10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 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 R No £

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 R No £

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 £ Accelerated filer £ Non-accelerated filer  £ Smaller reporting company R

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

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 July 22, 2011
Common, par value $5.00	3,330,038

EXPLANATORY NOTE

The purpose of this amendment to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the Securities Exchange Commission on July 29, 2011 (the “Form 10-Q”), is solely to furnish the interactive data files using the eXtensible Business Reporting Language Format ("XBRL") contained in Exhibit 101 to the Form 10-Q, as required by Rule 405 of Regulation S-T. No other changes have been made to the Form 10-Q.  This amendment speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date and does not modify or update in any way disclosures made in the Form 10-Q. 

Pursuant to Rule 406T of Regulation S-T, the XBRL files contained in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

TABLE OF CONTENTS

Explanatory Note

Signatures

Part II

Item 6. Exhibits

Exhibit Index

101.INS**	XBRL Instance
101.SCH**	XBRL Taxonomy Extension Schema
101.CAL**	XBRL Taxonomy Extension Calculation
101.DEF**	XBRL Taxonomy Extension Definition
101.LAB**	XBRL Taxonomy Extension Labels
101.PRE**	XBRL Taxonomy Extension Presentation

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
Date:  August 16, 2011	By:	/s/ Thomas D. Ogaard
		Thomas D. Ogaard
		President and Chief Executive Officer

PART II

Item 6. Exhibits

The exhibits filed herewith are listed on the Exhibit Index filed as part of this report on Form 10-Q/A.

101.INS**	XBRL Instance
101.SCH**	XBRL Taxonomy Extension Schema
101.CAL**	XBRL Taxonomy Extension Calculation
101.DEF**	XBRL Taxonomy Extension Definition
101.LAB**	XBRL Taxonomy Extension Labels
101.PRE**	XBRL Taxonomy Extension Presentation

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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Condensed Consolidated Balance Sheets (Parentheticals) (USD $) In Thousands, except Share data	Jun. 30, 2011	Dec. 31, 2010
Held-to-maturity, fair value (in Dollars)	$ 11,502	$ 12,472
Preferred stock: par value (in Dollars per share)	$ 0	$ 0
Preferred stock: shares authorized	100,000	100,000
Preferred stock: shares issued	25,083	25,083
Preferred stock: shares outstanding	25,083	25,083
Common stock: par value (in Dollars per share)	$ 5	$ 5
Common stock: shares authorized	7,000,000	7,000,000
Common stock: shares issued	4,478,295	4,478,295
Treasury shares	1,148,257	1,152,354

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Condensed Consolidated Statements of Income (unaudited) (USD $) In Thousands, except Share data	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Interest Income:
Interest and fees on loans	$ 8,186	$ 9,841	$ 17,045	$ 20,427
Interest and dividends on investment securities:
Taxable	1,591	1,156	3,107	2,647
Tax-exempt	763	1,336	1,661	2,688
Interest on interest-bearing deposits in other banks	34	40	56	72
Total interest income	10,574	12,373	21,869	25,834
Interest Expense:
Interest on deposits	1,634	2,657	3,372	6,030
Interest on borrowings	184	531	384	1,136
Total interest expense	1,818	3,188	3,756	7,166
Net interest income	8,756	9,185	18,113	18,668
Provision for loan losses	8,050	2,650	9,925	6,575
Net interest income after provision for loan losses	706	6,535	8,188	12,093
Non-interest income:
Fiduciary and farm management fees	269	317	559	581
Service charges on deposit accounts	1,002	958	1,945	1,849
Other service charges	421	507	826	967
Gains on sales of securities available-for-sale	1,598	80	2,682	722
Brokerage fee income	207	224	346	413
Mortgage servicing rights impairment	0	(589)	0	(589)
Mortgage banking income, net	288	268	740	763
Bank-owned life insurance income	225	228	446	457
Other operating income	17	36	83	58
Total non-interest income	4,027	2,029	7,627	5,221
Non-interest expense:
Salaries and employee benefits	4,529	4,452	9,145	8,864
Occupancy	623	633	1,312	1,333
Equipment expense	781	747	1,562	1,514
Federal insurance assessments	447	534	1,087	1,232
Intangible assets amortization	175	201	369	402
Data processing	349	320	715	632
Marketing	139	206	294	382
Other real estate expenses, net	1,433	387	2,015	1,122
Loan collection expenses	371	184	534	388
Other operating expense	1,386	1,152	2,635	2,233
Total non-interest expense	10,233	8,816	19,668	18,102
Income (loss) before income taxes	(5,500)	(252)	(3,853)	(788)
Income tax benefit	(2,575)	(672)	(2,663)	(1,467)
Net income (loss)	(2,925)	420	(1,190)	679
Dividends on preferred shares	0	314	0	627
Accretion of preferred stock discount	7	7	15	14
Net income (loss) available to common stockholders	$ (2,932)	$ 99	$ (1,205)	$ 38
Earnings (loss) per share available to common stockholders:
Basic net income (loss) per common share available to common stockholders (in Dollars per share)	$ (0.88)	$ 0.03	$ (0.36)	$ 0.01
Diluted net income (loss) per common share available to common stockholders (in Dollars per share)	$ (0.88)	$ 0.03	$ (0.36)	$ 0.01
Basic weighted average shares outstanding (in Shares)	3,328,035	3,309,746	3,327,005	3,308,262
Diluted weighted average shares outstanding (in Shares)	3,328,035	3,309,746	3,327,005	3,308,262

