Exhibit 13

Exhibit 13.
Portions of 2009 Annual Report to Stockholders

Report of Independent Registered Public
Accounting Firm

(BKD LLP LOGO)

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

We have audited the accompanying consolidated balance sheets of
Princeton National Bancorp, Inc. as of December 31, 2009 and 2008, and the
related consolidated statements of income, stockholders equity and cash flows
for each of the years in the three-year period ended December 31, 2009. The
Companys management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Princeton
National Bancorp, Inc. as of December 31, 2009 and 2008, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2009, in conformity with accounting principles generally accepted
in the United States of America.

|                  
|------------------
|-s- BKD, LLP      
|                  
|Decatur,
 Illinois
|March 26,
 2010   

9

---



Consolidated Balance Sheets(dollars in
thousands except share data)

|                                                                                                                    |  |             |           |      |   |           |  
|------------------------------------------------------------------------------------------------------------------- |  | ----------- | --------- | ---- | - | --------- | -
|                                                                                                                    |  | December 31 |          
|                                                                                                                    |  | 2009        |           | 2008 |  
|                                                                                                                    |  |             |           |      |   |           |  
|ASSETS                                                                                                              |  |             |           |      |   |           |  
|Cash and due from banks                                                                                             |  | $           | 15,546    |      | $ | 20,163    |  
|Interest-bearing deposits with financial institutions                                                               |  |             | 55,527    |      |   | 98        |  
|                                                                                                                    |  |             |           |      |   |           |  
|Total cash and cash equivalents                                                                                     |  |             | 71,073    |      |   | 20,261    |  
|Loans held-for-sale, at lower of cost or market                                                                     |  |             | 3,296     |      |   | 2,155     |  
|Investment securities:                                                                                              |  |             |           |      |   |           |  
|Available-for-sale, at fair value                                                                                   |  |             | 288,474   |      |   | 236,883   |  
|Held-to-maturity, at amortized cost (fair value of $13,331 and
 $14,461)                                            |  |             | 12,793    |      |   | 14,232    |  
|                                                                                                                    |  |             |           |      |   |           |  
|Total investment securities                                                                                         |  |             | 301,267   |      |   | 251,115   |  
|Loans:                                                                                                              |  |             |           |      |   |           |  
|Loans, net of unearned interest                                                                                     |  |             | 798,074   |      |   | 790,837   |  
|Allowance for loan losses                                                                                           |  |             | (12,075   | )    |   | (5,064    | )
|                                                                                                                    |  |             |           |      |   |           |  
|Net loans                                                                                                           |  |             | 785,999   |      |   | 785,773   |  
|Premises and equipment, net of accumulated depreciation                                                             |  |             | 28,269    |      |   | 29,297    |  
|Land held for sale, at lower of cost or market                                                                      |  |             | 2,354     |      |   | 2,354     |  
|Federal Reserve and Federal Home Loan Bank stock                                                                    |  |             | 4,230     |      |   | 4,211     |  
|Bank-owned life insurance                                                                                           |  |             | 22,540    |      |   | 21,588    |  
|Accrued interest receivable                                                                                         |  |             | 9,267     |      |   | 9,693     |  
|Other real estate owned                                                                                             |  |             | 17,658    |      |   | 2,487     |  
|Goodwill                                                                                                            |  |             | -0-       |      |   | 24,521    |  
|Intangible assets, net of accumulated amortization                                                                  |  |             | 3,347     |      |   | 4,207     |  
|Other assets                                                                                                        |  |             | 11,430    |      |   | 5,468     |  
|                                                                                                                    |  |             |           |      |   |           |  
|TOTAL ASSETS                                                                                                        |  | $           | 1,260,730 |      | $ | 1,163,130 |  
|                                                                                                                    |  |             |           |      |   |           |  
|                                                                                                                    |  |             |           |      |   |           |  
|                                                                                                                    |  |             |           |      |   |           |  
|LIABILITIES                                                                                                         |  |             |           |      |   |           |  
|Deposits:                                                                                                           |  |             |           |      |   |           |  
|Demand                                                                                                              |  | $           | 136,026   |      | $ | 110,559   |  
|Interest-bearing demand                                                                                             |  |             | 374,624   |      |   | 246,714   |  
|Savings                                                                                                             |  |             | 68,292    |      |   | 61,089    |  
|Time                                                                                                                |  |             | 496,597   |      |   | 543,770   |  
|                                                                                                                    |  |             |           |      |   |           |  
|Total deposits                                                                                                      |  |             | 1,075,539 |      |   | 962,132   |  
|Borrowings:                                                                                                         |  |             |           |      |   |           |  
|Customer repurchase agreements                                                                                      |  |             | 47,327    |      |   | 35,532    |  
|Federal funds purchased                                                                                             |  |             | -0-       |      |   | 6,500     |  
|Interest-bearing demand notes issued to the U.S. Treasury                                                           |  |             | 1,021     |      |   | 2,441     |  
|Advances from the Federal Home Loan Bank                                                                            |  |             | 31,500    |      |   | 32,493    |  
|Trust preferred securities                                                                                          |  |             | 25,000    |      |   | 25,000    |  
|Note payable                                                                                                        |  |             | -0-       |      |   | 16,050    |  
|                                                                                                                    |  |             |           |      |   |           |  
|Total borrowings                                                                                                    |  |             | 104,848   |      |   | 118,016   |  
|Other liabilities                                                                                                   |  |             | 5,683     |      |   | 10,511    |  
|                                                                                                                    |  |             |           |      |   |           |  
|TOTAL LIABILITIES                                                                                                   |  |             | 1,186,070 |      |   | 1,090,659 |  
|                                                                                                                    |  |             |           |      |   |           |  
|                                                                                                                    |  |             |           |      |   |           |  
|STOCKHOLDERS EQUITY                                                                                                |  |             |           |      |   |           |  
|Preferred stock: no par value, 100,000 shares authorized:                                                           |  |             |           |      |   |           |  
|25,083 shares issued and outstanding at December 31, 2009, and 0 shares issued and outstanding at December 31, 2008 |  |             | 24,958    |      |   | -0-       |  
|Common stock: $5 par value, 7,000,000 shares authorized:                                                            |  |             |           |      |   |           |  
|4,478,295 shares issued at December 31, 2009 and 2008                                                               |  |             | 22,391    |      |   | 22,391    |  
|Common stock warrants                                                                                               |  |             | 150       |      |   | -0-       |  
|Surplus                                                                                                             |  |             | 18,423    |      |   | 18,420    |  
|Retained earnings                                                                                                   |  |             | 29,851    |      |   | 54,329    |  
|Accumulated other comprehensive income, net of tax                                                                  |  |             | 2,816     |      |   | 1,402     |  
|Less: cost of 1,171,926 and 1,180,254 treasury shares at December
 31, 2009 and 2008, respectively                  |  |             | (23,929   | )    |   | (24,071   | )
|                                                                                                                    |  |             |           |      |   |           |  
|TOTAL STOCKHOLDERS EQUITY                                                                                          |  |             | 74,660    |      |   | 72,471    |  
|                                                                                                                    |  |             |           |      |   |           |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                          |  | $           | 1,260,730 |      | $ | 1,163,130 |  
|                                                                                                                    |  |             |           |      |   |           |  
|                                                                                                                    |  |             |           |      |   |           |  
|                                                                                                                    |  |             |           |      |   |           |  

