               |   |                 | 259    |       |   |       |   |    |        |   |   | 259    |  
|Dividends on preferred stock                                                  |  |                  |        |               |   |                         |  |         |     |                    |   |                                                               |   |                 | (314   | )     |   |       |   |    |        |   |   | (314   | )
|Accretion on preferred stock discount                                         |  |                  |        |               |   |                         |  |         |     |                    |   |                                                               |   |                 |        |       |   |       |   |    |        |   |   |       |  
|Sale of 1,341 shares of treasury common
 stock                                |  |                  |        |               |   |                         |  |         |     |                    |   | (12                                                           | ) |                 |        |       |   |       |   |    | 23     |   |   | 11     |  
|Award of 2,000 shares of nonvested common
 stock out of treasury common stock |  |                  |        |               |   |                         |  |         |     |                    |   | (14                                                           | ) |                 |        |       |   |       |   |    | 34     |   |   | 20     |  
|Amortization of unearned compensation
 expense                                |  |                  |        |               |   |                         |  |         |     |                    |   | 22                                                            |   |                 |        |       |   |       |   |    |        |   |   | 22     |  
|Other comprehensive income, net of $807 tax
 effect                           |  |                  |        |               |   |                         |  |         |     |                    |   |                                                               |   |                 |        |       |   | 1,277 |   |    |        |   |   | 1,277  |  
|Balance, March 31, 2010                                                       |  | $                | 24,958 |               | $ | 22,391                  |  | $       | 150 |                    | $ | 18,419                                                        |   | $               | 29,796 |       | $ | 4,093 |   | ($ | 23,872 | ) | $ | 75,935 |  

|                                                                                
|--------------------------------------------------------------------------------
|                                                                                
|See
 accompanying notes to unaudited condensed consolidated financial statements

5

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Schedule 4

Princeton National Bancorp, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)

|                                                                                   |  |                     |         |                    |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------- | ------- | ------------------ | - | ------- | -
|(dollars in thousands)                                                             |  | THREE MONTHS
 ENDED |         | THREE MONTHS
ENDED |  
|                                                                                   |  | March
 31, 2011     |         | March 31, 2010     |  
|Operating activities:                                                              |  |                     |         |                    |   |         |  
|Net income                                                                         |  | $                   | 1,735   |                    | $ | 259     |  
|Adjustments to reconcile net income to net
 cash provided by operating activities: |  |                     |         |                    |   |         |  
|Depreciation                                                                       |  |                     | 486     |                    |   | 531     |  
|Provision for loan losses                                                          |  |                     | 1,875   |                    |   | 3,925   |  
|Deferred income tax benefit                                                        |  |                     | (692    | )                  |   | 1,671   |  
|Amortization of intangible assets and other
 purchase accounting adjustments, net  |  |                     | 194     |                    |   | 204     |  
|Amortization of premiums and discounts on
 investment securities, net              |  |                     | 427     |                    |   | 404     |  
|Gain on sales of securities
 available-for-sale, net                               |  |                     | (1,084  | )                  |   | (642    | )
|Compensation expense for vested stock
 options                                     |  |                     | 29      |                    |   | 22      |  
|(Gain) loss on sales of other real estate
 owned, net                              |  |                     | 95      |                    |   | (14     | )
|Loans originated for sale                                                          |  |                     | (11,498 | )                  |   | (15,808 | )
|Proceeds from sales of loans originated for
 sale                                  |  |                     | 13,773  |                    |   | 18,172  |  
|Decrease in accrued interest payable                                               |  |                     | (124    | )                  |   | (599    | )
|Decrease in accrued interest receivable                                            |  |                     | 1,323   |                    |   | 1,912   |  
|Decrease in other assets                                                           |  |                     | 2,173   |                    |   | 287     |  
|Increase (decrease) in other liabilities                                           |  |                     | 704     |                    |   | (2,574  | )
|                                                                                   |  |                     |         |                    |   |         |  
|Net cash provided by operating activities                                          |  |                     | 9,416   |                    |   | 7,750   |  
|                                                                                   |  |                     |         |                    |   |         |  
|Investing activities:                                                              |  |                     |         |                    |   |         |  
|Proceeds from sales of investment
 securities available-for-sale                   |  |                     | 34,395  |                    |   | 24,418  |  
|Proceeds from maturities of investment
 securities available-for-sale              |  |                     | 5,494   |                    |   | 17,952  |  
|Purchase of investment securities
 available-for-sale                              |  |                     | (34,949 | )                  |   | (1,949  | )
|Proceeds from maturities of investment
 securities held-to-maturity                |  |                     | 1,197   |                    |   | 0       |  
|Purchase of investment securities
 held-to-maturity                                |  |                     | 0       |                    |   | (1,240  | )
|Proceeds from sales of other real estate
 owned                                    |  |                     | 1,134   |                    |   | 1,044   |  
|Net decrease in loans                                                              |  |                     | 12,918  |                    |   | 36,406  |  
|Purchases of premises and equipment                                                |  |                     | (161    | )                  |   | (150    | )
|                                                                                   |  |                     |         |                    |   |         |  
|Net cash provided by  investing
 activities                                        |  |                     | 20,028  |                    |   | 76,481  |  
|                                                                                   |  |                     |         |                    |   |         |  
|Financing activities:                                                              |  |                     |         |                    |   |         |  
|Net decrease in deposits                                                           |  |                     | (12,294 | )                  |   | (44,085 | )
|Net decrease in short-term borrowings                                              |  |                     | (4,829  | )                  |   | (16,752 | )
|Dividends paid on preferred stock                                                  |  |                     | 0       |                    |   | (314    | )
|Dividends paid on common stock                                                     |  |                     | 0       |                    |   | 0       |  
|Sales of treasury stock                                                            |  |                     | 10      |                    |   | 11      |  
|Award of nonvested stock from treasury
 stock                                      |  |                     | 0       |                    |   | 20      |  
|                                                                                   |  |                     |         |                    |   |         |  
|Net cash used in financing activities                                              |  |                     | (17,113 | )                  |   | (61,120 | )
|                                                                                   |  |                     |         |                    |   |         |  
|Increase in cash and cash equivalents                                              |  |                     | 12,331  |                    |   | 23,111  |  
|Cash and cash equivalents at beginning of
 period                                  |  |                     | 43,880  |                    |   | 71,073  |  
|                                                                                   |  |                     |         |                    |   |         |  
|Cash and cash equivalents at end of period                                         |  | $                   | 56,211  |                    | $ | 94,184  |  
|                                                                                   |  |                     |         |                    |   |         |  
|                                                                                   |  |                     |         |                    |   |         |  
|                                                                                   |  |                     |         |                    |   |         |  
|Supplemental disclosure of cash flow
 information:                                 |  |                     |         |                    |   |         |  
|Cash paid during the period for:                                                   |  |                     |         |                    |   |         |  
|Interest                                                                           |  | $                   | 1,946   |                    | $ | 4,585   |  
|Income taxes                                                                       |  | $                   | 0       |                    | $ | 150     |  
|                                                                                   |  |                     |         |                    |   |         |  
|Supplemental disclosures of non-cash flow
 activities:                             |  |                     |         |                    |   |         |  
|Loans transferred to other real estate
 owned                                      |  | $                   | 1,149   |                    | $ | 3,194   |  

|                                                                                 
|---------------------------------------------------------------------------------
|                                                                                 
|See
 accompanying notes to unaudited condensed consolidated financial statements.

6

---



Schedule 5

PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARYNotes to Condensed Consolidated Financial Statements
(Unaudited)

The
accompanying unaudited condensed Consolidated Financial Statements reflect all
adjustments, which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods ended March 31, 2011 and
2010, and all such adjustments are of a normal recurring nature. The 2010
year-end condensed Consolidated Balance Sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles.

The
unaudited condensed Consolidated Financial Statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information required by accounting principles generally accepted in the United
States of America for complete financial statements and related footnote
disclosures. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered for a fair presentation of the results
for the interim period have been included. For further information, refer to
the Consolidated Financial Statements and notes included in the Registrants
2010 Annual Report on Form 10-K. Results of operations for interim periods are
not necessarily indicative of the results that may be expected for the year.
Certain amounts in the 2010 Consolidated Financial Statements have been
reclassified to conform to the 2011 presentation.

NOTE 1  CAPITAL PURCHASE PROGRAM

On January
23, 2009, the Corporation received $25,083,000 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 condensed Consolidated Statements of Income as Dividends on
preferred shares, resulting in additional dilution to the Corporations
earnings per share. The warrants are 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.

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 payments on the Corporations 25,083 shares in
Series B Preferred Stock. As of March 31, 2011, dividends in arrears on the
preferred stock, which must be paid prior to the payment of dividends on the
common shares, total approximately $314,000.

7

---



NOTE 2  EARNINGS PER SHARE CALCULATION

The
following table sets forth the computation for basic and diluted earnings
(loss) per share for the periods indicated:

|                                                                      |  |                               |           |      |   |           |  
|--------------------------------------------------------------------- |  | ----------------------------- | --------- | ---- | - | --------- | -
|(in thousands, except share
 data)                                    |  | Three Months Ended
 March 31, |          
|                                                                      |  | 2011                          |           | 2010 |  
|Numerator:                                                            |  |                               |           |      |   |           |  
|Net income (loss) available to common

stockholders                   |  | $                             | 1,728     |      | $ | (62       | )
|                                                                      |  |                               |           |      |   |           |  
|Denominator:                                                          |  |                               |           |      |   |           |  
|Basic earnings per share - weighted average common

shares            |  |                               | 3,325,964 |      |   | 3,306,762 |  
|Effect of dilutive securities - stock options                         |  |                               | 3,445     |      |   |          |  
|Diluted earnings per share - adjusted weighted average

common shares |  |                               | 3,329,409 |      |   | 3,306,762 |  
|                                                                      |  |                               |           |      |   |           |  
|Net income (loss) per share available to common stockholders:         |  |                               |           |      |   |           |  
|Basic                                                                 |  | $                             | 0.52      |      | $ | (0.02     | )
|Diluted                                                               |  | $                             | 0.52      |      | $ | (0.02     | )

The
following shares were not considered in computing diluted earnings per share
for the three month periods ended March 31, 2011 and 2010 because they were
anti-dilutive:

|                                                                                |  |                               |         |      |  |         | 
|------------------------------------------------------------------------------- |  | ----------------------------- | ------- | ---- |  | ------- | 
|                                                                                |  | Three Months Ended
 March 31, |        
|                                                                                |  | 2011                          |         | 2010 | 
|                                                                                |  |                               |         |      |  |         | 
|Stock options to purchase shares of common stock                                |  |                               | 555,277 |      |  | 522,511 | 
|Average dilutive potential common shares associated with common stock
 warrants |  |                               | 155,025 |      |  | 155,025 | 

NOTE 3  INTANGIBLE ASSETS

The balance
of intangible assets, net of accumulated amortization, totaled $2,337,000 and
$2,531,000 at March 31, 2011 and December 31, 2010, respectively.

8

---



The
following table summarizes the Corporations intangible assets, which are
subject to amortization, as of March 31, 2011 and December 31, 2010:

|                        |  |                         |       |                           |   |                         |   |                           |       |  |   |        |  
|----------------------- |  | ----------------------- | ----- | ------------------------- | - | ----------------------- | - | ------------------------- | ----- |  | - | ------ | -
|(in thousands)          |  | March
 31, 2011         |       | December
 31, 2010        |  
|                        |  | Gross
 Carrying
 Amount |       | Accumulated
 Amortization |   | Gross
 Carrying
 Amount |   | Accumulated
 Amortization |      
|                        |  |                         |       |                           |   |                         |   |                           |       |  |   |        |  
|Core deposit intangible |  | $                       | 9,004 |                           | $ | (6,713                  | ) | $                         | 9,004 |  | $ | (6,522 | )
|                        |  |                         |       |                           |   |                         |   |                           |       |  |   |        |  
|Other acquisition costs |  |                         | 234   |                           |   | (188                    | ) |                           | 234   |  |   | (185   | )
|Total                   |  | $                       | 9,238 |                           | $ | (6,901                  | ) | $                         | 9,238 |  | $ | (6,707 | )

Amortization
expense of all intangible assets totaled $194,000 and $201,000 for the three
months ended March 31, 2011 and 2010, respectively. The amortization expense of
these intangible assets will be approximately $459,000 for the remaining nine
months of 2011.