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Document And Entity Information	6 Months Ended
	Jun. 30, 2011	Jul. 22, 2011
Document and Entity Information [Abstract]
Entity Registrant Name	PRINCETON NATIONAL BANCORP INC
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		3,330,038
Amendment Flag	false
Entity Central Index Key	0000707855
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Jun. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2

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Note 5 - Other Comprehensive Income (Loss)

3 Months Ended

Jun. 30, 2011

Comprehensive Income (Loss) Note [Text Block]

NOTE 5 -- OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss) components and related taxes for the six months ended June 30, 2011 and 2010 were as follows:

(in thousands)	2011			2010
Net unrealized gains on securities available-for-sale	$	1,541		$	5,289
Reclassification adjustment for realized gains included in income		(2,682	)		(722	)
Other comprehensive income (loss), before tax effect		(1,141	)		4,567
Tax expense (benefit)		(442	)		1,769
Other comprehensive income (loss)	$	(699	)	$	2,798

The components of accumulated other comprehensive income, included in stockholders’ equity at June 30, 2011 and 2010, are as follows:

(in thousands)	2011			2010
Net unrealized gains on securities available-for-sale	$	4,391		$	9,694
Net unrealized benefit obligations		(530	)		(530	)
		3,861			9,164
Tax effect		(1,496	)		(3,550	)
Net-of-tax amount	$	2,365		$	5,614

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Note 10 - Income Taxes

3 Months Ended

Jun. 30, 2011

Income Tax Disclosure [Text Block]

NOTE 10 -- INCOME TAXES

A reconciliation of income tax benefit at 34 percent of pre-tax income to the Corporation’s actual tax benefit for the three and six month periods ended June 30 is shown below:

(in thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Computed "expected" tax benefit	$	(1,870	)	$	(86	)	$	(1,310	)	$	(267	)
Increase (decrease) in income taxes resulting from:
Tax-exempt income		(300	)		(461	)		(610	)		(924	)
State income tax, net of federal tax effect		(692	)		(42	)		(627	)		(104	)
Bank-owned life insurance income		(77	)		(77	)		(155	)		(159	)
Other, net		364			(6	)		39			(12	)
Actual tax benefit	$	(2,575	)	$	(672	)	$	(2,663	)	$	(1,467	)

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Note 1 - Capital Purchase Program

3 Months Ended

Jun. 30, 2011

Capital Purchase Program [Text Block]

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 June 30, 2011, “dividends in arrears” on the preferred stock, which must be paid prior to the payment of dividends on the common shares, total approximately $627,000.

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Note 7 - Investment Securities

3 Months Ended

Jun. 30, 2011

Marketable Securities [Text Block]

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 June 30, 2011 and December 31, 2010 were as follows:

	June 30, 2011
(in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available-for-sale:
United States Government and federal agency and U.S. Government sponsored enterprises (GSEs)	$	75,079	$	620	$	(389	)	$	75,310
State and  Municipal		88,118		2,920		(303	)		90,735
Collateralized mortgage obligations: GSE residential		66,295		1,766		(223	)		67,838
Total		229,492		5,306		( 915	)		233,883
Held-to-maturity:
State and Municipal		11,350		162		(10	)		11,502
Total	$	240,842	$	5,468	$	(925	)	$	245,385

	December 31, 2010
(in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			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

Securities with unrealized losses at June 30, 2011 and December 31, 2010 not recognized in income are as follows:

						June 30, 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)	$	32,290	$	(389	)	$	0	$	0		$	32,290	$	(389	)
State and municipal		11,619		(228	)		857		(85	)		12,476		(313	)
Collateralized mortgage obligations: GSE residential		20,455		(223	)		0		0			20,455		(223	)
Temporarily impaired securities	$	64,364	$	(840	)	$	857	$	(85	)	$	65,221	$	(925	)

						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	)
Temporarily impaired securities	$	46,731	$	(1,000	)	$	1,343	$	(41	)	$	48,074	$	(1,041	)

There are 58 securities in an unrealized loss position in the investment portfolio at June 30, 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 June 30, 2011:

(in thousands)	Adjusted		Fair
	Carrying Value		Value
Available-for-sale:
Due in one year or less	$	869	$	871
Due after one year through five years		19,276		19,765
Due after five years through ten years		51,353		52,889
Due after ten years		35,249		35,886
		106,747		109,412
Mortgage-backed securities		56,450		56,633
Collateralized mortgage obligations		66,295		67,838
	$	229,492	$	233,883
Held-to-maturity:
Due in one year or less	$	2,710	$	2,727
Due after one year through five years		6,267		6,403
Due after five years through ten years		2,269		2,272
Due after ten years		103		100
	$	11,350	$	11,502

Proceeds from sales of investment securities available-for sale were $80.4 million for the first six months of 2011 compared to $52.7 million for the year ended December 31, 2010. Net gains were realized of $2,682,000 for the six months ended June 30, 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 $210.7 million at June 30, 2011 and $209.5 million at December 31, 2010.