See accompanying notes to
consolidated financial statements.

10

---



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

|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|---------------------------------------------------------------------------- |  | ------------------------------- | --------- | ---- | - | --------- |  | - | --------- | 
|                                                                             |  | For the Years Ended December 31 |          
|                                                                             |  | 2009                            |           | 2008 |   | 2007      | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|Interest
 income:                                                            |  |                                 |           |      |   |           |  |   |           | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|Interest and fees on loans                                                   |  | $                               | 43,719    |      | $ | 47,715    |  | $ | 49,982    | 
|Interest and dividends on investment securities:                             |  |                                 |           |      |   |           |  |   |           | 
|Taxable                                                                      |  |                                 | 7,607     |      |   | 6,834     |  |   | 6,822     | 
|Tax-exempt                                                                   |  |                                 | 5,296     |      |   | 4,148     |  |   | 4,302     | 
|Interest on federal funds sold                                               |  |                                 | -0-       |      |   | 71        |  |   | 332       | 
|Interest on interest-bearing deposits in other banks                         |  |                                 | 114       |      |   | 54        |  |   | 121       | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|Total interest income                                                        |  |                                 | 56,736    |      |   | 58,822    |  |   | 61,559    | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|Interest expense:                                                            |  |                                 |           |      |   |           |  |   |           | 
|Interest on deposits                                                         |  |                                 | 19,220    |      |   | 23,782    |  |   | 30,324    | 
|Interest on borrowings                                                       |  |                                 | 2,865     |      |   | 3,519     |  |   | 4,181     | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|Total interest expense                                                       |  |                                 | 22,085    |      |   | 27,301    |  |   | 34,505    | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|Net interest income                                                          |  |                                 | 34,651    |      |   | 31,521    |  |   | 27,054    | 
|Provision for loan losses                                                    |  |                                 | 11,062    |      |   | 2,968     |  |   | 640       | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|Net interest income after provision for loan losses                          |  |                                 | 23,589    |      |   | 28,553    |  |   | 26,414    | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|Non-interest income:                                                         |  |                                 |           |      |   |           |  |   |           | 
|Trust & farm management fees                                                 |  |                                 | 1,334     |      |   | 1,530     |  |   | 1,507     | 
|Service charges on deposit accounts                                          |  |                                 | 3,961     |      |   | 4,408     |  |   | 4,431     | 
|Other service charges                                                        |  |                                 | 1,954     |      |   | 2,137     |  |   | 1,966     | 
|Gain on sales of securities available-for-sale                               |  |                                 | 1,781     |      |   | 405       |  |   | 541       | 
|Brokerage fee income                                                         |  |                                 | 857       |      |   | 913       |  |   | 920       | 
|Mortgage banking income, net                                                 |  |                                 | 2,277     |      |   | 1,069     |  |   | 903       | 
|Bank-owned life insurance income                                             |  |                                 | 941       |      |   | 874       |  |   | 816       | 
|Other operating income                                                       |  |                                 | 139       |      |   | 257       |  |   | 214       | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|Total non-interest income                                                    |  |                                 | 13,244    |      |   | 11,593    |  |   | 11,298    | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|Non-interest expense:                                                        |  |                                 |           |      |   |           |  |   |           | 
|Salaries and employee benefits                                               |  |                                 | 18,011    |      |   | 17,692    |  |   | 16,874    | 
|Occupancy                                                                    |  |                                 | 2,598     |      |   | 2,559     |  |   | 2,393     | 
|Equipment expense                                                            |  |                                 | 3,071     |      |   | 2,996     |  |   | 3,158     | 
|Federal insurance assessments                                                |  |                                 | 2,584     |      |   | 845       |  |   | 338       | 
|Goodwill impairment losses                                                   |  |                                 | 24,521    |      |   | -0-       |  |   | -0-       | 
|Intangible assets amortization                                               |  |                                 | 816       |      |   | 714       |  |   | 704       | 
|Data processing                                                              |  |                                 | 1,290     |      |   | 1,151     |  |   | 1,101     | 
|Advertising                                                                  |  |                                 | 751       |      |   | 742       |  |   | 722       | 
|Other real estate expenses, net                                              |  |                                 | 1,064     |      |   | 201       |  |   | 157       | 
|Other operating expense                                                      |  |                                 | 4,853     |      |   | 4,223     |  |   | 4,118     | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|Total non-interest expense                                                   |  |                                 | 59,559    |      |   | 31,123    |  |   | 29,565    | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|Income (loss) before income taxes                                            |  |                                 | (22,726   | )    |   | 9,023     |  |   | 8,147     | 
|Income tax expense (benefit)                                                 |  |                                 | (1,600    | )    |   | 1,697     |  |   | 1,377     | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|Net income (loss)                                                            |  | $                               | (21,126   | )    | $ | 7,326     |  | $ | 6,770     | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|Dividends on preferred shares                                                |  |                                 | 1,178     |      |   | -0-       |  |   | -0-       | 
|Accretion of preferred stock discount                                        |  |                                 | 25        |      |   | -0-       |  |   | -0-       | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|Net income (loss) available to common stockholders                           |  | $                               | (22,329   | )    | $ | 7,326     |  | $ | 6,770     | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|Earnings per share:                                                          |  |                                 |           |      |   |           |  |   |           | 
|Basic net income (loss) per common share available to common
 stockholders   |  | $                               | (6.76     | )    | $ | 2.22      |  | $ | 2.04      | 
|Diluted net income (loss) per common share available to common
 stockholders |  | $                               | (6.76     | )    | $ | 2.21      |  | $ | 2.03      | 
|Basic weighted average shares outstanding                                    |  |                                 | 3,301,016 |      |   | 3,297,990 |  |   | 3,326,467 | 
|Diluted weighted average shares outstanding                                  |  |                                 | 3,301,479 |      |   | 3,314,439 |  |   | 3,334,406 | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 
|                                                                             |  |                                 |           |      |   |           |  |   |           | 