NOTE 4  ORIGINATED MORTGAGE SERVICING
RIGHTS

Mortgage
servicing rights, which are included in other assets on the condensed
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. Changes in the carrying value of
capitalized mortgage servicing rights are summarized as follows:

|                                 |  |   |       |  
|-------------------------------- |  | - | ----- | -
|(in thousands)                   |  |   |       |  
|                                 |  |   |       |  
|Balance, January 1, 2011         |  | $ | 3,385 |  
|Servicing rights capitalized     |  |   | 112   |  
|Amortization of servicing rights |  |   | (105  | )
|Valuation adjustment             |  |   |      |  
|Balance, March 31, 2011          |  | $ | 3,392 |  

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

|                         |  |   |     | 
|------------------------ |  | - | --- | 
|(in thousands)           |  |   |     | 
|                         |  |   |     | 
|Balance, January 1, 2011 |  | $ | 295 | 
|Additions                |  |   |    | 
|Reductions               |  |   |    | 
|Balance, March 31, 2011  |  | $ | 295 | 

9

---



The
following table shows the future estimated amortization expense for mortgage
servicing rights based on existing balances as of March 31, 2011. 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:

|                                             |  |                       |      
|-------------------------------------------- |  | --------------------- | -----
|                                             |  | Amount (in thousands)
|For the nine
 months ended December 31, 2011 |  | $                     | 277  
|For the year
 ended December 31, 2012        |  |                       | 358  
|For the year
 ended December 31, 2013        |  |                       | 336  
|For the year
 ended December 31, 2014        |  |                       | 315  
|For the year
 ended December 31, 2015        |  |                       | 296  
|For the year
 ended December 31, 2016        |  |                       | 277  
|Thereafter                                   |  |                       | 1,533

The
Corporation services loans for others with unpaid principal balances at March
31, 2011 and December 31, 2010 of approximately $395.2 million, and $395.0
million, respectively.

NOTE 5  OTHER COMPREHENSIVE INCOME (LOSS)

Other
comprehensive income components and related taxes for the three months ended
March 31, 2011 and 2010 were as follows:

|                                                                   |  |      |        |      |   |       |  
|------------------------------------------------------------------ |  | ---- | ------ | ---- | - | ----- | -
|(in thousands)                                                     |  | 2011 |        | 2010 |  
|                                                                   |  |      |        |      |   |       |  
|Net unrealized gains (losses) on securities
 available-for-sale    |  | $    | (2,666 | )    | $ | 2,726 |  
|                                                                   |  |      |        |      |   |       |  
|Reclassification adjustment for realized
 gains included in income |  |      | (1,084 | )    |   | (642  | )
|                                                                   |  |      |        |      |   |       |  
|Other comprehensive income (loss), before
 tax effect              |  |      | (1,582 | )    |   | 2,084 |  
|                                                                   |  |      |        |      |   |       |  
|Tax expense (benefit)                                              |  |      | (613   | )    |   | 807   |  
|                                                                   |  |      |        |      |   |       |  
|Other comprehensive income (loss)                                  |  | $    | (969   | )    | $ | 1,277 |  

The
components of accumulated other comprehensive income, included in stockholders
equity at March 31, 2011 and 2010, are as follows:

|                                                      |  |      |        |      |   |        |  
|----------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                                      |  |      |        |      |  
|(in thousands)                                        |  | 2011 |        | 2010 |  
|                                                      |  |      |        |      |   |        |  
|Net unrealized
 gain on securities available-for-sale |  | $    | 3,950  |      | $ | 7,210  |  
|                                                      |  |      |        |      |   |        |  
|Net
 unrealized benefit obligations                   |  |      | (531   | )    |   | (530   | )
|                                                      |  |      |        |      |   |        |  
|                                                      |  |      | 3,419  |      |   | 6,680  |  
|                                                      |  |      |        |      |   |        |  
|Tax effect                                            |  |      | (1,324 | )    |   | (2,587 | )
|                                                      |  |      |        |      |   |        |  
|Net-of-tax
 amount                                    |  | $    | 2,095  |      | $ | 4,093  |  

10

---



NOTE 6  FEDERAL RESERVE AND FEDERAL HOME
LOAN BANK STOCK

The
subsidiary bank held $2,373,000 in Federal Home Loan Bank stock and $2,125,000
in Federal Reserve Bank stock at March 31, 2011 and December 31, 2010. 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 during
2010, a dividend was declared based on preliminary results from the fourth
quarter of 2010, and paid in February 2011. Management performed an analysis
and deemed the cost-method investment in Federal Home Loan Bank stock was
ultimately recoverable.

NOTE
7  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 March 31, 2011 and December 31, 2010 were as follows:

|                                                                                              |  |                 |         |                      |   |                       |  |             |        |   |   |         | 
|--------------------------------------------------------------------------------------------- |  | --------------- | ------- | -------------------- | - | --------------------- |  | ----------- | ------ | - | - | ------- | 
|                                                                                              |  | March
 31, 2011 |         |                      |  
|(in thousands)                                                                                |  | Amortized
 Cost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair
 Value |       
|                                                                                             
|Available-for-sale:                                                                           |  |                 |         |                      |   |                       |  |             |        |   |   |         | 
|United States Government and federal agency and U.S. Government
 sponsored enterprises (GSEs) |  | $               | 77,085  |                      | $ | 826                   |  | $           | (931   | ) | $ | 76,980  | 
|State and Municipal                                                                           |  |                 | 103,597 |                      |   | 2,405                 |  |             | (375   | ) |   | 105,627 | 
|Collateralized mortgage obligations: GSE residential                                          |  |                 | 57,820  |                      |   | 2,025                 |  |             | (0     | ) |   | 59,845  | 
|Total                                                                                         |  |                 | 238,502 |                      |   | 5,256                 |  |             | (1,306 | ) |   | 242,542 | 
|Held-to-maturity:                                                                             |  |                 |         |                      |   |                       |  |             |        |   |   |         | 
|State and Municipal                                                                           |  |                 | 11,425  |                      |   | 315                   |  |             | (29    | ) |   | 11,711  | 
|Total                                                                                         |  | $               | 249,927 |                      | $ | 5,571                 |  | $           | (1,335 | ) | $ | 254,163 | 

|                                                                                              |  |                    |         |                      |   |                       |  |             |        |   |   |         | 
|--------------------------------------------------------------------------------------------- |  | ------------------ | ------- | -------------------- | - | --------------------- |  | ----------- | ------ | - | - | ------- | 
|                                                                                              |  | December
 31, 2010 |        
|(in
thousands)                                                                                |  | Amortized
 Cost    |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | 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 | 

11

---



Securities
with unrealized losses at March 31, 2011 and December 31, 2010 not recognized
in income are as follows:

|                                                                                           |  |                     |        |                    |   |             |   |                    |       |             |   |                    |   |   |        |  |   |        |  
|------------------------------------------------------------------------------------------ |  | ------------------- | ------ | ------------------ | - | ----------- | - | ------------------ | ----- | ----------- | - | ------------------ | - | - | ------ |  | - | ------ | -
|                                                                                           |  |                     |        |                    |   |             |   | March 31, 2011     |       |             |   |                    |   |   |       
|(in
 thousands)                                                                            |  | Less Than 12 Months |        | 12 Months or More  |   | Total       |  
|                                                                                           |  | Fair
 Value         |        | Unrealized
 Losses |   | Fair
 Value |   | Unrealized
 Losses |       | Fair
 Value |   | Unrealized
 Losses |  
|United States government and federal agency and U.S.
 government-sponsored entities (GSEs) |  | $                   | 49,279 |                    | $ | (931        | ) | $                  | 0     |             | $ | 0                  |   | $ | 49,279 |  | $ | (931   | )
|State and municipal                                                                        |  |                     | 17,396 |                    |   | (369        | ) |                    | 1,349 |             |   | (35                | ) |   | 18,745 |  |   | (404   | )
|Collateralized mortgage obligations: GSE residential                                       |  |                     | 6      |                    |   | (0          | ) |                    | 0     |             |   | 0                  |   |   | 6      |  |   | (0     | )
|Temporarily impaired securities                                                            |  | $                   | 66,681 |                    | $ | (1,300      | ) | $                  | 1,349 |             | $ | (35                | ) | $ | 68,030 |  | $ | (1,335 | )

|                                                                                           |  |                     |        |                    |   |             |   |                    |       |             |   |                    |   |   |        |  |   |        |  
|------------------------------------------------------------------------------------------ |  | ------------------- | ------ | ------------------ | - | ----------- | - | ------------------ | ----- | ----------- | - | ------------------ | - | - | ------ |  | - | ------ | -
|                                                                                           |  |                     |        |                    |   |             |   | December 31, 2010  |       |             |   |                    |   |   |       
|(in
 thousands)                                                                            |  | Less Than 12 Months |        | 12 Months or More  |   | Total       |  
|                                                                                           |  | Fair
 Value         |        | Unrealized
 Losses |   | Fair
 Value |   | Unrealized
 Losses |       | Fair
 Value |   | Unrealized
 Losses |  
|United States government and federal agency and U.S.
 government-sponsored entities (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     | )
|Temporarily impaired
 securities                                                           |  | $                   | 46,737 |                    | $ | (1,000      | ) | $                  | 1,343 |             | $ | (41                | ) | $ | 48,080 |  | $ | (1,041 | )

There are
65 securities in an unrealized loss position in the investment portfolio at
March 31, 2011 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 intent and ability to hold for the foreseeable future and it
is more likely than not that the Corporation will not be required to sell the
security before recovery. The fair value is expected to recover as the
investments approach their maturity date or there is a downward shift in
interest rates.

Maturities
of investment securities classified as available-for-sale and held to maturity
were as follows at March 31, 2011:

|                                       |  |                          |         |             |   |         | 
|-------------------------------------- |  | ------------------------ | ------- | ----------- | - | ------- | 
|(in
thousands)                         |  | Adjusted
 Carrying Value |         | Fair
 Value |  
|Available-for-sale:                    |  |                          |         |             |   |         | 
|Due in one year or less                |  | $                        | 2,979   |             | $ | 3,017   | 
|Due after one year through five years  |  |                          | 20,736  |             |   | 21,150  | 
|Due after five years through ten years |  |                          | 57,753  |             |   | 58,690  | 
|Due after ten years                    |  |                          | 36,774  |             |   | 37,242  | 
|                                       |  |                          | 118,242 |             |   | 120,099 | 
|Mortgage-backed
 securities            |  |                          | 62,440  |             |   | 62,508  | 
|Collateralized
 mortgage obligations   |  |                          | 57,820  |             |   | 59,845  | 
|                                       |  | $                        | 238,502 |             | $ | 242,452 | 
|                                       |  |                          |         |             |   |         | 
|Held-to-maturity:                      |  |                          |         |             |   |         | 
|Due in one year or less                |  | $                        | 3,648   |             | $ | 3,704   | 
|Due after one year through five years  |  |                          | 5,325   |             |   | 5,529   | 
|Due after five years through ten years |  |                          | 2,349   |             |   | 2,377   | 
|Due after ten years                    |  |                          | 103     |             |   | 101     | 
|                                       |  | $                        | 11,425  |             | $ | 11,711  | 

12

---



Proceeds
from sales of investment securities available-for sale were $34.4 million for
the first three months of 2011 compared to $52.7 million for the year ended
December 31, 2010. Net gains were realized of $1,084,000 for the three months
ended March 31, 2011 and $722,000 for the year ended December 31, 2010. The
carrying value of securities pledged as collateral, to secure public deposits
and for other purposes was $206.1 million at March 31, 2011 and $209.5 million
at December 31, 2010.

NOTE
8  LOANS AND THE ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio was as follows:

|                                    |  |                 |         |                    |   |         | 
|----------------------------------- |  | --------------- | ------- | ------------------ | - | ------- | 
|                                    |  | March 31,
 2011 |         | December 31,
 2010 |  
|Commercial                          |  | $               | 143,009 |                    | $ | 138,325 | 
|                                    |  |                 |         |                    |   |         | 
|Agricultural                        |  |                 | 66,427  |                    |   | 78,086  | 
|                                    |  |                 |         |                    |   |         | 
|Agricultural Real Estate            |  |                 | 46,791  |                    |   | 46,361  | 
|Commercial Real Estate              |  |                 | 205,134 |                    |   | 205,301 | 
|Commercial Real Estate
 Development |  |                 | 85,758  |                    |   | 88,402  | 
|Residential Real Estate             |  |                 | 87,989  |                    |   | 90,869  | 
|                                    |  |                 |         |                    |   |         | 
|Total real estate                   |  |                 | 425,672 |                    |   | 430,933 | 
|Consumer                            |  |                 | 53,205  |                    |   | 56,730  | 
|                                    |  |                 |         |                    |   |         | 
|Total                               |  | $               | 688,313 |                    | $ | 704,074 | 

At March
31, 2011 and December 31, 2010, the Corporation held $205,134 and $205,301 in
commercial real estate and $85,758 and $88,402 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 March
31, 2011 and December 31, 2010, the Corporation held $66,427 and $78,086 in
agricultural production loans and $46,791 and $46,361 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.

The
Corporation believes that sound loans are a necessary and desirable means of
employing funds available for investment. Recognizing the Corporations
obligations to its depositors and to the communities it serves, authorized
personnel are expected to seek to develop and make sound, profitable loans that
resources permit and that opportunity affords. The Corporation maintains
lending policies and procedures in place designed to focus our lending efforts on
the types, locations, and duration of loans most appropriate for our business
model and markets. The Corporations principal lending activity is the
origination of one-to four-family residential mortgage and commercial real
estate loans but also includes agricultural real estate loans, commercial
business loans, agribusiness loans, multi-family loans, home equity lines of
credits, consumer (consisting primarily of automobile loans), and, to a lesser
extent, construction loans and land loans. The primary lending market includes
the Illinois counties of Aurora, Bureau, DeKalb, Henry, Kane, Kendall, LaSalle,
McHenry and Will as well as adjacent counties in Illinois. Generally, loans are
collateralized by assets, primarily real estate, of the borrowers and guaranteed
by individuals. The loans are expected to be repaid from cash flows of the
borrowers or from proceeds from the sale of selected assets of the borrowers.