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Note 12 - Regulatory Matters

3 Months Ended

Jun. 30, 2011

Regulatory Matters [Text Block]

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 Directors 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 Directors 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 on 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 Directors 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 began in April of 2011 and are structured to cover 75% of the loan portfolio annually (excluding residential and consumer loans).  The external loan review services are managed by the Loan Review Officer or another designee deemed independent and appropriate 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 has assisted management in ensuring the Bank’s internal ratings of commercial credit relationships are timely, accurate and consistent with regulatory credit classification criteria.  In addition, this process has contributed in the identification of trends and the assessment of the overall quality of the loan portfolio.

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Note 8 - Loans And The Allowance For Loan Losses

3 Months Ended

Jun. 30, 2011

Loans And The Allowance For Loan Losses [Text Block]

NOTE 8 -- LOANS AND THE ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio was as follows:

	June 30,		December 31,
	2011		2010
Commercial	$	129,771	$	138,325
Agricultural		64,354		78,086
Agricultural Real Estate		49,391		46,361
Commercial Real Estate		201,571		205,301
Commercial Real Estate Development		75,126		88,402
Residential Real Estate		86,673		90,869
Total real estate		412,761		430,933
Consumer		50,801		56,730
Total	$	657,687	$	704,074

At June 30, 2011 and December 31, 2010, the Corporation held $201,571 and $205,301 in commercial real estate loans and $75,126 and $88,402 in commercial real estate development loans, respectively. Generally, these loans are collateralized by the real estate being financed and are expected to be repaid from cash flows or from proceeds of sale of the real estate collateral.

At June 30, 2011 and December 31, 2010, the Corporation held $64,354 and $78,086 in agricultural production loans and $49,391 and $46,361 in agricultural real estate loans, respectively. Generally, these loans are collateralized by the assets of the borrower and 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 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 loans (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.

Management reviews and approves the Corporation’s lending policies and procedures on a regular basis.  Management regularly (at least quarterly) reviews the 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 and Chief Executive Officer, Chief Credit Officer and Senior Commercial Banking Manager may combine their loan authority limits to approve a commercial loan.  The 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 will the Corporation originate a loan where a borrower's total borrowing relationship exceeds the Bank’s regulatory lending limit.  Loans to related parties, including executive officers and the Corporation’s directors, are reviewed for compliance with regulatory guidelines by the board of directors at least annually.

The Corporation’s loan review department conducts periodic independent loan reviews of outstanding loans.  The primary objective of the independent loan review function is to ensure the maintenance of a quality loan portfolio and minimize the potential for loan losses.  The loan review department is responsible for reviewing a sample of existing loans for compliance with internal policies and procedures.  In addition to reviewing loans for compliance, at a minimum, the loan review department analyzes the appropriateness and timeliness of risk grading and problem loan identification by loan officers, the identification of individually impaired loans, the measurement of estimated loan impairment and timeliness of charge-offs, the credit quality, including underwriting and borrower performance, and the overall adequacy of the allowance for loan and lease losses.  Beginning in 2011, the Corporation began using a third party service provider to assist with the loan review functions, including the overall assessment of the loan portfolio and the identification of problem loans.  Results of these reviews are presented to management and the Directors Loan Committee.

The Corporation’s lending can be summarized into six primary areas; one-to-four family residential mortgage loans, commercial real estate loans and multi-family real estate loans, home equity lines of credits, real estate construction loans, 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 dropped and remained near historic lows.  As a result, the Corporation has sold a substantial portion of 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 loans 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.

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, farms and churches.  In underwriting commercial real estate loans 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 collateral.  The cash flows of the underlying borrower, however, may not perform consistent with historical or projected information.  Further, the collateral securing the 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 types.