See accompanying notes to
consolidated financial statements.

11

---



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

|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 |         |       |   |       |   |   |         |   |   |         |  
|------------------------------------------------------------------------------------------- |  | ---------------- | ------ | ------------- | - | ----------------------- |  | ------- | --- | ------------------ | - | ------------------------------------------------------------------- | - | --------------- | ------- | ----- | - | ----- | - | - | ------- | - | - | ------- | -
|                                                                                            |  | Preferred
 Stock |        | Common
 Stock |   | Common
 Stock
 Warrants |  | Surplus |     | Retained
 Earnings |   | Accumulated
 Other
 Comprehensive
 Income (Loss)
 net of tax effect |   | Treasury
 Stock |         | Total |  
|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 |         |       |  
|Balance, January 1, 2007                                                                    |  | $                | -0-    |               | $ | 22,391                  |  | $       | -0- |                    | $ | 18,158                                                              |   | $               | 48,109  |       | $ | (960  | ) | $ | (22,343 | ) | $ | 65,355  |  
|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 |         |       |   |       |   |   |         |   |   |         |  
|Net income                                                                                  |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 | 6,770   |       |   |       |   |   |         |   |   | 6,770   |  
|Sale of 6,537 shares of treasury stock                                                      |  |                  |        |               |   |                         |  |         |     |                    |   | 63                                                                  |   |                 |         |       |   |       |   |   | 112     |   |   | 175     |  
|Purchase of 50,000 shares of treasury stock                                                 |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 |         |       |   |       |   |   | (1,459  | ) |   | (1,459  | )
|Exercise of stock options and re-issuance of treasury stock (500
 shares)                   |  |                  |        |               |   |                         |  |         |     |                    |   | 7                                                                   |   |                 | (3      | )     |   |       |   |   | 8       |   |   | 12      |  
|Cash dividends ($1.08 per share)                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 | (3,597  | )     |   |       |   |   |         |   |   | (3,597  | )
|Amortization of unearned compensation expense                                               |  |                  |        |               |   |                         |  |         |     |                    |   | 47                                                                  |   |                 |         |       |   |       |   |   |         |   |   | 47      |  
|Other comprehensive income, net of $825 tax effect                                          |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 |         |       |   | 1,304 |   |   |         |   |   | 1,304   |  
|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 |         |       |   |       |   |   |         |   |   |         |  
|Balance, December 31, 2007                                                                  |  | $                | -0-    |               | $ | 22,391                  |  | $       | -0- |                    | $ | 18,275                                                              |   | $               | 51,279  |       | $ | 344   |   | $ | (23,682 | ) | $ | 68,607  |  
|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 |         |       |   |       |   |   |         |   |   |         |  
|Net income                                                                                  |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 | 7,326   |       |   |       |   |   |         |   |   | 7,326   |  
|Sale of 4,894 shares of treasury stock                                                      |  |                  |        |               |   |                         |  |         |     |                    |   | 40                                                                  |   |                 |         |       |   |       |   |   | 84      |   |   | 124     |  
|Purchase of 20,000 shares of treasury stock                                                 |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 |         |       |   |       |   |   | (553    | ) |   | (553    | )
|Exercise of stock options and re-issuance of treasury stock (4,700
 shares)                 |  |                  |        |               |   |                         |  |         |     |                    |   | 21                                                                  |   |                 |         |       |   |       |   |   | 80      |   |   | 101     |  
|Cash dividends ($1.12 per share)                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 | (3,696  | )     |   |       |   |   |         |   |   | (3,696  | )
|Amortization of unearned compensation expense                                               |  |                  |        |               |   |                         |  |         |     |                    |   | 84                                                                  |   |                 |         |       |   |       |   |   |         |   |   | 84      |  
|Adjustment to initially apply ASC 715, split-dollar life insurance                          |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 | (580    | )     |   |       |   |   |         |   |   | (580    | )
|Other comprehensive income, net of $660 tax effect                                          |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 |         |       |   | 1,058 |   |   |         |   |   | 1,058   |  
|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 |         |       |   |       |   |   |         |   |   |         |  
|Balance, December 31, 2008                                                                  |  | $                | -0-    |               | $ | 22,391                  |  | $       | -0- |                    | $ | 18,420                                                              |   | $               | 54,329  |       | $ | 1,402 |   | $ | (24,071 | ) | $ | 72,471  |  
|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 |         |       |   |       |   |   |         |   |   |         |  
|Net loss                                                                                    |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 | (21,126 | )     |   |       |   |   |         |   |   | (21,126 | )
|Sale of 25,083 shares of preferred stock and 155,025 common stock
 warrants, net of expense |  |                  | 24,933 |               |   |                         |  |         | 150 |                    |   | (63                                                                 | ) |                 |         |       |   |       |   |   |         |   |   | 25,020  |  
|Dividends on preferred stock                                                                |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 | (1,016  | )     |   |       |   |   |         |   |   | (1,016  | )
|Accretion on preferred stock discount                                                       |  |                  | 25     |               |   |                         |  |         |     |                    |   |                                                                     |   |                 | (25     | )     |   |       |   |   |         |   |   | -0-     |  
|Sale of 8,328 shares of treasury common stock                                               |  |                  |        |               |   |                         |  |         |     |                    |   | (28                                                                 | ) |                 |         |       |   |       |   |   | 142     |   |   | 114     |  
|Dividends on common stock ($.70 per share)                                                  |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 | (2,311  | )     |   |       |   |   |         |   |   | (2,311  | )
|Amortization of unearned compensation expense                                               |  |                  |        |               |   |                         |  |         |     |                    |   | 94                                                                  |   |                 |         |       |   |       |   |   |         |   |   | 94      |  
|Other comprehensive income, net of $868 tax effect                                          |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 |         |       |   | 1,414 |   |   |         |   |   | 1,414   |  
|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 |         |       |   |       |   |   |         |   |   |         |  
|Balance, December 31, 2009                                                                  |  | $                | 24,958 |               | $ | 22,391                  |  | $       | 150 |                    | $ | 18,423                                                              |   | $               | 29,851  |       | $ | 2,816 |   | $ | (23,929 | ) | $ | 74,660  |  
|                                                                                            |  |                  |        |               |   |                         |  |         |     |                    |   |                                                                     |   |                 |         |       |   |       |   |   |         |   |   |         |  