13

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Management
reviews and approves the Corporations lending policies and procedures on a
routine basis. Management routinely (at least quarterly) reviews our allowance
for loan losses and reports related to loan production, loan quality,
concentrations of credit, loan delinquencies and non-performing and potential
problem loans. Our underwriting standards are designed to encourage
relationship banking rather than transactional banking. Relationship banking
implies a primary banking relationship with the borrower that includes, at
minimum, an active deposit banking relationship in addition to the lending
relationship. The integrity and character of the borrower are significant
factors in our loan underwriting. As a part of underwriting, tangible positive
or negative evidence of the borrowers integrity and character are sought out.
Additional significant underwriting factors beyond location, duration, the
sound and profitable cash flow basis underlying the loan and the borrowers
character are the quality of the borrowers financial history, the liquidity of
the underlying collateral and the reliability of the valuation of the
underlying collateral.

The
Corporations policies and loan approval limits are established by the Board of
Directors. The loan officers generally have authority to approve secured loans
up to $250,000, and unsecured loans or exposures up to $50,000. Managing
Officers (those with designated loan approval authority) generally have
authority to approve secured loans up to $500,000 and unsecured loans or
exposures up to $100,000. The Senior Commercial Banking Officer has authority
to approve secured loans up to $1,000,000 and unsecured loans or exposures up
to $250,000. The Chief Credit Officer has authority to approve secured loans up
to $1,500,000, and unsecured loans or exposures up to $250,000. In addition,
in certain circumstances any two consumer officers may combine their loan
authority limits to approve a loan, while only the President/Chief Executive
Officer, Chief Credit Officer and Senior Commercial Banking Manager may combine
their loan authority limits to approve a commercial loan. Our Executive Loan Committee may
approve one- to four-family residential mortgage loans up to $2,500,000,
commercial real estate loans, multi-family real estate loans and land loans up
to $3,500,000 in aggregate,  and unsecured loans or exposures up to
$1,000,000. All loans above these limits must be approved by the Directors Loan
Committee, consisting of the Chairman, the President and Chief Executive
Officer, and up to three other Board members. At no time is a borrowers total
borrowing relationship to exceed our regulatory lending limit. Loans to related
parties, including executive officers and the Corporations directors, are
reviewed for compliance with regulatory guidelines and the board of directors
at least annually.

The
Corporation conducts internal loan reviews that validate the loans against the
Corporations loan policy quarterly for mortgage, consumer, and small commercial
loans on a sample basis, and all larger commercial loans on an annual basis.
Beginning in 2011, the Corporation also began receiving independent loan
reviews performed by a third party on larger commercial loans to be performed
annually. In addition to compliance with our policy, the loan review process
reviews the risk assessments made by our credit department, lenders and loan
committees. Results of these reviews are presented to management and the board
of directors.

The
Corporations lending can be summarized into six primary areas; one- to
four-family residential mortgage loans, commercial real estate and multi-family
real estate loans, home equity lines of credits, real estate construction,
commercial business loans, and consumer loans. The primary lending market
includes the Illinois counties of Aurora, Bureau, DeKalb, Henry, Kane, Kendall,
LaSalle, McHenry and Will as well as the adjacent counties in Illinois.

One- to Four-Family Residential Mortgage
Loans

The
Corporation offers one-to four-family residential mortgage loans that conform
to Fannie Mae and Freddie Mac underwriting standards (conforming loans) as well
as non-conforming loans. In recent years there has been an increased demand for
long-term fixed-rate loans, as market rates have dropped and remained near
historic lows. As a result, the Corporation has sold a substantial portion of
the fixed-rate one- to four-family residential mortgage loans with terms of 15
years or greater. Generally, the Corporation retains fixed-rate one- to
four-family residential mortgage loans with terms of less than 15 years,
although this has represented a small percentage of the fixed-rate loans
originated in recent years due to the favorable long-term rates for borrower.

In
addition, the Corporation also offers home equity loans that are secured by a
second mortgage on the borrowers primary or secondary residence. Home equity
loans are generally underwritten using the same criteria used to underwrite
one- to four-family residential mortgage loans.

As one- to four-family residential
mortgage and home equity loan underwriting are subject to specific regulations, the Corporation typically underwrites its
one- to four-family residential mortgage and home equity loans to conform to generally accepted standards. Several factors
are considered in underwriting including the value of the underlying real estate and the debt to income and credit history of
the borrower. The Corporation has established minimum standards and underwriting guidelines for all residential real estate
loan collateral types.

14

---



Commercial Real Estate and Multi-Family Real
Estate Loans

Commercial
real estate mortgage loans are primarily secured by office buildings,
owner-occupied businesses, strip mall centers, farm loans secured by real
estate and churches. In underwriting commercial real estate and multi-family
real estate loans, the Corporation considers a number of factors, which include
the projected net cash flow to the loans debt service requirement, the age and
condition of the collateral, the financial resources and income level of the
borrower and the borrowers experience in owning or managing similar
properties. Personal guarantees are typically obtained from commercial real estate
and multi-family real estate borrowers. In addition, the borrowers financial
information on such loans is monitored on an ongoing basis by requiring
periodic financial statement updates. The repayment of these loans is primarily
dependent on the cash flows of the underlying property. However, the commercial
real estate loan generally must be supported by an adequate underlying
collateral value. The performance and the value of the underlying property may
be adversely affected by economic factors or geographical and/or industry
specific factors. These loans are subject to other industry guidelines that are
closely monitored by the Corporation.

Home Equity Lines of Credit

In addition
to traditional one- to four-family residential mortgage loans and home equity
loans, the Corporation offers home equity lines of credit that are secured by
the borrowers primary or secondary residence. Home equity lines of credit are
generally underwritten using the same criteria used to underwrite one- to
four-family residential mortgage loans. As home equity line of credit
underwriting  is subject to specific regulations, the Corporation typically
underwrites its home equity lines of credit to conform to widely accepted
standards. Several factors are considered in underwriting including the value
of the underlying real estate and the debt to income and credit history of the
borrower.

Commercial Business Loans

The
Corporation originates commercial non-mortgage business (term) loans and
adjustable lines of credit. These loans are generally originated to small- and
medium-sized companies in the Corporations primary market area. Commercial
business loans are generally used for working capital purposes or for acquiring
equipment, inventory or furniture, and are primarily secured by business assets
other than real estate, such as business equipment and inventory, accounts
receivable or stock. The Corporation also offers agriculture loans that are not
secured by real estate.

The
commercial business loan portfolio consists primarily of secured loans. When
making commercial business loans, the Corporation considers the financial
statements, lending history and debt service capabilities of the borrower, the
projected cash flows of the business and the value of the collateral, if any.
The cash flows of the underlying borrower, however, may not perform consistent
with historical or projected information. Further, the collateral securing
loans may fluctuate in value due to individual economic or other factors.
Virtually all of our loans are guaranteed by the principals of the borrower.
The Corporation has established minimum standards and underwriting guidelines
for all commercial loan types.

Real Estate Construction Loans

The
Corporation originates construction loans for one- to four-family residential
properties and commercial real estate properties, including multi-family
properties. The Corporation generally requires that a commitment for permanent
financing be in place prior to closing the construction loan. The repayment of
these loans is typically through permanent financing following completion of
the construction. Real estate construction loans are inherently more risky than
loans on completed properties as the unimproved nature and the financial risks
of construction significantly enhance the risks of commercial real estate
loans. These loans are closely monitored and subject to other industry
guidelines.

Consumer Loans

Consumer
loans consist of installment loans to individuals, primarily automotive loans.
These loans are centrally underwritten utilizing the borrowers financial
history, including the Fair Isaac Corporation (FICO) credit scoring and information as to the
underlying collateral. Repayment is expected from the cash flow of the
borrower. Consumer loans may be underwritten with terms up to seven years,
fully amortized. Unsecured loans are limited to twenty four months.
Loan-to-value ratios vary based on the type of collateral. The Corporation has
established minimum standards and underwriting guidelines for all consumer loan
collateral types.

15

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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 March 31, 2011:

|                                                      |  |            |         |              |   |                           |   |                         |        |                                      |   |                          |  |          |        |             |   |        |  |   |        |   |   |     |   |   |         | 
|----------------------------------------------------- |  | ---------- | ------- | ------------ | - | ------------------------- | - | ----------------------- | ------ | ------------------------------------ | - | ------------------------ |  | -------- | ------ | ----------- | - | ------ |  | - | ------ | - | - | --- | - | - | ------- | 
|                                                      |  | 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                            |  | $          | 4,435   |              | $ | 99                        |   | $                       | 107    |                                      | $ | 6,029                    |  | $        | 15,526 |             | $ | 1,897  |  | $ | 1,595  |   | $ | 38  |   | $ | 29,726  | 
|Provision charged to expense                          |  |            | (1,061  | )            |   | (23                       | ) |                         | (18    | )                                    |   | 5,042                    |  |          | (2,608 | )           |   | 855    |  |   | (302   | ) |   | (10 | ) |   | 1,875   | 
|Less: loans charged off                               |  |            | 514     |              |   | 16                        |   |                         | 8      |                                      |   | 539                      |  |          | 150    |             |   | 354    |  |   | 186    |   |   | -0- |   |   | 1,767   | 
|Recoveries                                            |  |            | 28      |              |   | -0-                       |   |                         | -0-    |                                      |   | -0-                      |  |          | -0-    |             |   | -0-    |  |   | 45     |   |   | -0- |   |   | 73      | 
|Balance, end of year                                  |  | $          | 2,888   |              | $ | 60                        |   | $                       | 81     |                                      | $ | 10,532                   |  | $        | 12,768 |             | $ | 2,398  |  | $ | 1,152  |   | $ | 28  |   | $ | 29,907  | 
|Ending Balance: individually evaluated for impairment |  | $          | 2,398   |              | $ | -0-                       |   | $                       | -0-    |                                      | $ | 7,650                    |  | $        | 8,741  |             | $ | 520    |  | $ | 285    |   | $ | -0- |   | $ | 19,594  | 
|Ending Balance: collectively evaluated for impairment |  | $          | 490     |              | $ | 60                        |   | $                       | 81     |                                      | $ | 2,882                    |  | $        | 4,027  |             | $ | 1,878  |  | $ | 867    |   | $ | 28  |   | $ | 10,313  | 
|                                                      |  |            |         |              |   |                           |   |                         |        |                                      |   |                          |  |          |        |             |   |        |  |   |        |   |   |     |   |   |         | 
|Loans                                                 |  |            |         |              |   |                           |   |                         |        |                                      |   |                          |  |          |        |             |   |        |  |   |        |   |   |     |   |   |         | 
|Ending Balance                                        |  | $          | 143,009 |              | $ | 66,427                    |   | $                       | 46,791 |                                      | $ | 205,134                  |  | $        | 85,758 |             | $ | 87,989 |  | $ | 53,205 |   | $ | -0- |   | $ | 688,313 | 
|Ending Balance: individually evaluated for impairment |  | $          | 6,540   |              | $ | -0-                       |   | $                       | -0-    |                                      | $ | 33,041                   |  | $        | 36,178 |             | $ | 7,492  |  | $ | 1,394  |   | $ | -0- |   | $ | 84,645  | 
|Ending Balance: collectively evaluated for impairment |  | $          | 136,469 |              | $ | 66,427                    |   | $                       | 46,791 |                                      | $ | 172,093                  |  | $        | 49,580 |             | $ | 80,497 |  | $ | 51,811 |   | $ | -0- |   | $ | 603,668 | 

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 period ended March 31,
2010 were as follows:

|                                            |  |   |        | 
|------------------------------------------- |  | - | ------ | 
|Balance,
 January 1                         |  | $ | 12,075 | 
|Provision
 for loan losses                  |  |   | 3,925  | 
|Loans charged
 off                          |  |   | 1,417  | 
|Recoveries
 of loans previously charged off |  |   | 99     | 
|Balance,
 December 31                       |  | $ | 14,682 | 

Managements opinion as to the ultimate collectability of loans is
subject to estimates regarding future cash flows from operations and the value
of property, real and personal, pledged as collateral. These estimates are
affected by changing economic conditions and the economic prospects of
borrowers.

16

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Allowance for Loan Losses

The
allowance for loan losses represents an estimate of the amount of losses
believed inherent in our loan portfolio at the balance sheet date. The
allowance calculation involves a high degree of estimation that management
attempts to mitigate through the use of objective historical data where available.
Loan losses are charged against the allowance for loan losses when management
believes the uncollectability of the loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. Overall, we believe the
reserve to be consistent with prior periods and adequate to cover the estimated
losses in our loan portfolio.

The
Corporations methodology for assessing the appropriateness of the allowance
for loan losses consists of two key elements: (1) specific allowances for estimated
credit losses on individual loans that are determined to be impaired through
the Corporations review for identified problem loans; and (2) a general
allowance based on estimated credit losses inherent in the remainder of the
loan portfolio.