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 for the six months ended June 30, 2011:

												Commercial
							Agricultural			Commercial		Real Estate		Residential
	Commercial			Agricultural			Real Estate			Real Estate		Development		Real Estate		Consumer		Unallocated			Total
Allowance for Loan Losses
Balance, beginning of period	$	4,435		$	99		$	107		$	6,029	$	15,526	$	1,897	$	1,595	$	38		$	29,726
Provision charged to expense		(592	)		(26	)		(24	)		7,812		1,182		1,461		124		(12	)		9,925
Less: loans charged off		1,556			16			22			8,481		8,462		1,438		682		-0-			20,657
Recoveries		44			-0-			-0-			-0-		-0-		8		83		-0-			135
Balance, end of period	$	2,331		$	57		$	61		$	5,360	$	8,246	$	1,928	$	1,120	$	26		$	19,129
Ending Balance: individually evaluated for impairment	$	1,879		$	-0-		$	-0-		$	1,169	$	4,722	$	757	$	298	$	-0-		$	8,825
Ending Balance: collectively evaluated for impairment	$	452		$	57		$	61		$	4,191	$	3,524	$	1,171	$	822	$	26		$	10,304
Loans
Ending Balance	$	129,771		$	64,354		$	49,391		$	201,571	$	75,126	$	86,673	$	50,801	$	-0-		$	657,687
Ending Balance: individually evaluated for impairment	$	11,477		$	1,822		$	1,078		$	31,919	$	40,345	$	9,899	$	1,066	$	-0-		$	97,606
Ending Balance: collectively evaluated for impairment	$	118,294		$	62,532		$	48,313		$	169,652	$	34,781	$	76,774	$	49,735	$	-0-		$	560,081

The following table presents the changes in the allowance for loan losses for the three months ended June 30, 2011:

											Commercial
						Agricultural			Commercial		Real Estate		Residential
	Commercial		Agricultural			Real Estate			Real Estate		Development		Real Estate		Consumer		Unallocated			Total
Allowance for Loan Losses
Balance, beginning of period	$	2,888	$	60		$	81		$	10,532	$	12,768	$	2,398	$	1,152	$	28		$	29,907
Provision charged to expense		469		(3	)		(6	)		2,770		3,790		606		426		(2	)		8,050
Less: loans charged off		1,042		-0-			14			7,942		8,312		1,084		496		-0-			18,890
Recoveries		16		-0-			-0-			-0-		-0-		8		38		-0-			62
Balance, end of period	$	2,331	$	57		$	61		$	5,360	$	8,246	$	1,928	$	1,120	$	26		$	19,129

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			Commercial		Real Estate		Residential
	Commercial		Agricultural			Real Estate			Real Estate		Development		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 six months ended June 30, 2010 were as follows:

Balance, January 1	$	12,075
Provision for loan losses		6,575
Loans charged off		2,789
Recoveries of loans previously charged off		114
Balance, June 30	$	15,975

Changes in the allowance for loan losses for the three months ended June 30, 2010 were as follows:

Balance, April 1	$	14,682
Provision for loan losses		2,650
Loans charged off		1,372
Recoveries of loans previously charged off		15
Balance, June 30	$	15,975

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.

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.  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) changes in the value of the underlying collateral; (2) management’s assumptions regarding the minimal level of risk for a given loan category; (3) changes in lending policies and procedures, including changes in underwriting standards and charge-off and recovery practices not considered elsewhere in estimating credit losses; (4) 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; (5) changes in the nature and volume of the portfolio and in the terms of loans; (6) changes in the experience, ability and depth of the loan officers and other relevant staff; (7) 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; (8) changes in the quality of the loan review system; (9) changes in the value of the underlying collateral for collateral-dependent loans; (10) the existence and effect of any concentrations of credit and changes in the level of such concentrations; and (11) 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 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 historically measured weakness, and which is no less than twice the percentage of the general allowance calculation on the non-classified loans.

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

The following tables present the credit risk profile of the Corporation’s loan portfolio based on rating category and payment activity as of June 30, 2011:

Commercial Credit Exposure: Credit Risk Profile by Creditworthiness Category

									Commercial
					Agricultural		Commercial		Real Estate
Risk Rating:	Commercial		Agricultural		Real Estate		Real Estate		Development		Total
1-2	$	14,869	$	20,023	$	14,327	$	11,712	$	407	$	61,338
3		53,622		31,303		21,672		72,560		8,941		188,098
4		31,031		9,324		10,016		40,664		1,965		93,000
5		10,526		1,170		1,928		29,112		3,270		46,006
6		19,584		2,534		1,448		47,523		60,543		131,632
7		139		-0-		-0-		-0-		-0-		139
Total	$	129,771	$	64,354	$	49,391	$	201,571	$	75,126	$	520,213

Consumer Credit Exposure: Credit Risk Profile by Creditworthiness Category

	Residential
Risk Rating:	Real Estate		Consumer		Total
Pass	$	75,087	$	48,141	$	123,228
Special Mention		924		283		1,207
Substandard		10,450		2,377		12,827
Doubtful		212		0		212
Total	$	86,673	$	50,801	$	137,474

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

									Commercial
					Agricultural		Commercial		Real Estate
Risk Rating:	Commercial		Agricultural		Real Estate		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

	Residential
Risk Rating:	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 according to credit risk. This analysis is performed on all loans at origination.  Subsequently, a majority of analyses are reviewed on an annual basis by Risk Management and/or a third party service provider and rating changes are made as necessary.  Interim reviews are performed if borrower circumstances warrant a more timely review.