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

12

---



Consolidated
Statements of Cash Flows(dollars in thousands)

|                                                                                      |  |                                 |          |      |   |          |   |   |         |  
|------------------------------------------------------------------------------------- |  | ------------------------------- | -------- | ---- | - | -------- | - | - | ------- | -
|                                                                                      |  | For the Years Ended December 31 |         
|                                                                                      |  | 2009                            |          | 2008 |   | 2007     |  
|                                                                                      |  |                                 |          |      |   |          |  
|Operating activities:                                                                 |  |                                 |          |      |   |          |   |   |         |  
|Net income (loss)                                                                     |  | $                               | (21,126  | )    | $ | 7,326    |   | $ | 6,770   |  
|Adjustments to reconcile net income to net cash provided by operating
 activities:    |  |                                 |          |      |   |          |   |   |         |  
|Depreciation                                                                          |  |                                 | 2,170    |      |   | 2,219    |   |   | 2,482   |  
|Provision
 for loan losses                                                            |  |                                 | 11,062   |      |   | 2,968    |   |   | 640     |  
|Deferred
 income tax benefit                                                          |  |                                 | (3,747   | )    |   | (602     | ) |   | (466    | )
|Impairment
 of goodwill                                                               |  |                                 | 24,521   |      |   | -0-      |   |   | -0-     |  
|Amortization
 of intangible assets and other purchase accounting adjustments, net     |  |                                 | 816      |      |   | 714      |   |   | 704     |  
|Amortization
 (accretion) of premiums and discounts on investment securities, net     |  |                                 | 1,549    |      |   | 56       |   |   | (217    | )
|Gain
 on sales of securities available-for-sale, net                                  |  |                                 | (1,781   | )    |   | (405     | ) |   | (541    | )
|Compensation
 expense for vested stock options                                        |  |                                 | 94       |      |   | 84       |   |   | 47      |  
|Impairment
 of mortgage servicing rights, net of recoveries                           |  |                                 | 185      |      |   | -0-      |   |   | -0-     |  
|Gain
 (loss) on sales or writedowns of other real estate owned, net                   |  |                                 | 943      |      |   | 2        |   |   | 47      |  
|Loans
 originated for sale                                                            |  |                                 | (141,315 | )    |   | (77,851  | ) |   | (56,791 | )
|Proceeds
 from sales of loans originated for sale                                     |  |                                 | 140,174  |      |   | 76,624   |   |   | 60,375  |  
|(Decrease)
 increase in accrued interest payable                                      |  |                                 | (1,473   | )    |   | (669     | ) |   | 530     |  
|Decrease
 in accrued interest receivable                                              |  |                                 | 426      |      |   | 1,183    |   |   | 348     |  
|Increase
 in other assets                                                             |  |                                 | (7,099   | )    |   | (398     | ) |   | (1,465  | )
|(Decrease)
 increase in other liabilities                                             |  |                                 | (502     | )    |   | (1,066   | ) |   | 466     |  
|                                                                                      |  |                                 |          |      |   |          |   |   |         |  
|                                                                                      |  |                                 |          |      |   |          |   |   |         |  
|Net cash provided by operating activities                                             |  |                                 | 4,897    |      |   | 10,185   |   |   | 12,929  |  
|                                                                                      |  |                                 |          |      |   |          |   |   |         |  
|                                                                                      |  |                                 |          |      |   |          |   |   |         |  
|Investing activities:                                                                 |  |                                 |          |      |   |          |   |   |         |  
|Proceeds from sales of investment securities available-for-sale                       |  |                                 | 88,847   |      |   | 38,499   |   |   | 17,455  |  
|Proceeds from maturities of investment securities available-for-sale                  |  |                                 | 58,550   |      |   | 53,568   |   |   | 63,876  |  
|Purchase of investment securities available-for-sale                                  |  |                                 | (196,419 | )    |   | (112,754 | ) |   | (44,431 | )
|Proceeds from maturities of investment securities held-to-maturity                    |  |                                 | 4,564    |      |   | 2,100    |   |   | 3,108   |  
|Purchase of investment securities held-to-maturity                                    |  |                                 | (3,182   | )    |   | (1,944   | ) |   | (2,237  | )
|Proceeds from sales of other real estate owned                                        |  |                                 | 549      |      |   | 891      |   |   | 410     |  
|Net increase in loans                                                                 |  |                                 | (27,873  | )    |   | (71,668  | ) |   | (77,600 | )
|Purchase of premises and equipment                                                    |  |                                 | (1,142   | )    |   | (1,725   | ) |   | (1,457  | )
|Purchase of Federal Home Loan and Federal Reserve Bank stock                          |  |                                 | (19      | )    |   | (113     | ) |   | (141    | )
|Payments related to acquisitions, net of cash and cash equivalents
 acquired          |  |                                 | -0-      |      |   | -0-      |   |   | (10,182 | )
|                                                                                      |  |                                 |          |      |   |          |   |   |         |  
|                                                                                      |  |                                 |          |      |   |          |   |   |         |  
|Net cash used in investing activities                                                 |  |                                 | (76,125  | )    |   | (93,146  | ) |   | (51,199 | )
|                                                                                      |  |                                 |          |      |   |          |   |   |         |  
|                                                                                      |  |                                 |          |      |   |          |   |   |         |  
|Financing activities:                                                                 |  |                                 |          |      |   |          |   |   |         |  
|Net increase (decrease) in deposits                                                   |  |                                 | 113,408  |      |   | 70,725   |   |   | (3,369  | )
|Net increase (decrease) in short-term borrowings                                      |  |                                 | 2,875    |      |   | (18,082  | ) |   | 28,877  |  
|Proceeds from borrowings                                                              |  |                                 | -0-      |      |   | 33,000   |   |   | 6,050   |  
|Repayment of borrowings                                                               |  |                                 | (16,050  | )    |   | (6,001   | ) |   | -0-     |  
|Dividends paid on preferred stock                                                     |  |                                 | (1,016   | )    |   | -0-      |   |   | -0-     |  
|Dividends paid on common stock                                                        |  |                                 | (2,311   | )    |   | (3,696   | ) |   | (3,597  | )
|Purchase of treasury stock                                                            |  |                                 | -0-      |      |   | (553     | ) |   | (1,459  | )
|Sales of treasury stock                                                               |  |                                 | 114      |      |   | 124      |   |   | 175     |  
|Exercise of stock options and issuance of treasury stock                              |  |                                 | -0-      |      |   | 101      |   |   | 12      |  
|Proceeds from issuance of preferred stock and common stock warrants,
 net of expenses |  |                                 | 25,020   |      |   | -0-      |   |   | -0-     |  
|                                                                                      |  |                                 |          |      |   |          |   |   |         |  
|                                                                                      |  |                                 |          |      |   |          |   |   |         |  
|Net cash provided by financing activities                                             |  |                                 | 122,040  |      |   | 75,618   |   |   | 26,689  |  
|                                                                                      |  |                                 |          |      |   |          |   |   |         |  
|                                                                                      |  |                                 |          |      |   |          |   |   |         |  
|Increase (decrease) in cash and cash equivalents                                      |  |                                 | 50,812   |      |   | (7,343   | ) |   | (11,581 | )
|Cash and cash equivalents at beginning of year                                        |  |                                 | 20,261   |      |   | 27,604   |   |   | 39,185  |  
|                                                                                      |  |                                 |          |      |   |          |   |   |         |  
|                                                                                      |  |                                 |          |      |   |          |   |   |         |  
|Cash and cash equivalents at end of year                                              |  | $                               | 71,073   |      | $ | 20,261   |   | $ | 27,604  |  
|                                                                                      |  |                                 |          |      |   |          |   |   |         |  
|                                                                                      |  |                                 |          |      |   |          |   |   |         |  
|Cash paid during the year for:                                                        |  |                                 |          |      |   |          |   |   |         |  
|Interest                                                                              |  | $                               | 23,558   |      | $ | 27,970   |   | $ | 33,975  |  
|Income taxes                                                                          |  | $                               | 2,040    |      | $ | 3,123    |   | $ | 1,817   |  
|Supplemental disclosure of non-cash flow activities:                                  |  |                                 |          |      |   |          |   |   |         |  
|Loans transferred to other real estate owned                                          |  | $                               | 16,663   |      | $ | 2,547    |   | $ | 1,290   |  
|Land transferred to held-for-sale                                                     |  | $                               | -0-      |      | $ | 1,010    |   | $ | 1,344   |  