The
specific allowance is measured by determining the present value of expected
cash flows, the loans observable market value, or for collateral-dependent
loans, the fair value of the collateral adjusted for market conditions and
selling expense. Factors used in identifying a specific problem loan include:
(1) the strength of the customers personal or business cash flows; (2) the
availability of other sources of repayment; (3) the amount due or past due; (4)
the type and value of collateral; (5) the strength of the collateral position;
(6) the estimated cost to sell the collateral; and (7) the borrowers effort to
cure the delinquency. In addition for loans secured by real estate, the
Corporation also considers the extent of any past due and unpaid property taxes
applicable to the property serving as collateral on the mortgage.

The
Corporation establishes a general allowance for loans that are not deemed
impaired to recognize the inherent losses associated with lending activities,
but which, unlike specific allowances, has not been allocated to particular
problem assets. The general valuation allowance is determined by segregating
the loans by loan category and assigning allowance percentages based on the
Corporations historical loss experience, delinquency trends, and managements
evaluation of the collectability of the loan portfolio. The allowance is then
adjusted for significant factors that, in managements judgment, affect the
collectability of the portfolio as of the evaluation date. These significant
factors may include: (1) Managements assumptions regarding the minimal level
of risk for a given loan category; (2) changes in lending policies and
procedures, including changes in underwriting standards, and charge-off and
recovery practices not considered elsewhere in estimating credit losses; (3)
changes in international, national, regional and local economics and business
conditions and developments that affect the collectability of the portfolio,
including the conditions of various market segments; (4) changes in the nature
and volume of the portfolio and in the terms of loans; (5) changes in the
experience, ability, and depth of the lending officers and other relevant
staff; (6) changes in the volume and severity of past due loans, the volume of
non-accrual loans, and the volume and severity of adversely classified loans;
(7) changes in the quality of the loan review system; (8) changes in the value
of the underlying collateral for collateral-dependent loans; (9) the existence
and effect of any concentrations of credit, and changes in the level of such
concentrations; and (10) the effect of other external factors such as
competition and legal and regulatory requirements on the level of estimated
credit losses in the existing portfolio.

The applied
loss factors are re-evaluated quarterly to ensure their relevance in the
current environment.

Although
the Corporations policy allows for a general valuation allowance on certain
smaller-balance, homogenous pools of loans classified as substandard, the
Corporation has historically evaluated every loan classified as substandard,
regardless of size, for impairment as part of the review for establishing
specific allowances. The Corporations policy also allows for general valuation
allowance on certain smaller-balance, homogenous pools of loans which are loans
criticized as special mention or watch. A separate general allowance
calculation is made on these loans based on historical measured weakness, and
which is no less than twice the amount of the general allowance calculated on
the non-classified loans.

There have
been no changes to the Corporations accounting policies or methodology from
the prior periods.

17

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The following tables present the credit risk profile of the
Corporations loan portfolio based on rating category and payment activity as
of March 31, 2011:

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   |            | $ | 19,758       |  | $                         | 20,295 |                         | $ | 10,404                               |  | $     | 9,194   |  | $ | 408    |  | $ | 60,059  | 
|              | 3     |            |   | 74,686       |  |                           | 32,394 |                         |   | 22,636                               |  |       | 89,244  |  |   | 12,314 |  |   | 231,274 | 
|              | 4     |            |   | 26,125       |  |                           | 9,804  |                         |   | 8,558                                |  |       | 33,053  |  |   | -0-    |  |   | 77,540  | 
|              | 5     |            |   | 2,368        |  |                           | 561    |                         |   | 3,736                                |  |       | 25,891  |  |   | 2,173  |  |   | 34,729  | 
|              | 6     |            |   | 20,015       |  |                           | 3,373  |                         |   | 1,457                                |  |       | 47,752  |  |   | 70,863 |  |   | 143,460 | 
|              | 7     |            |   | 57           |  |                           | -0-    |                         |   | -0-                                  |  |       | -0-     |  |   | -0-    |  |   | 57      | 
|              | Total |            | $ | 143,009      |  | $                         | 66,427 |                         | $ | 46,791                               |  | $     | 205,134 |  | $ | 85,758 |  | $ | 547,119 | 

Consumer
Credit Exposure: Credit Risk Profile by Creditworthiness Category

|              |                  |                          |   |          |  |       |        |  |   |         | 
|------------- | ---------------- | ------------------------ | - | -------- |  | ----- | ------ |  | - | ------- | 
|Risk
 Rating: |                  | Residential
 Real Estate |   | Consumer |  | Total |       
|              | Pass             |                          | $ | 76,770   |  | $     | 50,071 |  | $ | 126,841 | 
|              | Special
 Mention |                          |   | 1,737    |  |       | 472    |  |   | 2,209   | 
|              | Substandard      |                          |   | 9,097    |  |       | 2,579  |  |   | 11,676  | 
|              | Doubtful         |                          |   | 385      |  |       | 83     |  |   | 468     | 
|              | Total            |                          | $ | 87,989   |  | $     | 53,205 |  | $ | 141,194 | 

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.
Subsequently, analyses are reviewed on an annual basis by the Risk Management
department and rating changes are made as necessary. Interim reviews are
performed if borrower circumstances warrant a more timely review.


18

---



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.

The accrual
of interest on loans is discontinued at the time the loan is 90 days past due
unless the credit is well-secured and in process of collection. Past due status
is based on contractual terms of the loan. In all cases, loans are placed on
non-accrual or charged-off at the earlier date if collection of principal and
interest is considered doubtful.

All
interest accrued but not collected for loans that are placed on non-accrual or
charged-off are reversed against interest income. The interest on these loans
is accounted for on the cash-basis or cost-recovery method, until qualifying
for return to accrual. Loans are returned to accrual status when all principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.

The following table presents the Corporations loan portfolio aging
analysis as of March 31, 2011:

|                                   |  |                     |        |                     |   |                   |  |                |        |               |   |             |  |   |         |  |   |         | 
|---------------------------------- |  | ------------------- | ------ | ------------------- | - | ----------------- |  | -------------- | ------ | ------------- | - | ----------- |  | - | ------- |  | - | ------- | 
|                                   |  | 30-59 Days
Past Due |        | 60-89 Days
Past Due |   | >90 Days
Past Due |  | Total
Past Due |        | Total
Current |   | Total
Loans | 
|Commercial                         |  | $                   | 2,023  |                     | $ | 783               |  | $              | 284    |               | $ | 3,090       |  | $ | 129,593 |  | $ | 132,683 | 
|Agricultural                       |  |                     | 140    |                     |   | -0-               |  |                | -0-    |               |   | 140         |  |   | 64,154  |  |   | 64,294  | 
|Agricultural Real Estate           |  |                     | -0-    |                     |   | 30                |  |                | 249    |               |   | 279         |  |   | 45,655  |  |   | 45,934  | 
|Commercial Real Estate             |  |                     | 7,122  |                     |   | 5,072             |  |                | -0-    |               |   | 12,194      |  |   | 166,184 |  |   | 178,378 | 
|Commercial Real Estate Development |  |                     | 6,278  |                     |   | 1,729             |  |                | 2,025  |               |   | 10,032      |  |   | 37,908  |  |   | 47,940  | 
|Residential Real Estate            |  |                     | 4,942  |                     |   | 155               |  |                | -0-    |               |   | 5,097       |  |   | 74,692  |  |   | 79,789  | 
|Consumer                           |  |                     | 437    |                     |   | 182               |  |                | -0-    |               |   | 619         |  |   | 51,601  |  |   | 52,220  | 
|Non-Accrual                        |  |                     | 4,545  |                     |   | 657               |  |                | 79,506 |               |   | 84,708      |  |   | 2,367   |  |   | 87,075  | 
|Total                              |  | $                   | 25,487 |                     | $ | 8,608             |  | $              | 82,064 |               | $ | 116,159     |  | $ | 572,154 |  | $ | 688,313 | 

19

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

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. 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 determined the
significance of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration all of the circumstances surrounding the loans 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 by either the present value of the expected
future cash flows, the loans observable market value, or, for
collateral-dependent loans, the fair value of the collateral adjusted for
market conditions and selling expenses. Significant restructured loans are
considered impaired in determining the adequacy of the allowance for loan
losses.

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
Corporation will restructure loans when the borrower demonstrates the inability
to comply with the terms of the loan, but can demonstrate the ability to meet
acceptable restructured terms. Restructurings generally include one or more of
the following restructuring options: reduction in the interest rate on the
loan, payment extensions, forgiveness of principal, forbearance, or other
actions intended to maximize collection. Restructured loans in compliance with
modified terms are classified as impaired

The
Corporation actively seeks to reduce its investment in impaired loans. The
primary tools to work through impaired loans are settlement with the borrowers
or guarantors, foreclosure of the underlying collateral, or restructuring.

The following
table presents impaired loans as of March 31, 2011:

|                                    |  |                    |        |                            |   |                     |  |                                         |        |                              |   |        |  |   |     | 
|----------------------------------- |  | ------------------ | ------ | -------------------------- | - | ------------------- |  | --------------------------------------- | ------ | ---------------------------- | - | ------ |  | - | --- | 
|                                    |  | Recorded 
 Balance |        | Unpaid
 Principal
 Balance |   | Specific
 Allowance |  | Average
 Investment
 in Impaired
 Loans |        | Interest
 Income
 Recognized |  
|With no related allowance recorded: |  |                    |        |                            |   |                     |  |                                         |        |                              |   |        |  |   |     | 
|Commercial                          |  | $                  | 7,991  |                            | $ | 8,059               |  | $                                       | -0-    |                              | $ | 8,939  |  | $ | 17  | 
|Commercial Real Estate              |  |                    | 3,916  |                            |   | 3,916               |  |                                         | -0-    |                              |   | 8,410  |  |   | 20  | 
|Commercial Real Estate Development  |  |                    | 11,283 |                            |   | 12,148              |  |                                         | -0-    |                              |   | 18,989 |  |   | 58  | 
|Residential Real Estate             |  |                    | 2,553  |                            |   | 2,553               |  |                                         | -0-    |                              |   | 3,617  |  |   | 3   | 
|Consumer                            |  |                    | 190    |                            |   | 236                 |  |                                         | -0-    |                              |   | 95     |  |   | -0- | 
|With an allowance recorded:         |  |                    |        |                            |   |                     |  |                                         |        |                              |   |        |  |   |     | 
|Commercial                          |  | $                  | 6,540  |                            | $ | 8,979               |  | $                                       | 2,398  |                              | $ | 4,224  |  |   | 18  | 
|Commercial Real Estate              |  |                    | 33,043 |                            |   | 33,704              |  |                                         | 7,650  |                              |   | 25,587 |  |   | 110 | 
|Commercial Real Estate Development  |  |                    | 36,178 |                            |   | 45,096              |  |                                         | 8,741  |                              |   | 27,343 |  |   | 95  | 
|Residential Real Estate             |  |                    | 7,492  |                            |   | 8,207               |  |                                         | 520    |                              |   | 5,683  |  |   | 23  | 
|Consumer                            |  |                    | 1,392  |                            |   | 1,440               |  |                                         | 285    |                              |   | 1,080  |  |   | 4   | 
|Total:                              |  |                    |        |                            |   |                     |  |                                         |        |                              |   |        |  |   |     | 
|Commercial                          |  | $                  | 98,951 |                            | $ | 111,902             |  | $                                       | 18,789 |                              | $ | 93,491 |  | $ | 318 | 
|Residential                         |  | $                  | 10,045 |                            | $ | 10,760              |  | $                                       | 520    |                              | $ | 9,299  |  | $ | 26  | 
|Consumer                            |  | $                  | 1,582  |                            | $ | 1,676               |  | $                                       | 285    |                              | $ | 1,175  |  | $ | 4   | 

20

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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 March 31, 2011, the Corporation had $1,128
of commercial loans, $15,498 of commercial real estate loans, $5,293 of
commercial real estate development loans, $1,578 of residential real estate
loans and $188 of consumer 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 $1,128 of commercial loans, $14,164 of commercial real estate loans,
$5,293 of commercial real estate development loans, $1,207 of residential real
estate loans and $188 of consumer loans at March 31, 2011.

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.

Interest
income recognized on impaired loans includes interest accrued and collected on
the outstanding balances of accruing impaired loans as well as interest cash
collections on non-accruing impaired loans for which the ultimate
collectability is not uncertain.

21

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The following table presents the Corporations non-accrual loans at March
31, 2011 and December 31, 2010. This table excludes accruing troubled debt
restructurings.

|                                    |  |                 |        |                    |   |        | 
|----------------------------------- |  | --------------- | ------ | ------------------ | - | ------ | 
|                                    |  | March 31,
 2011 |        | December 31,
 2010 |  
|Commercial                          |  | $               | 10,326 |                    | $ | 8,841  | 
|Agricultural                        |  |                 | 2,133  |                    |   | 1,910  | 
|Agricultural
 Real Estate           |  |                 | 857    |                    |   | 444    | 
|Commercial
 Real Estate             |  |                 | 26,756 |                    |   | 25,659 | 
|Commercial
 Real Estate Development |  |                 | 37,818 |                    |   | 37,091 | 
|Residential
 Real Estate            |  |                 | 8,200  |                    |   | 6,760  | 
|Consumer                            |  |                 | 985    |                    |   | 717    | 
|Total                               |  | $               | 87,075 |                    | $ | 81,422 | 

NOTE 9  FAIR VALUE OF ASSETS AND LIABILITIES

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 used for instruments measured
at fair value on a recurring basis and recognized in the accompanying balance
sheet.