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 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 is 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 June 30, 2011:

	30-59 Days		60-89 Days		>90 Days		Total		Total		Total
	Past Due		Past Due		Past Due		Past Due		Current		Loans
Commercial	$	790	$	1,052	$	274	$	2,116	$	117,808	$	119,924
Agricultural		656		-0-		-0-		656		61,876		62,532
Agricultural Real Estate		20		-0-		-0-		20		48,293		48,313
Commercial Real Estate		4,350		3,238		-0-		7,588		169,126		176,714
Commercial Real Estate Development		698		-0-		2,195		2,893		39,575		42,468
Residential Real Estate		-0-		1,763		-0-		1,763		77,819		79,582
Consumer		880		343		-0-		1,223		48,907		50,130
Non-Accrual		272		722		74,582		75,576		2,448		78,024
Total	$	7,666	$	7,118	$	77,051	$	91,835	$	565,852	$	657,687

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

	30-59 Days		60-89 Days		>90 Days		Total		Total		Total
	Past Due		Past Due		Past Due		Past Due		Current		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 determines 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.  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 June 30, 2011:

							Six Months				Three Months
							Ended				Ended
							Average				Average
			Unpaid				Investment		Interest		Investment		Interest
	Recorded		Principal		Specific		in Impaired		Income		in Impaired		Income
	Balance		Balance		Allowance		Loans		Recognized		Loans		Recognized
With no related allowance recorded:
Commercial	$	9,737	$	11,450	$	-0-	$	9,812	$	55	$	9,922	$	27
Commercial Real Estate		25,852		34,249		-0-		19,378		36	$	29,481	$	13
Commercial Real Estate Development		25,631		42,877		-0-		26,163		96	$	29,627	$	46
Residential Real Estate		6,374		7,588		-0-		5,527		15	$	6,846	$	4
Consumer		657		783		-0-		329		8	$	731	$	3
With an allowance recorded:
Commercial	$	3,562	$	3,930	$	1,879	$	2,735	$	8	$	3,691	$	2
Commercial Real Estate		7,145		7,351		1,169		12,638		181	$	7,159	$	85
Commercial Real Estate Development		14,714		15,294		4,722		16,611		151	$	14,799	$	73
Residential Real Estate		3,525		3,615		757		3,699		36	$	3,548	$	11
Consumer		409		409		298		589		6	$	412	$	3
Total:
Commercial	$	86,641	$	115,151	$	7,770	$	87,336	$	527	$	94,677	$	246
Residential	$	9,899	$	11,203	$	757	$	9,226	$	51	$	10,394	$	15
Consumer	$	1,066	$	1,192	$	298	$	917	$	14	$	1,143	$	6

The following table presents impaired loans as of December 31, 2010:

							Average
			Unpaid				Investment		Interest
	Recorded		Principal		Specific		in Impaired		Income
	Balance		Balance		Allowance		Loans		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 are classified as impaired. At June 30, 2011, the Corporation had $937 of commercial loans, $15,071 of commercial real estate loans, $5,293 of commercial real estate development loans, $3,461 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 $937 of commercial loans, $4,868 of commercial real estate loans, $5,293 of commercial real estate development loans, $3,186 of residential real estate loans and $188 of consumer loans at June 30, 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.

The following table presents the Corporation’s non-accrual loans at June 30, 2011 and December 31, 2010. This table excludes accruing troubled debt restructurings.

	June 30,		December 31,
	2011		2010
Commercial	$	9,847	$	8,841
Agricultural		1,822		1,910
Agricultural Real Estate		1,078		444
Commercial Real Estate		24,857		25,659
Commercial Real Estate Development		32,658		37,091
Residential Real Estate		7,091		6,760
Consumer		671		717
Total	$	78,024	$	81,422

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Note 6 - Federal Reserve Bank And Federal Home Loan Bank Stock

3 Months Ended

Jun. 30, 2011

Investment in Federal Home Loan Bank Stock, Fair Value Disclosure, Methodology

NOTE 6 -- FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK STOCK

The subsidiary bank held $2,373,000 in Federal Home Loan Bank stock at June 30, 2011 and December 31, 2010 and $2,127,000 and $2,125,000 in Federal Reserve Bank stock at June 30, 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, dividends were declared and paid in February and May of 2011. Management performed an analysis and deemed the cost-method investment in Federal Home Loan Bank stock was ultimately recoverable.