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

13

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

1. Summary of Significant Accounting Policies

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

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

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

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

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

Interest-bearing Deposits in Banks Interest-bearing
deposits in banks mature within one year and are carried at cost.

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

Federal Reserve and Federal Home Loan Bank Stock -The
subsidiary bank held Federal Home Loan Bank and Federal Reserve Bank stock
totaling $2,373 and $1,857 at December 31, 2009, and $2,373 and $1,838 at
December 31, 2008, respectively. During the third quarter of 2007, the Federal
Home Loan Bank of Chicago received a Cease and Desist Order from their
regulator, the Federal Housing Finance Board. The Federal Home Loan Bank will
continue to provide liquidity and funding through advances, however, the order
prohibits capital stock repurchases and redemptions 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 will continue
to assess its dividend capacity each quarter and make appropriate request for
approval. There were no dividends paid by the Federal Home Loan Bank of Chicago
during 2009 or 2008. Management performed an analysis and deemed the
cost-method investment in Federal Home Loan Bank stock was ultimately
recoverable.

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

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

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

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

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

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

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

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

A
loan is considered impaired when, based on current information and events, it
is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms
of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value and the probability of
collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are
not classified as impaired. Management determines the significance of payment
delays and

14

---



payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrowers prior payment record and
the amount of the shortfall in relation to the principal and interest owed. Impairment
is measured on a loan-by-loan basis for commercial and construction loans by
either the present value of expected future cash flows discounted at the loans
effective interest rate, the loans obtainable market price or the fair value
of the collateral if the loan is collateral dependent.

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

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

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

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

Goodwill and Intangible Assets The
Corporation has goodwill from business combinations, identifiable intangible
assets assigned to core deposit relationships and customer lists acquired.
Identifiable intangible assets generally arise from branches acquired that the
Corporation accounted for as purchases. Such assets consist of the excess of
the purchase price over the fair value of net assets acquired, with specific
amounts assigned to core deposit relationships. Intangible assets are amortized
by the straight-line method over various periods up to fifteen years.
Management reviews intangible assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may be
not recoverable.

A
goodwill impairment test was performed as of December 31, 2009 and full
impairment was deemed necessary.