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
obligations of U.S. government corporations and federal agency and U.S.
Government sponsored enterprises (GSEs), obligations of states and political
subdivisions, 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.

22

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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 March 31, 2011 and December 31, 2010 (in
thousands):

|                                                                                              |  |                               |         |                                                                   |   |                                                 |  |                                              |         |  |   |   | 
|--------------------------------------------------------------------------------------------- |  | ----------------------------- | ------- | ----------------------------------------------------------------- | - | ----------------------------------------------- |  | -------------------------------------------- | ------- |  | - | - | 
|March 31, 2011                                                                                |  | Fair Value Measurements Using |        
|(in thousands)                                                                                |  | Fair Value                    |         | Quoted Prices in
 Active Markets forIdentical Assets
 (Level 1)   |   | Significant OtherObservable Inputs
 (Level 2)   |  | Significant
 UnobservableInputs
 (Level 3)   |        
|                                                                                              |  |                               |         |                                                                   |   |                                                 |  |                                              |         |  |   |   | 
|Available-for-sale
 securities                                                                |  |                               |         |                                                                   |   |                                                 |  |                                              |         |  |   |   | 
|United States Government and federal agency and U.S. Government
 sponsored enterprises (GSEs) |  | $                             | 76,980  |                                                                   | $ |                                                |  | $                                            | 76,980  |  | $ |  | 
|State and Municipal                                                                           |  |                               | 105,627 |                                                                   |   |                                                |  |                                              | 105,627 |  |   |  | 
|Collateral mortgage obligations:                                                              |  |                               |         |                                                                   |   |                                                 |  |                                              |         |  |   |   | 
|GSE Residential                                                                               |  |                               | 59,845  |                                                                   |   |                                                |  |                                              | 59,845  |  |   |  | 
|Total                                                                                         |  | $                             | 242,542 |                                                                   | $ |                                                |  | $                                            | 242,542 |  | $ |  | 
|                                                                                              |  |                               |         |                                                                   |   |                                                 |  |                                              |         |  |   |   | 
|December
31, 2010                                                                             |  | Fair Value Measurements Using |        
|(in thousands)                                                                                |  | 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
 securities                                                                |  |                               |         |                                                                   |   |                                                 |  |                                              |         |  |   |   | 
|United States Government and federal agency and U.S. Government
 sponsored enterprises (GSEs) |  | $                             | 78,204  |                                                                   | $ |                                                |  | $                                            | 78,204  |  | $ |  | 
|State and Municipal                                                                           |  |                               | 115,654 |                                                                   |   |                                                |  |                                              | 115,654 |  |   |  | 
|Collateral mortgage obligations:                                                              |  |                               |         |                                                                   |   |                                                 |  |                                              |         |  |   |   | 
|GSE Residential                                                                               |  |                               | 54,894  |                                                                   |   |                                                |  |                                              | 54,894  |  |   |  | 
|Total                                                                                         |  | $                             | 248,752 |                                                                   | $ |                                                |  | $                                            | 248,752 |  | $ |  | 

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 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.
Fair value adjustments on impaired loans were $27,381 for the quarter ended March 31, 2011, compared to $16,040 for the
year ended December 31, 2010.

23

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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 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. 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.
Fair value adjustments on other real estate owned were $(147) for the quarter ended March 31, 2011
and $14,759 for the year ended December 31, 2010.

The
following table presents the fair value measurement of assets 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 March 31, 2011 and
December 31, 2010 (in thousands):

|                                       |  |                               |        |                                                                   |  |                                                 |  |                                              |   |  |   |        | 
|-------------------------------------- |  | ----------------------------- | ------ | ----------------------------------------------------------------- |  | ----------------------------------------------- |  | -------------------------------------------- | - |  | - | ------ | 
|March 31,
 2011                        |  | Fair Value Measurements Using |       
|(in thousands)                         |  | Fair Value                    |        | Quoted Prices in
 Active Markets foe
 Identical Assets
 (Level 1) |  | Significant Other
 Observable Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |  
|                                       |  |                               |        |                                                                   |  |                                                 |  |                                              |   |  |   |        | 
|Impaired loans (collateral
 dependent) |  | $                             | 58,137 |                                                                   |  |                                                |  |                                              |  |  | $ | 58,137 | 
|Other real estate owned                |  |                               | 2,752  |                                                                   |  |                                                |  |                                              |  |  |   | 2,752  | 
|                                       |  |                               |        |                                                                   |  |                                                 |  |                                              |   |  |   |        | 
|December
 31, 2010                     |  | Fair Value Measurements Using |       
|(in thousands)                         |  | 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 |                                                                   |  |                                                |  |                                              |  |  | $ | 30,756 | 
|Mortgage servicing rights              |  |                               | 3,385  |                                                                   |  |                                                |  |                                              |  |  |   | 3,385  | 
|Other real estate owned                |  |                               | 2,899  |                                                                   |  |                                                |  |                                              |  |  |   | 2,899  | 

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.

24

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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 March 31, 2011 and December 31, 2010, were as follows:

|                                                             |  |                 |           |                   |   |                 |  |           |           |  |   |           | 
|------------------------------------------------------------ |  | --------------- | --------- | ----------------- | - | --------------- |  | --------- | --------- |  | - | --------- | 
|                                                             |  | March 31, 2011  |           | December 31, 2010 |  
|(in thousands)                                               |  | Carrying
 Value |           | Fair
 Value       |   | Carrying
 Value |  | FairValue |          
|Financial
 Assets:                                           |  |                 |           |                   |   |                 |  |           |           |  |   |           | 
|                                                             |  |                 |           |                   |   |                 |  |           |           |  |   |           | 
|Cash and due from banks                                      |  | $               | 15,059    |                   | $ | 15,059          |  | $         | 12,992    |  | $ | 12,992    | 
|Interest-bearing deposits
 in financial institutions         |  |                 | 41,152    |                   |   | 41,152          |  |           | 30,888    |  |   | 30,888    | 
|Investment securities                                        |  |                 | 253,877   |                   |   | 254,163         |  |           | 260,939   |  |   | 261,224   | 
|Loans, net, including loans
 held for sale                   |  |                 | 661,646   |                   |   | 665,924         |  |           | 679,863   |  |   | 684,438   | 
|Accrued interest receivable                                  |  |                 | 6,159     |                   |   | 6,159           |  |           | 7,482     |  |   | 7,482     | 
|Total financial assets                                       |  | $               | 977,893   |                   | $ | 982,447         |  | $         | 992,164   |  | $ | 997,024   | 
|                                                             |  |                 |           |                   |   |                 |  |           |           |  |   |           | 
|Financial
 Liabilities:                                      |  |                 |           |                   |   |                 |  |           |           |  |   |           | 
|                                                             |  |                 |           |                   |   |                 |  |           |           |  |   |           | 
|Non-interest bearing demand
 deposits                        |  | $               | 135,210   |                   | $ | 135,210         |  | $         | 138,683   |  | $ | 138,683   | 
|Interest-bearing deposits                                    |  |                 | 815,457   |                   |   | 818,728         |  |           | 824,278   |  |   | 827,266   | 
|Borrowings                                                   |  |                 | 66,730    |                   |   | 66,776          |  |           | 71,559    |  |   | 71,615    | 
|Accrued interest payable                                     |  |                 | 1,326     |                   |   | 1,326           |  |           | 1,335     |  |   | 1,335     | 
|Total financial liabilities                                  |  | $               | 1,020,732 |                   | $ | 1,024,040       |  | $         | 1,035,855 |  | $ | 1,038,899 | 
|                                                             |  |                 |           |                   |   |                 |  |           |           |  |   |           | 
|Unrecognized financial
 instruments (net of contract amount) |  |                 |           |                   |   |                 |  |           |           |  |   |           | 
|                                                             |  |                 |           |                   |   |                 |  |           |           |  |   |           | 
|Commitments to originate
 loans                              |  | $               |          |                   | $ |                |  | $         |          |  | $ |          | 
|Lines of credit                                              |  |                 |          |                   |   |                |  |           |          |  |   |          | 
|Letters of credit                                            |  |                 |          |                   |   |                |  |           |          |  |   |          | 

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.

25

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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 large 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.

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.

NOTE 10  INCOME TAXES

A
reconciliation of income tax benefit at 34 percent of pre-tax income to the
Corporations actual tax expense (benefit) for the three month periods ended
March 31 is shown below:

|                                                     |  |      |      |      |   |      |  
|---------------------------------------------------- |  | ---- | ---- | ---- | - | ---- | -
|(in thousands)                                       |  |      |      |      |   |      |  
|                                                     |  | 2011 |      | 2010 |  
|Computed expected tax
 expense (benefit)           |  | $    | 560  |      | $ | (182 | )
|                                                     |  |      |      |      |   |      |  
|Increase (decrease) in
 income taxes resulting from: |  |      |      |      |   |      |  
|Tax-exempt income                                    |  |      | (310 | )    |   | (463 | )
|State income tax, net of federal tax effect          |  |      | 65   |      |   | (62  | )
|Bank-owned life insurance income                     |  |      | (78  | )    |   | (82  | )
|Other, net                                           |  |      | (325 | )    |   | (6   | )
|Actual tax benefit                                   |  | $    | (88  | )    | $ | (795 | )

NOTE 11  IMPACT OF NEW ACCOUNTING STANDARDS

In
January 2010, the FASB issued ASU No. 2010-06 Fair
Value Measurements and Disclosures (Topic 820)  Improving Disclosures about
Fair Value Measurements. ASU 2010-06 amends the fair value
disclosure guidance. The amendments include new disclosures and changes to
clarify existing disclosure requirements. ASU 2010-06 was effective for interim
and annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements of Level 3 fair
value measurements. Those disclosures are effective for fiscal years beginning
after December 15, 2010, and for interim periods within those fiscal years.
Adoption of this update as of March 31, 2011 did not have a material effect on
the Corporations financial statements.

26

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FASB
ASC 310 Receivables(ASC310)
was amended to enhance disclosures about credit quality of financing
receivables and the allowance for credit losses. The amendments require an
entity to disclose credit quality information, such as internal risk grades,
more detailed nonaccrual and past due information and modifications of its
financing receivables. The disclosures under ASC 310, as amended, were
effective for interim and annual reporting periods ending on or after December
15, 2010. This amendment did not have a significant impact on the Corporations
financial results, but it has significantly expanded the disclosures that the
Corporation is required to provide.

In
April 2011, the FASB issued ASU No. 2011-02, A Creditors Determination of
Whether a Restructuring is a Troubled Debt Restructuring. The provisions of
ASU NO. 2011-02 provide additional guidance related to determining whether a
creditor has granted a concession, include factors and examples for creditors
to consider in evaluating whether a restructuring results in a delay in payment
that is insignificant, prohibit creditors from using the borrowers effective
rate test to evaluate whether a concession has been granted to the borrower,
and add factors for creditors to use in determining whether a borrower is
experiencing financial difficulties. A provision in ASU No. 2011-02 also ends
the FASBs deferral of the additional disclosures about troubled debt
restructurings as required by ASU No. 2010-20. The provisions of ASU No. 2011-02
are effective for the Corporations reporting period ending September 30, 2011.
The adoption of ASU 2011-02 is not expected to have a material impact on the
Corporations statements of income and condition.

NOTE 12  REGULATORY MATTERS

On
March 15, 2010, Citizens First National Bank, Princeton, Illinois (the Bank),
a subsidiary of Princeton National Bancorp, Inc. (the Corporation) entered
into a formal written agreement (the Agreement) with the Comptroller of the
Currency (the Comptroller). The Agreement sets forth the Banks commitment
to: (i) review and take action as necessary regarding its allowance for loan
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.

Pursuant
to the Agreement, the Banks Board of Directors has reviewed the adequacy of
the Banks allowance for loan losses and established a program for the
maintenance of an adequate allowance. The Bank also took immediate action to
protect its interest in criticized assets and to adopt individual written
workout plans with respect to such assets. A copy of the workout plans is
provided to the Comptroller on a quarterly basis for any criticized asset equal
to or exceeding $100,000. Under the Agreement, the Board of Directors ensures
that the Banks internal ratings of loan relationships are timely, accurate,
and consistent with the regulatory credit classification criteria established
by the Comptroller.

In
the fourth quarter of 2010, the Bank filled a newly created role of Chief
Credit Officer and established a credit administration division to oversee the
development, maintenance, and monitoring of loan policies and procedures. Other
responsibilities of the credit administration division include credit analysis,
credit risk management, loan servicing and administration, collections, and the
special assets group, as well as loan portfolio analysis and the allowance for
loan losses. The functions of the special assets group include loss mitigation
and workout of non-performing loans, liquidation of non-performing assets, and
other responsibilities to accelerate and maximize loan recoveries. As part of
establishing the new credit administration division and improving internal
controls, the Banks Chief Credit Officer identified and engaged experienced
personnel to fill key roles within credit administration.