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Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) (Parentheticals) (Preferred Stock Discount [Member], USD $) In Thousands, except Share data	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Accumulated Other Comprehensive Income (Loss) [Member]
Other comprehensive income, tax effect (in Dollars)	$ (442)	$ 1,769
Treasury Stock [Member]
Sale of treasury common stock, shares	4,097	4,634
Award of nonvested common stock out of treasury common stock, shares		2,000

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Note 2 - Earnings Per Share

3 Months Ended

Jun. 30, 2011

Earnings Per Share [Text Block]

NOTE 2 --  EARNINGS PER SHARE

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					Six Months Ended
	June 30,					June 30,
	2011			2010		2011			2010
Numerator:
Net income (loss) available to common stockholders	$	(2,932	)	$	99	$	(1,205	)	$	38
Denominator:
Basic earnings per share - weighted average common shares		3,328,035			3,309,746		3,327,005			3,308,262
Effect of dilutive securities - stock options		-			-		-			-
Diluted earnings per share - adjusted weighted average common shares		3,328,035			3,309,746		3,327,005			3,308,262
Net income (loss) per share available to common stockholders:
Basic	$	(0.88	)	$	0.03	$	(0.36	)	$	0.01
Diluted	$	(0.88	)	$	0.03	$	(0.36	)	$	0.01

The following shares were not considered in computing diluted earnings per share for the three and six month periods ended June 30, 2011 and 2010 because they were anti-dilutive:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
Stock options to purchase shares of common stock		555,277		522,511		555,277		522,511
Average dilutive potential common shares associated with common stock warrants		155,025		155,025		155,025		155,025

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Note 3 - Intangible Assets

3 Months Ended

Jun. 30, 2011

Intangible Assets Disclosure [Text Block]

 NOTE 3 -- INTANGIBLE ASSETS

The balance of intangible assets, net of accumulated amortization, totaled $2,163,000 and $2,531,000 at June 30, 2011 and December 31, 2010, respectively.

The following table summarizes the Corporation’s intangible assets, which are subject to amortization, as of June 30, 2011 and December 31, 2010:

(in thousands)	June 30, 2011					December 31, 2010
	Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Core deposit intangible	$	9,004	$	(6,885	)	$	9,004	$	(6,522	)
Other acquisition costs		234		(190	)		234		(185	)
Total	$	9,238	$	(7,075	)	$	9,238	$	(6,707	)

Amortization expense of all intangible assets totaled $369,000 and $402,000 for the six months ended June 30, 2011 and 2010, respectively.  The amortization expense of these intangible assets will be approximately $284,000 for the remaining six months of 2011.

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Note 11 - Impact Of New Accounting Standards

3 Months Ended

Jun. 30, 2011

New Accounting Pronouncement or Change in Accounting Principle, Description

NOTE 11 -- IMPACT OF NEW ACCOUNTING STANDARDS

In April 2011, FASB issued ASU No. 2011-02 “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“TDR”).” ASU No. 2011-02 is intended to provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring.  The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and are to be applied retrospectively to the beginning of the annual period of adoption.  As a result of applying these amendments, an entity may identify receivables that are newly considered impaired.  Early adoption is permitted.  The Corporation intends to adopt the methodologies prescribed by this ASU by the date required and is continuing to evaluate the impact of adoption of this ASU.

In April 2011, FASB issued ASU No. 2011-03 “Reconsideration of Effective Control for Repurchase Agreements.”  The amendments in this ASU remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee.  The amendments in this ASU also eliminate the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets.  The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011.  The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted.  The Corporation will adopt the methodologies prescribed by this ASU by the date required and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

In May 2011, FASB issued ASU No. 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed.  This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs.  The amendments in this ASU are to be applied prospectively.  For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011.  Early application by public entities is not permitted.  The Corporation will adopt the methodologies prescribed by this ASU by the date required and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

In June 2011, FASB issued ASU No. 2011-05 “Amendments to Topic 220, Comprehensive Income.”  Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity.  The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  The amendments in this ASU should be applied retrospectively.  For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  Early adoption is permitted, because compliance with the amendments is already permitted.  The amendments do not require any transition disclosures.  The Corporation intends to adopt the disclosures prescribed by this ASU by the date required.

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Note 4 - Originated Mortgage Servicing Rights

3 Months Ended

Jun. 30, 2011

Originated Mortgage Servicing Rights [Text Block]

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		246
Amortization of servicing rights		(211	)
Valuation adjustment		-
Balance, June 30, 2011	$	3,420

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

(in thousands)
Balance, January 1, 2011	$	295
Additions		-
Reductions		-
Balance, June 30, 2011	$	295

The following table shows the future estimated amortization expense for mortgage servicing rights based on existing balances as of June 30, 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 six months ended December 31, 2011	$	174
For the year ending December 31, 2012		361
For the year ending December 31, 2013		339
For the year ending December 31, 2014		318
For the year ending December 31, 2015		298
For the year ending December 31, 2016		279
Thereafter		1,651

The Corporation services loans for others with unpaid principal balances at June 30, 2011 and December 31, 2010 of approximately $398.9 million and $395.0 million, respectively.