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

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

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

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

The
Corporation files consolidated income tax returns with its subsidiaries.

Trust Assets Assets held in fiduciary or
agency capabilities are not included in the consolidated balance sheets since
such items are not assets of the Corporation. Fees from trust activities are
recorded on an accrual basis over the period in which the service is provided.
Fees are a function of the market value of assets managed and administered, the
volume of transactions, and fees for other services rendered, as set forth in
the underlying client agreement with fiduciary services. This revenue
recognition involves the use of estimates and assumptions, including components
that are calculated based on estimated asset valuations and transaction volumes.
Generally, the actual trust fee is charged to each account on a monthly
prorated basis. Any out-of-pocket expenses or services not typically covered by
the fee schedule for trust activities are charged directly to the trust account
on a gross basis as trust revenue is incurred. The Corporation was the manager
or administrator of 965 trust accounts with assets totaling approximately
$171,429 at December 31, 2009 and 966 trust accounts with assets totaling
approximately $174,753 at December 31, 2008.

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

Earnings Per Share Basic earnings (loss)
per share represents income (loss) available to common stockholders divided by
the weighted-average number of common shares outstanding each period. Diluted
earnings per share reflects additional potential common shares that would have
been outstanding if dilutive potential common shares had been issued, as well
as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Corporation relate solely to
outstanding stock options and warrants issued in conjunction with the Capital
Purchase Program/Troubled Asset Relief Program (TARP). (See Note 21 - Capital
Purchase Program/Troubled Asset Relief Program (TARP) in the Notes to
Consolidated Financial Statements.

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

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

Cash Equivalents The Corporation
considers all liquid investments with original maturities of three months or
less to be cash equivalents. At December 31, 2009 and 2008, cash equivalents
consisted of non-interest-bearing and interest-bearing cash accounts.

The
financial institutions holding the Corporations cash accounts are
participating in the FDICs Transaction Account Guarantee Program. Under that

15

---



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

program,
through June 30, 2010, all non-interest-bearing transaction accounts are fully
guaranteed by the FDIC for the entire amount in the account.

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

Reclassification -Certain amounts in the
2008 and 2007 consolidated financial statements have been reclassified to
conform to the 2009 presentation. These reclassifications had no effect on net
income.

Stock Options At December 31, 2009 and
2008, the Corporation has a share-based employee compensation plan, which is
described more fully in Note 13. The Corporation accounts for this plan under
the recognition and measurement principles of Financial Accounting Standards
Board Accounting Standards Codification 718 (ASC 718), Share-Based Payment.
The number of shares of common stock authorized under the stock option plans is
802,500. The exercise price must be at least 100% of the fair market value of
the common stock on the date of the grant, and the option term cannot exceed
ten years.

Impact of New Accounting Standards -In
December 2007, the FASB issued ASC 805, Business Combinations, which changed
multiple aspects of the accounting for business combinations. Under the
guidance in ASC 805, the acquisition method must be used, which requires the
acquirer to recognize most identifiable assets acquired, liabilities assumed
and non-controlling interests in the acquiree at their full fair value on the
acquisition date. Goodwill is to be recognized as the excess of the
consideration transferred plus the fair value of the non-controlling interest over
the fair values of the identifiable net assets acquired. Subsequent changes in
the fair value of contingent consideration classified as a liability are to be
recognized in earnings, while contingent consideration classified as equity is
not to be re-measured. Costs such as transaction costs are to be excluded from
acquisition accounting, generally leading to recognizing expense and
additionally, restructuring costs that do not meet certain criteria at
acquisition date are to be subsequently recognized as post-acquisition costs.
ASC 805 is effective for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. The implementation of ASC 805 did not have a material
impact on the Corporations financial position or results of operations.

In
December 2007, the FASB issued ASC 810, Noncontrolling Interests in
Consolidated Financial Statements  an amendment of ARB No. 51. The Statement
requires that a noncontrolling interest in a subsidiary be reported separately
within equity and the amount of consolidated net income specifically
attributable to the noncontrolling interest be identified in the consolidated
financial statements. It also calls for consistency in the manner of reporting
changes in the parents ownership interest and requires fair value measurement
of any noncontrolling equity investment retained in deconsolidation. ASC 810
became effective for fiscal years beginning after December 15, 2008. The
application of ASC 810 did not have a material impact on the Corporations
consolidated financial statements.

In
March 2008, the FASB issued ASC 815, Disclosures About Derivative Instruments
and Hedging Activities. ASC 815 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments and
disclosures about credit-risk-related contingent features in derivative agreements.
ASC 815 is effective for fiscal years beginning after November 15, 2008. The
implementation of ASC 815 did not have a material impact on its consolidated
financial statements.

In
January 2009, the FASB issued ASC 325, Amendments to the Impairment and
Interest Income Measurement Guidance of EITF Issue No. 99-20. ASC 325 amends
the impairment guidance previously issued in order to achieve more consistent
determination of whether an other-than-temporary impairment (OTTI) has
occurred. This ASC amended previous guidance to more closely align the OTTI
guidance therein to the guidance in ASC 320. Retrospective application to a
prior interim or annual period is prohibited. The implementation of ASC 325 did
not have a material impact on its consolidated financial statements.

In
April 2009, the FASB issued an accounting standard which amended
other-than-temporary impairment (OTTI) guidance in GAAP for debt securities
by requiring a write-down when fair value is below amortized cost in circumstances
where: (1) an entity has the intent to sell a security; (2) it is more likely
than not that an entity will be required to sell the security before recovery
of its amortized cost basis; or (3) an entity does not expect to recover the
entire amortized cost basis of the security. If an entity intends to sell a
security, or if it is more likely than not that the entity will be required to
sell the security before recovery, an OTTI write-down is recognized in earnings
equal to the entire difference between the securitys amortized cost basis and
its fair value. If an entity does not intend to sell the security, or it is not
more likely than not that it will be required to sell the security before
recovery, the OTTI write-down is separated into an amount representing credit
loss, which is recognized in earnings, and an amount related to all other
factors, which is recognized in other comprehensive income. This accounting
standard does not amend existing recognition and measurement guidance related
to OTTI write-downs of equity securities. This accounting standard also extends
disclosure requirements related to debt and equity securities to interim
reporting periods. The Corporation adopted this accounting standard on April 1,
2009. The adoption of this standard had no impact on retained earnings and is
not expected to have a material impact on the Corporations statements of
income and condition. See Note 7 for the disclosures required under this
accounting standard, which was subsequently codified into ASC 320, Investments
Debt and Equity Securities.