In
2010, the internal loan review staff, and the scope of their reviews, was expanded. Considerable progress was
achieved in meeting the expanded loan review scope and evaluating and verifying internal loan ratings in
a timely basis consistent with credit classification criteria set forth in the Comptroller’s Handbook.
Loan review grading methodology was refined to ensure that loans with a probability of payment default or well defined weaknesses
are graded substandard regardless of mitigating controls which might reduce credit risk. The
Director’s Loan Committee monitored this process with bi-monthly meetings and reviewed loan review reports to ensure compliance with the terms
of the Agreement.

In
March of 2011, the risk management departments loan review function was
restructured, and the majority of the loan review responsibilities were
out-sourced to a loan review risk advisory firm. The external loan review
services will begin in April of 2011 and are structured to cover 75% of the
loan portfolio (excluding residential and consumer loans). The
external loan review will be managed by the Loan Review Officer within the risk
management department with reports made independently to the Directors Loan
Committee. The Directors Loan Committee then reports results to the Banks
Board of Directors. The outsourcing of the loan review function will assist
management in ensuring the Banks internal ratings of commercial credit
relationships are timely, accurate and consistent with regulatory credit
classification criteria, as well as assist in the identification of trends and
the assessment of the overall quality of the loan portfolio.

27

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Schedule 6


PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three month periods ended March 31, 2011 and 2010


The
following discussion and analysis provides information about Princeton National
Bancorp, Inc.s (PNBC or the Corporation) financial condition and results
of operations for the three month periods ended March 31, 2011 and 2010. This
discussion and analysis should be read in conjunction with the Corporations
condensed Consolidated Financial Statements and Notes thereto included in this
report. This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended (the Exchange Act),
such as discussions of the Corporations pricing and fee trends, credit quality
and outlook, liquidity, new business results, expansion plans, anticipated
expenses and planned schedules. The Corporation intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995,
and is including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Corporation, are identified by
use of the words believe, expect, intend, anticipate, estimate, project
or similar expressions. Actual results could differ materially from the results
indicated by these statements because the realization of those results is
subject to many risks and uncertainties including: the effect of the disruption
in financial markets and the United States government programs introduced to
restore stability and liquidity, changes in interest rates, general economic
conditions and the state of the United States economy, legislative/regulatory
changes, monetary and fiscal policies of the U.S. government, including
policies of the U.S. Treasury and the Federal Reserve Board, the quality or
composition of the loan or investment portfolios, demand for loan products,
deposit flows, competition, demand for financial services in the Corporations
market area and accounting principles, policies and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements,
and undue reliance should not be placed on such statements. Further information
concerning the Corporation and its business, including a discussion of these
and additional factors that could materially affect the Corporations financial
results, is included in the Corporations 2010 Annual Report on Form 10-K under
the heading Item 1. Business.

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 condensed 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 condensed 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.

28

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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 significantly 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 estimated selling costs 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

A
net deferred income tax asset arises from differences in the dates that items
of income and expense enter into 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 taxable income, estimates of
future taxable income and the reversals of deferred tax liabilities. In most
cases, the realization of the deferred tax asset is based on future profitability.
If we were to experience net operating losses for tax purposes in a future
period, the realization of our deferred tax assets would be evaluated for a
potential valuation reserve.

Additionally,
the Corporation reviews its uncertain tax positions annually under ASC 740-10,
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 2011, and no impairment
was recognized.

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 4  Originated Mortgage Servicing Rights in the Notes to
condensed Consolidated Financial Statements.

29

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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.

ASC
820 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.

ASC
820, Fair Value Measurements, establishes a framework for measuring the fair
value of financial instrument 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
9- Fair Value of Assets and Liabilities in the Notes to condensed Consolidated
Financial Statements.

RECENT DEVELOPMENTS

Effective
as of March 15, 2010, Citizens First National Bank entered into a formal
written agreement (the Agreement) with the Office of the Comptroller of the
Currency (the Comptroller) that contains provisions to lower nonperforming
loan levels and foster improvement in the Banks policies and procedures with
respect to the Banks allowance for loan and lease losses and loan risk rating
system. The Bank has addressed all of these requirements.

Pursuant
to the Agreement, the Banks board is required to review the adequacy of the
Banks allowance for loan and lease losses and to establish a program for the
maintenance of an adequate allowance. A copy of the boards program is required
to be submitted to the Comptroller for review. The program has been completed
and is reviewed quarterly by the Banks Board of Directors in order to verify
management is maintaining an adequate allowance.

The
Bank is also required to take immediate action to protect its interest in
criticized assets identified in the Banks most recent Report of Examination
with the Comptroller and to adopt individual written workout plans with respect
to such assets. A copy of the workout plans is required to be submitted
quarterly to the Comptroller with respect to any criticized asset equal to or
exceeding $100,000. Additionally, the Bank is prohibited from extending any
additional credit to any borrower whose loan is criticized, unless a majority
of the Banks board (or appropriate committee) has determined that the
extension is necessary to promote the best interests of the Bank and such
determination is properly recorded.

30

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Under
the Agreement, the board must also ensure that the Banks internal ratings of
credit relationships are timely, accurate, and consistent with the regulatory
credit classification criteria set forth in the Comptrollers Handbook and
related authority. The board must also ensure that any loan relationship with a
high probability of payment default or other well-defined weakness is rated no
better than substandard, regardless of the existence of certain other
mitigating factors that could reduce credit risk.

In
2010, the internal loan review staff, and the scope of their reviews, was expanded. Considerable progress was
achieved in meeting the expanded loan review scope and evaluating and verifying internal loan ratings in
a timely basis consistent with credit classification criteria set forth in the Comptroller’s Handbook.
Loan review grading methodology was refined to ensure that loans with a probability of payment default or well defined weaknesses
are graded substandard regardless of mitigating controls which might reduce credit risk. The
Director’s Loan Committee monitored this process with bi-monthly meetings and reviewed loan review reports to ensure compliance with the terms
of the Agreement.

In
March of 2011, the risk management departments loan review function was
restructured, and the majority of the loan review responsibilities were
out-sourced to a loan review risk advisory firm. The external loan review
services will begin in April of 2011 and are structured to cover 75% of the
loan portfolio (excluding residential and consumer loans). The
external loan review will be managed by the Loan Review Officer within the risk
management department with reports made independently to the Directors Loan
Committee. The Directors Loan Committee then reports results to the Banks
Board of Directors. The outsourcing of the loan review function will assist
management in ensuring the Banks internal ratings of commercial credit
relationships are timely, accurate and consistent with regulatory credit
classification criteria, as well as assist in the identification of trends and
the assessment of the overall quality of the loan portfolio.

In
the fourth quarter of 2010, the Corporation filled a newly created role of
Chief Credit Officer and established a credit administration division to
oversee the development, maintenance and monitoring of loan policies and
procedures. Responsibilities of the credit administration division that have
been created in the fourth quarter of 2010 and the first quarter of 2011
include credit analysis, credit risk management, loan servicing and
administration, collections and the special assets group, as well as loan
portfolio analysis and the maintenance of the allowance for loan losses. The
functions of the special assets group include loss mitigation and workout of
non-performing loans, liquidation of non-performing assets and other
responsibilities to accelerate and maximize loan recoveries. As part of
establishing the new credit administration division and improving internal
controls, the Banks Chief Credit Officer has identified and engaged
experienced personnel to fill key roles within credit administration.

In
addition to the special assets group, credit risk analytics was created and
staffed to facilitate allowance for loan losses calculations, loan portfolio
monitoring, migration analysis, concentration analysis and other credit risk
analysis. In conjunction with the special assets group, the credit risk
analytics position is responsible for ensuring that loan level detail is
appropriately maintained relative to problem loan reporting, including current
appraisal documentation and the identification of non-accrual loans and loans subject
to classification as troubled debt restructurings.

On
January 24, 2011, the Corporation notified the U.S. Treasury that it will defer
regularly scheduled payments on the Corporations 25,083 shares in Series B
Preferred Stock. As of March 31, 2011, dividends in arrears on the preferred
stock, which must be paid prior to the payment of dividends on common shares,
total approximately $314,000.

In
April 2011, the Corporation received a Sale Agreement concerning an industrial
development property located in the Corporations northern region, the carrying
value of which represents over 40% of the balance of other real estate owned as
of March 31, 2011. The closing of this other real estate owned sale is expected
to occur in the third quarter of 2011.

RESULTS OF OPERATIONS

Net income available to common
stockholders was $1,728,000 for the first quarter of 2011 compared to net loss
available to common stockholders of ($62,000) for the first quarter of 2010.
Basic and diluted earnings per common share available to common stockholders
for the first quarter of 2011 was $0.52 compared to basic and diluted loss per
share of $0.02 for the first quarter of 2010. This represents an increase of
$1,790,000 (2,887%) or $0.54 per basic and diluted common share. The higher net
income figure is attributable to a decrease in the provision for loan losses,
resulting from the stabilization in the rate of deterioration in the loan
portfolio. The annualized return on average assets and return on average equity
increased to 0.64% and 12.16%, respectively, for the first quarter of 2011,
compared with 0.09% and 1.38% for the first quarter of 2010.

Net
interest income before the provision for loan losses was $9,357,000 for the
first quarter of 2011, compared to $9,483,000 for the first quarter of 2010 (a
decrease of only $126,000 or 1.3%). The net yield on interest-earning assets
(on a fully taxable equivalent basis) increased by 0.52% to 4.42% in the first
quarter of 2011 from 3.90% in the first quarter of 2010. This large increase in
the net yield on average interest-earning assets was driven
by a reduction in the cost of interest-bearing liabilities, primarily time
deposits, which decreased from 1.59% for the first quarter of 2010 to 0.88% for
the first quarter of 2011.

31

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The
Corporations provision for loan loss expense recorded each quarter is
determined by managements evaluation of the risk characteristics of the loan
portfolio. Net charge-offs increased during the first quarter of 2011 to
$1,694,000, compared to net charge-offs of $1,318,000 for the first quarter of
2010. The Corporation recorded a loan loss provision of $1,875,000 in the first
quarter of 2011 compared to a provision of $3,925,000 in the first quarter of
2010. The allowance for loan losses is discussed more fully below.

Non-interest
income totaled $3,600,000 for the first quarter of 2011, compared to $3,192,000
in the first quarter of 2010, an increase of $408,000 or 12.8%. This increase
was primarily due to the realization of gains on securities sold of $442,000
for the first quarter of 2011. During the first quarter of 2010, $316,000 in
income was recognized with the adoption of ASC 310 regarding deferred loan
fees, and gains on securities sold were recognized of $640,000. The categories
of service charges on deposits and trust and farm management fees experienced
increases of $52,000 (5.8%) and $26,000 (9.8.%), respectively, due to an
increase in overdraft fee income and higher fees received from estate
settlement projects. Annualized non-interest income as a percentage of total
average assets increased to 1.32% for the first three months of 2011, from
1.06% for the same period in 2010.          Total
non-interest expense for the first quarter of 2011 was $9,435,000, an increase
of $149,000 (or 1.6%) from $9,286,000 in the first quarter of 2010. The largest
differences between the first quarters of 2011 and 2010 was an increase in
salaries and employee benefits costs of $203,000, an increase of 4.6%, due to
the addition of personnel, primarily in the Credit Administration department.
Also, the category of other operating expense increased $170,000 (or 15.8%) due
primarily to an increase in insurance premium expenses. Annualized non-interest
expense as a percentage of total average assets decreased to 3.45% for the
first three months of 2011, compared to 3.09% for the same period in 2010.

INCOME
TAXES

The
Corporation recorded an income tax benefit of $88,000 for the first quarter of
2011, as compared to an income tax benefit of $795,000 for the first quarter of
2010. The effective tax rate was (5.3%) for the three-month period ended March
31, 2011 and (148.5%) for the three-month period ended March 31, 2010. The
income tax benefit recognized as of March 31, 2011 is due to the periods
pre-tax income coupled with the effect of tax-exempt investment interest
income. The Corporation also recorded a tax benefit of approximately $328,000
to reflect the impact of first quarter 2011 changes in state income tax rates
on the deferred tax assets. For more information on the Corporations income
taxes see Note 10 
Income Taxes in the Notes to condensed Consolidated Financial Statements.

FDIC

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 estimated 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 extend the restoration period from seven to
eight years.

Under
GAAP accounting rules, unlike special assessments, prepaid assessments do not
immediately affect bank earnings. Each institution recorded 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 was made. The Corporation paid an
assessment of $6,763,000 for the fourth quarter of 2009 and for all of 2010,
2011 and 2012.

Beginning
January 1, 2010, 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
March 31, 2011, the Corporation had a remaining prepaid assessment of
$3,733,000. This amount is reflected in the category of Other Assets in the
condensed Consolidated Balance Sheets. The Corporation recorded $534,000 of
federal insurance assessment expense for the first quarter of 2011 and $603,000
for the first quarter of 2010.