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Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) (USD $) In Thousands	Total	Dividends2010 [Member]	Preferred Stock Discount [Member]	Preferred Stock [Member]	Preferred Stock [Member] Preferred Stock Discount [Member]	Common Stock [Member]	Common Stock Warrants [Member]	Additional Paid-in Capital [Member]	Additional Paid-in Capital [Member] Preferred Stock Discount [Member]	Retained Earnings [Member]	Retained Earnings [Member] Dividends2010 [Member]	Retained Earnings [Member] Preferred Stock Discount [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Accumulated Other Comprehensive Income (Loss) [Member] Preferred Stock Discount [Member]	Treasury Stock [Member]	Treasury Stock [Member] Preferred Stock Discount [Member]
Balance at Dec. 31, 2009	$ 74,660			$ 24,958		$ 22,391	$ 150	$ 18,423		$ 29,851			$ 2,816		$ (23,929)
Net Income	679									679
Dividends on preferred stock	(627)	(628)									(628)
Accretion on preferred stock discount	14		0		14							(14)
Sale of treasury common stock			31						(49)							80
Award of 2,000 shares of nonvested common stock out of treasury common stock	(20)		20						(14)							34
Amortization of unearned compensation expense	45		45						45
Other comprehensive income			2,798											2,798
Balance at Jun. 30, 2010	77,605			24,972		22,391	150	18,405		29,888			5,614		(23,815)
Balance at Dec. 31, 2010	56,861			24,986		22,391	150	18,275		11,589			3,064		(23,594)
Net Income	(1,190)									(1,190)
Dividends on preferred stock	0
Accretion on preferred stock discount	15		0		15							(15)
Sale of treasury common stock			21						(49)							70
Award of 2,000 shares of nonvested common stock out of treasury common stock	0
Amortization of unearned compensation expense	33		33						33
Other comprehensive income			(699)											(699)
Balance at Jun. 30, 2011	$ 55,026			$ 25,001		$ 22,391	$ 150	$ 18,259		$ 10,384			$ 2,365		$ (23,524)

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Condensed Consolidated Statements of Cash Flows (unaudited) (USD $) In Thousands	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Operating activities:
Net income (loss)	$ (1,190)	$ 679
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	966	1,057
Provision for loan losses	9,925	6,575
Deferred income tax benefit	(2,503)	0
Amortization of intangible assets and other purchase accounting adjustments, net	368	402
Amortization of premiums and discounts on investment securities, net	767	799
Gains on sales of securities available-for-sale, net	(2,682)	(722)
Impairment of mortgage servicing rights	0	589
Compensation expense for vested stock options	33	45
Loss on sales of other real estate owned, net	1,069	388
Loans originated for sale	(27,245)	(38,962)
Proceeds from sales of loans originated for sale	30,145	40,850
Increase (decrease) in accrued interest payable	140	(959)
Decrease in accrued interest receivable	1,366	2,314
Increase in other assets	595	259
Increase (decrease) in other liabilities	803	(2,058)
Net cash provided by operating activities	12,557	11,256
Investing activities:
Proceeds from sales of investment securities available-for-sale	83,036	42,929
Proceeds from maturities of investment securities available-for-sale	10,622	23,373
Purchase of investment securities available-for-sale	(78,445)	(5,436)
Proceeds from maturities of investment securities held-to-maturity	1,267	0
Purchase of investment securities held-to-maturity	0	(1,340)
Proceeds from sales of other real estate owned	3,245	2,309
Net decrease in loans	23,895	48,742
Purchases of premises and equipment	(277)	(284)
Net cash provided by investing activities	43,343	110,293
Financing activities:
Net decrease in deposits	(23,546)	(107,685)
Net decrease in short-term borrowings	(2,272)	(23,915)
Dividends paid on preferred stock	0	(628)
Sales of treasury stock	21	31
Award of nonvested stock from treasury stock	0	20
Net cash used in financing activities	(25,797)	(132,177)
Increase (decrease) in cash and cash equivalents	30,103	(10,628)
Cash and cash equivalents at beginning of period	43,880	71,073
Cash and cash equivalents at end of period	73,983	60,445
Cash paid during the period for:
Interest	3,616	8,125
Income taxes	896	1,019
Supplemental disclosures of non-cash flow activities:
Loans transferred to other real estate owned	$ 1,970	$ 4,740

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Note 9 - Fair Value Of Assets And Liabilities

3 Months Ended

Jun. 30, 2011

Fair Value Disclosures [Text Block]

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 on the accompanying Condensed Consolidated 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.

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 June 30, 2011 and December 31, 2010 (in thousands):

June 30, 2011	Fair Value Measurements Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
(in thousands)	Fair Value		Identical Assets		Observable Inputs		Inputs
			(Level 1)		(Level 2)		(Level 3)
Available-for-sale securities
United States Government and federal agency and U.S. Government sponsored enterprises (GSEs)	$	75,310	$	-	$	75,310	$	-
State and Municipal		90,735		-		90,735		-
Collateralized mortgage obligations:
GSE Residential		67,838		-		67,838		-
Total	$	233,883	$	-	$	233,883	$	-

December 31, 2010	Fair Value Measurements Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
(in thousands)	Fair Value		Identical Assets		Observable Inputs		Inputs
			(Level 1)		(Level 2)		(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		-
Collateralized 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 Condensed Consolidated Balance Sheets, as well as the general classification of such assets pursuant to the valuation hierarchy.