In
September 2006, the FASB issued an accounting standard related to fair value
measurements, which was effective for the Corporation on January 1, 2008. This
standard defined fair value, established a framework for measuring fair value
and expanded disclosure requirements about fair value measurements. On January
1, 2008, the Corporation adopted this accounting standard related to fair value
measurements for the Corporations financial assets and financial liabilities.
The Corporation deferred adoption of this accounting standard related to fair
value measurements for the Corporations nonfinancial assets and nonfinancial
liabilities, except for those items recognized or disclosed at fair value on an
annual or more frequently recurring basis, until January 1, 2009. The adoption
of this accounting standard related to fair value measurements for the
Corporations nonfinancial assets and nonfinancial liabilities had no impact on
retained earnings and did not have a material impact on the Corporations
statements of income and condition. This accounting standard was subsequently
codified into ASC Topic 820, Fair Value Measurements and Disclosures.

In
April 2009, the FASB issued an accounting standard which provided guidance on
estimating fair value when the volume and level of activity for an asset or
liability have significantly decreased and in identifying transactions that are
not orderly. In such instances, the accounting standard provides that
management may determine that further analysis of the transactions or quoted
prices is required, and a significant adjustment to the transactions or quoted
prices may be necessary to estimate fair value in accordance with GAAP. The
Corporation adopted this accounting standard on April 1, 2009. The provisions
in this accounting standard were applied prospectively and did not result in
significant changes to the Corporations valuation techniques. Furthermore, the
adoption of this accounting standard, which was subsequently codified into ASC
Topic 820, Fair Value Measurements and Disclosures, did not have a material
impact on the Corporations statements of income and condition.

In
April 2009, the FASB issued an accounting standard related to disclosures about
the fair value of financial instruments in interim reporting periods of
publicly traded companies that were previously only required to be disclosed in
annual financial statements. The Corporation adopted this accounting standard
in preparing the Consolidated Financial Statements for the period ended June
30, 2009. As this accounting standard amended only the disclosure requirements
about the fair value of financial instruments in interim periods, the adoption
had no impact on the Corporations statements of income and condition. See Note
16 for the disclosures required under this accounting standard, which was
subsequently codified into ASC Topic 825, Financial Instruments.

In
June 2009, the FASB issued an accounting standard which amends current GAAP
related to the accounting for transfers and servicing of financial assets and
extinguishments of liabilities, including the removal of the concept of a
qualifying special-purpose entity from GAAP. This new accounting standard also
clarifies that a transferor must evaluate whether it has maintained effective
control of a financial asset by considering its continuing direct or indirect
involvement

16

---



with
the transferred financial asset. This accounting standard is effective for
financial asset transfers occurring after December 31, 2009. Management has not
determined the impact adoption of this accounting standard may have on the
Corporations consolidated financial statements.

In
June 2009, the FASB issued an accounting standard which will require a
qualitative rather than a quantitative analysis to determine the primary
beneficiary of a variable interest entity (VIE) for consolidation purposes.
The primary beneficiary of a VIE is the enterprise that has: (1) the power to
direct the activities of the VIE that most significantly impact the VIEs
economic performance, and (2) the obligation to absorb losses of the VIE that
could potentially be significant to the VIE or the right to receive benefits of
the VIE that could potentially be significant to the VIE. This accounting
standard is effective for the Corporation on January 1, 2010. The adoption of
this accounting standard will have no impact on the Corporations statements of
income and condition.

In
June 2009, the FASB issued ASU No. 2009-01 (formerly Statement No. 168), Topic
105  Generally Accepted Accounting Principles - FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles.
The Codification is the single source of authoritative nongovernmental U.S.
generally accepted accounting principles (GAAP). The Codification does not
change current GAAP, but is intended to simplify user access to all
authoritative GAAP by providing all the authoritative literature related to a
particular topic in one place. Rules and interpretive releases of the SEC under
federal securities laws are also sources of authoritative GAAP for SEC
registrants. The Corporation adopted this standard for the interim reporting
period ended September 30, 2009. The adoption of this statement did not have a
material impact on the Corporations operating results or financial position.

2. Earnings Per Share

The
following table sets forth the computation for basic and diluted earnings per share
for the years ended December 31, 2009, 2008 and 2007:

|                                                                     |  |      |           |      |   |           |  |   |           | 
|-------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | 
|                                                                     |  | 2009 |           | 2008 |   | 2007      | 
|Numerator:                                                           |  |      |           |      |   |           |  |   |           | 
|Net (loss) income available to common stockholders                   |  | $    | (22,329   | )    | $ | 7,326     |  | $ | 6,770     | 
|Denominator:                                                         |  |      |           |      |   |           |  |   |           | 
|Basic earnings per share - weighted average common shares            |  |      | 3,301,016 |      |   | 3,297,990 |  |   | 3,326,467 | 
|Effect of dilutive securities - stock options                        |  |      | 463       |      |   | 16,449    |  |   | 7,939     | 
|                                                                     |  |      |           |      |   |           |  |   |           | 
|Diluted earnings per share - adjusted weighted average common shares |  |      | 3,301,479 |      |   | 3,314,439 |  |   | 3,334,406 | 
|Net (loss) income per share available to common stockholders         |  |      |           |      |   |           |  |   |           | 
|Basic                                                                |  | $    | (6.76     | )    | $ | 2.22      |  | $ | 2.04      | 
|Diluted                                                              |  | $    | (6.76     | )    | $ | 2.21      |  | $ | 2.03      | 