32

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ANALYSIS OF FINANCIAL CONDITION

Total
assets at March 31, 2011 decreased to $1,080,734,000 from $1,096,471,000 at
December 31, 2010 (a decrease
of $15.7 million or 1.5%). Total loan balances decreased by $15.8 million
during the three month period to $688.3 million due to seasonal pay downs in
the agricultural portfolio and general decline in the overall demand for new
low-risk credit. Investment balances totaled $253,877,000 at March 31, 2011,
compared to $260,940,000 at December 31, 2010 (a decrease of $7.1 million, or
2.7%), as part of managements overall asset liability management strategy to
reduce higher cost deposit relationships while maintaining stable liquidity.
Total deposits decreased to $950,667,000 at March 31, 2011 from $962,961,000 at
December 31, 2010 (a decrease of $12.3 million or 1.3%). Comparing categories
of deposits at March 31, 2011 to December 31, 2010, time deposits decreased
$13.7 million (or 3.7%), interest-bearing demand deposits decreased $3.5
million (or 0.9%), savings deposits increased $8.4 million (or 11.2%) and
demand deposits decreased $3.5 million (or 2.5%). Borrowings, consisting of
customer repurchase agreements, treasury, tax, and loan (TT&L) deposits,
and Federal Home Loan Bank (FHLB) advances, decreased from $71,559,000 at December
31, 2010 to $66,730,000 at March 31, 2011 (a decrease of $4.8 million or 6.7%).
This decrease was primarily due to the maturity and repayment of a $4,000,000
FHLB advance in the first quarter of 2011.

CAPITAL
PURCHASE PROGRAM


On
January 23, 2009, the Corporation received $25,083,000 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 statement of income as Dividends on preferred
shares, resulting in additional dilution to the Corporations earnings per
share. The warrants are 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.

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 payments on the Corporations 25,083 shares in Series B
Preferred Stock. As of March 31, 2011, dividends in arrears on the preferred
stock, which must be paid prior to the payment of dividends on common shares,
total approximately $314,000.

33

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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:

|                                   |  |                  |           |                     |  |                  |   |             |           |        |  |           |   |   |           |   |  |       |  
|---------------------------------- |  | ---------------- | --------- | ------------------- |  | ---------------- | - | ----------- | --------- | ------ |  | --------- | - | - | --------- | - |  | ----- | -
|                                   |  | March
 31,
 2011 |           | December
 31,
 2010 |  | March
 31,
 2010 |  
|                                   |  | Amount           |           | % of
 Total         |  | Amount           |   | % of
 Total |           | Amount |  | % ofTotal |  
|Commercial                         |  | $                | 143,009   |                     |  | 20.8             | % | $           | 138,325   |        |  | 19.6      | % | $ | 151,806   |   |  | 21.6  | %
|Agricultural                       |  |                  | 66,427    |                     |  | 9.7              |   |             | 78,086    |        |  | 11.1      |   |   | 74,797    |   |  | 10.6  |  
|Agricultural real estate           |  |                  | 46,791    |                     |  | 6.8              |   |             | 46,361    |        |  | 6.6       |   |   | 45,912    |   |  | 6.5   |  
|Commercial real estate             |  |                  | 205,134   |                     |  | 29.8             |   |             | 205,301   |        |  | 29.2      |   |   | 225,309   |   |  | 32.0  |  
|Commercial real estate development |  |                  | 85,758    |                     |  | 12.5             |   |             | 88,402    |        |  | 12.6      |   |   | 97,017    |   |  | 13.8  |  
|Residential real estate            |  |                  | 87,989    |                     |  | 12.8             |   |             | 90,869    |        |  | 12.9      |   |   | 99,725    |   |  | 14.2  |  
|Total Real Estate                  |  |                  | 425,672   |                     |  | 61.8             |   |             | 430,933   |        |  | 61.2      |   |   | 467,963   |   |  | 66.5  |  
|                                   |  |                  |           |                     |  |                  |   |             |           |        |  |           |   |   |           |   |  |       |  
|Consumer                           |  |                  | 53,205    |                     |  | 7.7              |   |             | 56,730    |        |  | 8.1       |   |   | 62,259    |   |  | 8.8   |  
|Total loans                        |  | $                | 688,313   |                     |  | 100.0            | % | $           | 704,074   |        |  | 100.0     | % | $ | 756,825   |   |  | 100.0 | %
|                                   |  |                  |           |                     |  |                  |   |             |           |        |  |           |   |   |           |   |  |       |  
|Total assets                       |  | $                | 1,080,734 |                     |  |                  |   | $           | 1,096,471 |        |  |           |   | $ | 1,200,474 |   |  |       |  
|Loans to total assets              |  |                  | 63.7      | %                   |  |                  |   |             | 64.2      | %      |  |           |   |   | 63.0      | % |  |       |  

Total
loans decreased $15,761 (or 2.2%) in the first three months of 2011. There were
no acquisitions in the first quarter of 2011 or in 2010. The decrease reflects
the Corporations 2011 capital management objectives, as well as the continued
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 increased $4,684 (or 3.4%) in the first three months of 2011. The small
increase is due to some expansion in the competitive environment for commercial
loans as economic circumstances begin to show slight improvement.

Loans
to agricultural operations decreased $11,659 (or 17.6%) in the first three
months of 2011. 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. As in 2010, selling prices remain historically
strong in 2011, 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 9.7% at March 31, 2011, compared to 11.1% at year-end 2010.

Total
real estate loans decreased $5,261 (or 1.2%) in the first three months of 2011.
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 and the first quarter of
2011 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 $3,525 (or 6.2%) in the first three months of 2011.
Home equity lending, which continues to reflect reduced consumer demand,
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.

34

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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 officers and
staff actively work with borrowers to achieve the best resolutions possible.

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 15.16% of total loans at March 31,
2011 compared to 13.83% at December 31, 2010. 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 43.3% of the Corporations total non-performing loans as
of March 31, 2011. 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 33.8% of the non-performing total as of March 31,
2011. 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 peaked
in 2010.

Restructured
loans at March 31, 2011 were $23,685 compared to $23,386 at December 31, 2010.
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 March 31, 2011 and December 31, 2010, $12,991 and $14,368, 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.

35

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Problem
credits are closely monitored by the lending staff, credit administration
division and special assets group, which was newly formed in 2010. In addition,
beginning in April 2011, external loan review performed by representatives
of a loan review risk advisory firm will provide 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 March 31, 2011 was $20,572. The Corporation had $20,652 in other real estate
owned as of December 31, 2010. Over 40% of the March 31, 2011 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 March 31, 2011 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. In April 2011, the Corporation
received a Sale Agreement concerning the remaining acres for this industrial
development property. The closing of this particular other real owned sale is
expected to occur in the third quarter of 2011.

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
condensed Consolidated Balance Sheets. The following table provides information
on the Corporations non-performing loans and other real estate owned as of the
periods indicated:

|                                                               |  |                 |         |                    |   |                 |   |   |        |  
|-------------------------------------------------------------- |  | --------------- | ------- | ------------------ | - | --------------- | - | - | ------ | -
|                                                               |  | March 31,
 2011 |         | December 31,
 2010 |   | March 31,
 2010 |  
|Non-accrual                                                    |  | $               | 78,086  |                    | $ | 72,404          |   | $ | 53,448 |  
|90 days past due and
 accruing                                 |  |                 | 2,562   |                    |   | 1,561           |   |   | 22     |  
|Restructured                                                   |  |                 | 23,685  |                    |   | 23,386          |   |   | 13,821 |  
|                                                               |  |                 |         |                    |   |                 |   |   |        |  
|Total non-performing loans                                     |  | $               | 104,333 |                    | $ | 97,351          |   | $ | 67,291 |  
|                                                               |  |                 |         |                    |   |                 |   |   |        |  
|Other real estate owned                                        |  |                 | 20,572  |                    |   | 20,652          |   |   | 20,145 |  
|Total non-performing assets                                    |  | $               | 124,905 |                    | $ | 118,003         |   | $ | 87,436 |  
|                                                               |  |                 |         |                    |   |                 |   |   |        |  
|Non-performing loans to total loans (net of unearned interest) |  |                 | 15.16   | %                  |   | 13.83           | % |   | 9.08   | %
|Non-performing assets to
 total assets                         |  |                 | 11.56   | %                  |   | 10.76           | % |   | 7.28   | %

Non-performing
loans consist of non-accrual loans, loans past due 90 days on which interest is
still accruing and restructured loans. Impaired loans of $110,578,
included in the impaired loans table in Note 8 - “Loans and the Allowance for
Loan Losses” in the Notes to Condensed Consolidated Financial Statements, include
$6,245 in impaired loans which are performing as of March 31, 2011, and
therefore are not included in non-performing loans. Performing impaired loans
consist of loans for which management has concern regarding the ultimate
collectability of full principal and interest under the original terms of the
loan agreement due to issues such as borrower payment capacity or
collateral coverage. There were no performing impaired loans as of December 31,
2010.

36

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Of
the $104,333 in impaired loans at March 31, 2011, the Corporation relied on
third party appraisals for $101,344 of the impaired loans. Approximately,
$85,857 or 82.3% of the impaired loans had current third party appraisals which
were relied upon. These appraisals were completed within 12 months of March 31,
2011. The appraisals for the remaining $15,472 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 for $2,434 of these loans.New appraisals for the
remaining impaired loan balances without updated appraisals have been
ordered during the first quarter and the bank will receive the new
appraisals during the second quarter. The average loan to fair value for the
$15,472 was approximately 73.8%. 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.

The
following table provides a loan-to-value ratio distribution for the $15,472 in
impaired loans with appraisals over twelve months old as of March 31, 2011:

| |               |  |        |       | 
| | ------------- |  | ------ | ----- | 
| | Loan-to-Value |  | Amount |      
| | 0 - 50%       |  | $      | 1,316 | 
| | 50 - 60%      |  | $      | 1,118 | 
| | 60 - 70%      |  | $      | -0-   | 
| | 70 - 80%      |  | $      | 2,957 | 
| | 80 - 90%      |  | $      | 1,188 | 
| | 90% +         |  | $      | 8,893 | 

Once
a loan is deemed an impaired loan, the Loan Officer or Special Assets officer
in conjunction with the credit analysis department in credit administration,
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 or the appraisal is less than twelve months old,
a new appraisal is not ordered. If the collateral value is not in significant
excess of the outstanding debt or the appraisal is over twelve months old, the
Loan Officer or Special Assets officer with concurrence of the Chief Credit
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 the three months ended March 31, 2011,
the Corporation recorded partial charge-offs totaling $1,267 on the impaired
loans with an outstanding balance of $3,066. 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.

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.

37

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ALLOWANCE FOR POSSIBLE LOAN LOSSES

The
allowance shown in the following table represents the allowance available to
absorb losses within the entire portfolio:

|                                                                                      |  |                  |         |                     |   |                |   |   |         |  
|------------------------------------------------------------------------------------- |  | ---------------- | ------- | ------------------- | - | -------------- | - | - | ------- | -
|                                                                                      |  | March
 31,
 2011 |         | December
 31,
 2010 |   | March
 31,2010 |  
|Amount of loans outstanding at end of period (net of unearned
 interest)              |  | $                | 688,313 |                     | $ | 704,074        |   | $ | 756,836 |  
|Average amount of loans outstanding for the period (net of unearned
 interest)        |  | $                | 696,574 |                     | $ | 687,177        |   | $ | 778,162 |  
|Allowance for loan losses at beginning of year                                        |  | $                | 29,726  |                     | $ | 12,075         |   | $ | 12,075  |  
|Charge-offs:                                                                          |  |                  |         |                     |   |                |   |   |         |  
|Agricultural                                                                          |  |                  | 24      |                     |   | 68             |   |   | -0-     |  
|Commercial                                                                            |  |                  | 1,203   |                     |   | 19,525         |   |   | 981     |  
|Real estate-mortgage                                                                  |  |                  | 354     |                     |   | 2,266          |   |   | 362     |  
|Installment                                                                           |  |                  | 186     |                     |   | 1,307          |   |   | 74      |  
|Total charge-offs                                                                     |  |                  | 1,767   |                     |   | 23,166         |   |   | 1,417   |  
|                                                                                     
|Recoveries:                                                                           |  |                  |         |                     |   |                |   |   |         |  
|Agricultural                                                                          |  |                  | -0-     |                     |   | -0-            |   |   | -0-     |  
|Commercial                                                                            |  |                  | 28      |                     |   | 45             |   |   | 96      |  
|Real estate-mortgage                                                                  |  |                  | -0-     |                     |   | -0-            |   |   | -0-     |  
|Installment                                                                           |  |                  | 45      |                     |   | 222            |   |   | 3       |  
|Total recoveries                                                                      |  |                  | 73      |                     |   | 267            |   |   | 99      |  
|Net loans charged off                                                                 |  |                  | 1,694   |                     |   | 22,899         |   |   | 1,318   |  
|Provision for loan losses                                                             |  |                  | 1,875   |                     |   | 40,550         |   |   | 3,925   |  
|                                                                                     
|Allowance for loan losses at end of period                                            |  | $                | 29,907  |                     | $ | 29,726         |   | $ | 14,682  |  
|                                                                                     
|Net loans charged off to average loans                                                |  |                  | 0.97    | %                   |   | 3.33           | % |   | 0.69    | %
|Allowance for loan losses to non-performing loans                                     |  |                  | 28.66   | %                   |   | 30.53          | % |   | 21.82   | %
|Allowance for loan losses to total loans at end of period (net of
 unearned interest) |  |                  | 4.34    | %                   |   | 4.22           | % |   | 1.94    | %

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
Credit Risk Analytics staff in Credit Administration, Senior Lending Officers,
Chief Credit Officer, Chief Operating Officer, Chief Financial Officer 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.