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

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.  Fair value adjustments on impaired loans were $47,785 for the six months ended June 30, 2011, $20,404 for the three months ended June 30, 2011, and $16,040 for the year ended December 31, 2010.

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 non-interest 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 is 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.  Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and posted to non-interest expense.  Fair value adjustments on other real estate owned were ($131) for the six months ended June 30, 2011, $16 for the three months ended June 30, 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 June 30, 2011, March 31, 2011 and December 31, 2010 (in thousands):

June 30, 2011
(in thousands)	Fair Value Measurements Using
			Quoted Prices in				Significant
			Active Markets foe		Significant Other		Unobservable
	Fair Value		Identical Assets		Observable Inputs		Inputs
			(Level 1)		(Level 2)		(Level 3)
Impaired loans (collateral dependent)	$	78,541		-		-	$	78,541
Other real estate owned		2,768		-		-		2,768

December 31, 2010
(in thousands)	Fair Value Measurements Using
			Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable
	Fair Value		Identical Assets		Observable Inputs		Inputs
			(Level 1)		(Level 2)		(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, are used by the Corporation for the purposes of this disclosure.

Estimated fair values have been determined by the Corporation using the best available data and an estimation methodology suitable for each category of financial instruments.  For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate the recorded book balances.  The estimation methodologies used, the estimated fair values and the recorded book balances at June 30, 2011 and December 31, 2010, are as follows:

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
(in thousands)	Value		Value		Value		Value
Financial Assets:
Cash and due from banks	$	18,349	$	18,349	$	12,992	$	12,992
Interest-bearing deposits in financial institutions		55,634		55,634		30,888		30,888
Investment securities		245,233		245,385		260,939		261,224
Loans, net, including loans held for sale		641,173		645,373		679,863		684,438
Accrued interest receivable		6,116		6,116		7,482		7,482
Total financial assets	$	966,505	$	970,857	$	992,164	$	997,024
Financial Liabilities:
Non-interest bearing demand deposits	$	142,579	$	142,579	$	138,683	$	138,683
Interest-bearing deposits		796,836		799,863		824,278		827,266
Borrowings		69,287		69,334		71,559		71,615
Accrued interest payable		1,223		1,223		1,335		1.335
Total financial liabilities	$	1,009,925	$	1,012,999	$	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.

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.

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Condensed Consolidated Balance Sheets (USD $) In Thousands	Jun. 30, 2011	Dec. 31, 2010
ASSETS
Cash and due from banks	$ 18,349	$ 12,992
Interest-bearing deposits with financial institutions	55,634	30,888
Total cash and cash equivalents	73,983	43,880
Loans held-for-sale, at lower of cost or market	2,615	5,515
Investment securities:
Available-for-sale, at fair value	233,883	248,752
Held-to-maturity, at amortized cost (fair value of $11,502 and $12,472)	11,350	12,187
Total investment securities	245,233	260,939
Loans:
Loans, net of unearned interest	657,687	704,074
Allowance for loan losses	(19,129)	(29,726)
Net loans	638,558	674,348
Premises and equipment, net of accumulated depreciation	26,212	26,901
Land held for sale, at lower of cost or market	2,244	2,244
Federal Reserve Bank and Federal Home Loan Bank stock	4,500	4,498
Bank-owned life insurance	23,871	23,416
Accrued interest receivable	6,116	7,482
Other real estate owned	18,308	20,652
Deferred income taxes	13,457	10,512
Intangible assets, net of accumulated amortization	2,163	2,531
Other assets	12,501	13,553
TOTAL ASSETS	1,069,761	1,096,471
Deposits:
Demand	142,579	138,683
Interest-bearing demand	373,086	383,126
Savings	82,127	74,817
Time	341,623	366,335
Total deposits	939,415	962,961
Borrowings:
Customer repurchase agreements	38,309	35,806
Interest-bearing demand notes issued to the U.S. Treasury	978	1,753
Advances from the Federal Home Loan Bank	5,000	9,000
Trust preferred securities	25,000	25,000
Total borrowings	69,287	71,559
Other liabilities	6,033	5,090
TOTAL LIABILITIES	1,014,735	1,039,610
STOCKHOLDERS' EQUITY
Preferred stock: no par value, 100,000 shares authorized: 25,083 shares issued and outstanding at June 30, 2011 and December 31, 2010	25,001	24,986
Common stock: $5 par value, 7,000,000 shares authorized: 4,478,295 shares issued at June 30, 2011 and December 31, 2010	22,391	22,391
Common stock warrants	150	150
Surplus	18,259	18,275
Retained earnings	10,384	11,589
Accumulated other comprehensive income, net of tax	2,365	3,064
Less: cost of 1,148,257 and 1,152,354 treasury shares at June 30, 2011 and December 31, 2010	(23,524)	(23,594)
TOTAL STOCKHOLDERS' EQUITY	55,026	56,861
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 1,069,761	$ 1,096,471