38

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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 credit administration.
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 $29,907 and $29,726, respectively, was 4.34% and
4.22% of total loans as of March 31, 2011 and December 31, 2010. The
Corporations net losses as a percentage of loans was 0.97% and 3.33% for the
three months ended March 31, 2011 and year ended December 31, 2010,
respectively. The Corporations net losses experienced and the level of the
required allowance for loan losses have grown slightly and remain high 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, but the
growth trend in losses and provision appears to be diminishing as signs of
economic stabilization begin to appear in the commercial real estate market.

During the
first quarter of 2011, $1,694 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.

In the
fourth quarter of 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 decreased
to 28.7% as of March 31, 2011 from 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.

39

---



There were
$19,594 in specific loan loss reserves for the non-performing loans as of March
31, 2011, compared to $12,245 as of December 31, 2010. 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 March 31, 2011. Management considers the
allowance for loan losses adequate to meet probable losses as of March 31,
2011.

CAPITAL RESOURCES

Federal
regulations require all financial institutions to evaluate capital adequacy by
the risk-based capital method, which makes capital requirements more sensitive
to the levels of risk inherent in different assets. At March 31, 2011, total
risk-based capital of PNBC was 10.01%, compared to 9.68% at December 31, 2010.
The Tier 1 capital ratio increased from 5.93% at December 31, 2010, to 6.19% at
March 31, 2011. Total stockholders equity to total assets at March 31, 2011
increased to 5.31% from 5.19% at December 31, 2010.

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 include cash flow from the repayment of loans and the maturity and
principal prepayment of amortizing investment securities. Major uses of cash
include the origination of loans and purchase of investment securities. Cash
flows provided by investing and operating activities, offset by those used in
financing activities, resulted in a net increase in cash and cash equivalents
of $12.3 million from December 31, 2010 to March 31, 2011. This increase was
primarily the result of a net decrease in loans. For more detailed information,
see the Corporations condensed Consolidated Statements of Cash Flows.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET
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.

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 they do for on-balance-sheet
instruments. At March 31, 2011, commitments to extend credit and standby
letters of credit were approximately $111.0 million and $1.5 million
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.

40

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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. The standby letters
of credit have terms that expire in one year or less.

LAND HELD FOR SALE

The
Corporation owns separate lots in Elburn, Aurora and Somonauk, Illinois that
have been removed from the land balance and are now 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 $820,000 at March 31,
2011. The land in Aurora, consisting of two lots remaining from the original
purchase of fourteen acres in 2004 which was used to construct a branch
facility, has a cost basis of $1,344,000. The land in Somonauk, acquired in
2005 during the acquisition of FSB Bancorp, Inc., consists of approximately two
acres with a cost basis of $80,000.

LEGAL PROCEEDINGS

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 operation.

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

As a
smaller reporting company under the SECs scaled reporting requirements, the
Corporation is not required to include the information required by this item.
Accordingly, the information is omitted from this 10-Q filing.

EFFECTS OF INFLATION

The
condensed Consolidated Financial Statements and related condensed 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.

41

---



PRINCETON NATIONAL BANCORP,
INC. AND SUBSIDIARY

The
following table sets forth (in thousands) details of average balances, interest
income and expense, and resulting annualized yields/costs for the Corporation
for the periods indicated, reported on a fully taxable equivalent basis, using
a tax rate of 34%.

|                                                            |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|----------------------------------------------------------- |  | ---------------------------------- | --------- | ---------------------------------- | - | ------------ |  | ---------------- | ---- | -------- | - | ------------ |  | - | ------ |  |  | ---- | -
|                                                            |  |                                    |           |                                    |  
|                                                            |  | Three Months Ended, March 31, 2011 |           | Three Months Ended, March 31, 2010 |  
|                                                            |  | Average
 Balance                   |           | Interest                           |   | Yield/
 Cost |  | Average
 Balance |      | Interest |   | Yield/
 Cost | 
|Average Interest-Earning Assets                             |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|                                                            |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Interest-bearing
 deposits                                  |  | $                                  | 38,932    |                                    | $ | 21           |  |                  | 0.22 | %        | $ | 61,316       |  | $ | 32     |  |  | 0.21 | %
|Taxable
 investment securities                              |  |                                    | 159,371   |                                    |   | 1,516        |  |                  | 3.86 | %        |   | 148,478      |  |   | 1,491  |  |  | 4.07 | %
|Tax-exempt
 investment securities                           |  |                                    | 92,167    |                                    |   | 1,361        |  |                  | 5.99 | %        |   | 126,315      |  |   | 2,049  |  |  | 6.58 | %
|Federal
 funds sold                                         |  |                                    | 0         |                                    |   | 0            |  |                  | 0.00 | %        |   | 145          |  |   | 0      |  |  | 0.00 | %
|Net
 loans                                                  |  |                                    | 613,884   |                                    |   | 8,896        |  |                  | 5.88 | %        |   | 725,573      |  |   | 10,621 |  |  | 5.94 | %
|                                                            |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Total interest-earning assets                               |  |                                    | 904,354   |                                    |   | 11,794       |  |                  | 5.29 | %        |   | 1,061,828    |  |   | 14,193 |  |  | 5.42 | %
|                                                            |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Average
 non-interest earning assets                        |  |                                    | 190,127   |                                    |   |              |  |                  |      |          |   | 158,716      |  |   |        |  |  |      |  
|                                                            |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Total average assets                                        |  | $                                  | 1,094,481 |                                    |   |              |  |                  |      |          | $ | 1,220,543    |  |   |        |  |  |      |  
|                                                            |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|                                                            |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Average Interest-Bearing Liabilities                        |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|                                                            |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Interest-bearing
 demand deposits                           |  | $                                  | 388,883   |                                    |   | 611          |  |                  | 0.64 | %        | $ | 378,885      |  |   | 1,143  |  |  | 1.22 | %
|Savings
 deposits                                           |  |                                    | 78,393    |                                    |   | 15           |  |                  | 0.08 | %        |   | 70,155       |  |   | 16     |  |  | 0.09 | %
|Time
 deposits                                              |  |                                    | 356,015   |                                    |   | 1,112        |  |                  | 1.27 | %        |   | 471,757      |  |   | 2,214  |  |  | 1.90 | %
|Interest-bearing demand notes issued to the
 U.S. Treasury  |  |                                    | 1,090     |                                    |   | 0            |  |                  | 0.03 | %        |   | 930          |  |   | 0      |  |  | 0.04 | %
|Federal funds purchased and customer
 repurchase agreements |  |                                    | 37,586    |                                    |   | 61           |  |                  | 0.66 | %        |   | 42,008       |  |   | 96     |  |  | 0.93 | %
|Advances
 from Federal Home Loan Bank                       |  |                                    | 8,511     |                                    |   | 23           |  |                  | 1.10 | %        |   | 27,644       |  |   | 153    |  |  | 2.24 | %
|Trust
 preferred securities                                 |  |                                    | 25,000    |                                    |   | 115          |  |                  | 1.87 | %        |   | 25,000       |  |   | 355    |  |  | 5.76 | %
|Note
 payable                                               |  |                                    | 0         |                                    |   | 0            |  |                  | 0.00 | %        |   | 0            |  |   | 0      |  |  | 0.00 | %
|                                                            |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Total interest-bearing liabilities                          |  |                                    | 895,478   |                                    |   | 1,937        |  |                  | 0.88 | %        |   | 1,016,378    |  |   | 3,977  |  |  | 1.59 | %
|                                                            |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Net
 yield on average interest-earning assets               |  |                                    |           |                                    | $ | 9,857        |  |                  | 4.42 | %        |   |              |  | $ | 10,216 |  |  | 3.90 | %
|                                                            |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Average
 non-interest-bearing liabilities                   |  |                                    | 141,379   |                                    |   |              |  |                  |      |          |   | 127,843      |  |   |        |  |  |      |  
|                                                            |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Average
 stockholders equity                               |  |                                    | 57,624    |                                    |   |              |  |                  |      |          |   | 76,322       |  |   |        |  |  |      |  
|                                                            |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Total average liabilities and stockholders
 equity         |  | $                                  | 1,094,481 |                                    |   |              |  |                  |      |          | $ | 1,220,543    |  |   |        |  |  |      |  

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

|                                      |  |                                       |       |      |   |        | 
|------------------------------------- |  | ------------------------------------- | ----- | ---- | - | ------ | 
|                                      |  | For the Three Months Ended
 March 31, |      
|                                      |  | 2011                                  |       | 2010 |  
|Net
 interest income as stated        |  | $                                     | 9,357 |      | $ | 9,483  | 
|Tax equivalent adjustment-investments |  |                                       | 463   |      |   | 697    | 
|Tax equivalent adjustment-loans       |  |                                       | 37    |      |   | 36     | 
|                                      |  |                                       |       |      |   |        | 
|Tax
 equivalent net interest income   |  | $                                     | 9,857 |      | $ | 10,216 | 

42

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Schedule 7

Controls and Procedures

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Disclosure controls and procedures. We
 evaluated the effectiveness of the design and operation of our disclosure
 controls and procedures as of March 31, 2011. Our disclosure controls and
 procedures are the controls and other procedures that we designed to ensure
 that we record, process, summarize and report in a timely manner the
 information we must disclose in reports that we file with or submit to the
 SEC. Thomas D. Ogaard, President and Chief Executive Officer, and Rodney D.
 Stickle, Senior Vice President and Chief Financial Officer, reviewed and
 participated in this evaluation. Based on this evaluation, management
 concluded that, as of the date of their evaluation, our disclosure controls
 were effective.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(b) | Internal controls. There have been
 significant changes in our internal accounting controls or in other factors
 during the quarter ended March 31, 2011 that strengthened those controls as
 described below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

During the
audit of the financial statements as of December 31, 2010, BKD, LLP, the
Corporations external public accounting firm, identified a control deficiency
that was determined to be a material weakness. A material weakness is a
deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material
misstatement of the Companys annual or interim financial statements will not
be prevented or detected on a timely basis. The material weaknesses noted was
in collateral valuation analysis. Management has taken remediation actions to
address this internal control matter and has remediated this material weakness
as of March 31, 2011. A more complete discussion of managements actions is
detailed below.

Management has evaluated the procedures for monitoring asset quality
and evaluating appraisals on classified and collateral dependent loans. The
following processes have been implemented to specifically mitigate the control
weakness identified:

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1) | Problem Asset Workout Summaries
 (PAWS), which are detailed analyses prepared quarterly in the evaluation of
 each non-performing loan relationship, are reviewed with more frequency prior
 to quarter end by management and staff of the Credit Administration
 Department with oversight now provided by the Directors Loan Committee to
 ensure that collateral valuations are appropriately obtained, and updated,
 where applicable, in a timely fashion.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 2) | In situations involving classified and
 collateral-dependent loans where appraisals are dated more than twelve months
 prior and updated appraisals are pending completion or are in the process of
 review, management evaluates the need for recognition of additional
 adjustment or discount to the existing appraised value of the collateral to
 assure that recorded reserves are appropriate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 3) | Management maintains a heightened sense
 of awareness of the need to fully evaluate all PAWS and ensure that all
 documentation is complete, appraisals are timely, reviewed and appropriately
 discounted, and all review procedures appropriately completed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 4) | The Corporation filled a newly created role of Chief Credit Officer
 and established a Credit Administration Department to oversee the
 development, maintenance, and monitoring of loan policies and procedures.
 Responsibilities of the Credit Administration Department include credit
 analysis, credit risk management, loan servicing and administration,
 collections, and the special assets group, as well as loan portfolio analysis
 and the maintenance of the allowance for loan losses. The functions of the
 special assets group include loss mitigation and workout of non-performing
 loans, liquidation of non-performing assets, and other responsibilities to
 accelerate and maximize loan recoveries. As part of establishing the new
 Credit Administration Department, the Banks Chief Credit Officer has
 identified and engaged experienced personnel to fill key roles within credit
 administration in continuing to address the Corporations identified material
 weakness.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 5) | A credit risk analytics group, within the Credit Administration
 Department, was created and staffed to facilitate the timely and appropriate
 preparation of allowance for loan losses evaluation, loan portfolio
 monitoring, migration analysis, concentration analysis, and other credit risk
 analysis. In conjunction with the special assets group, the credit risk
 analytics group is responsible for ensuring that loan level detail is
 appropriately maintained relative to problem loan reporting, including
 current appraisal documentation, and the identification of non-accrual loans
 and loans subject to classification as troubled debt restructurings.                                                                                                                                                                                                                                                                                                                               

43

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