The
following shares were not considered in computing diluted earnings per share
for the years ended December 31, 2009, 2008 and 2007 because they were
anti-dilutive:

|                                                                                |  |      |         |      |  |         |  |  |         | 
|------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ------- |  |  | ------- | 
|                                                                                |  | 2009 |         | 2008 |  | 2007    | 
|                                                                                |  |      |         |      |  |         |  |  |         | 
|Stock options to purchase shares of common stock                                |  |      | 519,777 |      |  | 341,516 |  |  | 221,583 | 
|                                                                                |  |      |         |      |  |         |  |  |         | 
|Average dilutive potential common shares associated with common stock
 warrants |  |      | 155,025 |      |  | -0-     |  |  | -0-     | 

3. Cash and Due From Banks

The
average compensating balances held at correspondent banks during 2009 and 2008
were $2,384 and $2,847, respectively. The subsidiary bank maintains such
compensating balances with correspondent banks to offset charges for services
rendered by those banks. In addition, the Federal Reserve Bank required the
subsidiary bank to maintain average balances of approximately $4,007 and
$2,590, for 2009 and 2008, respectively, as reserve requirements.

4. Investment Securities

The
amortized cost, gross unrealized gains, gross unrealized losses and estimated
fair value of available-for-sale and held-to-maturity securities by major
security type at December 31, 2009 and December 31, 2008 were as follows:

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

17

---



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

|                                                                                              |  |                 |         |                          |   |                           |  |             |        |   |   |         | 
|--------------------------------------------------------------------------------------------- |  | --------------- | ------- | ------------------------ | - | ------------------------- |  | ----------- | ------ | - | - | ------- | 
|                                                                                              |  | 2008            |        
|                                                                                              |  | Amortized
 Cost |         | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Fair
 Value |       
|                                                                                              |  |                 |         |                          |   |                           |  |             |       
|Available-for-sale:                                                                           |  |                 |         |                          |   |                           |  |             |        |   |   |         | 
|United States Government and federal agency and
 U.S. Government sponsored enterprises (GSEs) |  | $               | 89,883  |                          | $ | 2,344                     |  | $           | (29    | ) | $ | 92,198  | 
|State and Municipal                                                                           |  |                 | 89,776  |                          |   | 1,336                     |  |             | (1,384 | ) |   | 89,728  | 
|Collateralized mortgage obligations:                                                          |  |                 |         |                          |   |                           |  |             |        |   |   |         | 
|GSE residential                                                                               |  |                 | 54,405  |                          |   | 579                       |  |             | (27    | ) |   | 54,957  | 
|                                                                                              |  |                 |         |                          |   |                           |  |             |        |   |   |         | 
|Total                                                                                         |  |                 | 234,064 |                          |   | 4,259                     |  |             | (1,440 | ) |   | 236,883 | 
|                                                                                              |  |                 |         |                          |   |                           |  |             |        |   |   |         | 
|Held-to-maturity:                                                                             |  |                 |         |                          |   |                           |  |             |        |   |   |         | 
|State and Municipal                                                                           |  |                 | 14,232  |                          |   | 294                       |  |             | (65    | ) |   | 14,461  | 
|                                                                                              |  |                 |         |                          |   |                           |  |             |        |   |   |         | 
|Total                                                                                         |  | $               | 248,296 |                          | $ | 4,553                     |  | $           | (1,505 | ) | $ | 251,344 | 
|                                                                                              |  |                 |         |                          |   |                           |  |             |        |   |   |         | 

Maturities
of investment securities classified as available-for-sale and held-to-maturity
were as follows at December 31, 2009:

|                                       |  |                           |         |             |   |         | 
|-------------------------------------- |  | ------------------------- | ------- | ----------- | - | ------- | 
|                                       |  | Adjusted
 Carrying
 Value |         | Fair
 Value |  
|                                       |  |                           |         |             |  
|Available-for-sale:                    |  |                           |         |             |   |         | 
|Due in one year or less                |  | $                         | 1,180   |             | $ | 1,185   | 
|Due after one year through five years  |  |                           | 10,022  |             |   | 10,405  | 
|Due after five years through ten years |  |                           | 65,739  |             |   | 67,680  | 
|Due after ten years                    |  |                           | 66,232  |             |   | 66,902  | 
|                                       |  |                           |         |             |   |         | 
|                                       |  |                           | 143,713 |             |   | 146,172 | 
|                                       |  |                           |         |             |   |         | 
|Mortgage-backed securities             |  |                           | 68,649  |             |   | 70,219  | 
|Collateralized mortgage obligations    |  |                           | 70,985  |             |   | 72,083  | 
|                                       |  |                           |         |             |   |         | 
|                                       |  | $                         | 283,347 |             | $ | 288,474 | 
|                                       |  |                           |         |             |   |         | 
|Held-to-maturity:                      |  |                           |         |             |   |         | 
|Due in one year or less                |  | $                         | 2,281   |             | $ | 2,321   | 
|Due after one year through five years  |  |                           | 6,856   |             |   | 7,213   | 
|Due after five years through ten years |  |                           | 3,258   |             |   | 3,367   | 
|Due after ten years                    |  |                           | 398     |             |   | 430     | 
|                                       |  |                           |         |             |   |         | 
|                                       |  | $                         | 12,793  |             | $ | 13,331  | 
|                                       |  |                           |         |             |   |         | 

Proceeds
from sales of investment securities available-for-sale during 2009, 2008 and
2007 were $88,847, $38,499 and $17,455, respectively. Gross gains were realized
of $3,323 in 2009, $431 in 2008 and $541 in 2007 on those sales. Gross losses
were realized of $1,542 in 2009 and $26 in 2008 on those sales. There were no gross
losses from those sales in 2007. There was resulting tax expense of $690 in
2009, $157 in 2008 and $210 in 2007 from those sales. There were no sales of
investment securities classified as held-to-maturity during 2009, 2008 or 2007.

Securities
with unrealized losses at December 31, 2009 and 2008 not recognized in income
are as follows:

|                                                                                              |  |                     |        |                         |   |             |   |                         |       |              |   |                           |   |   |        |  |   |        |  
|--------------------------------------------------------------------------------------------- |  | ------------------- | ------ | ----------------------- | - | ----------- | - | ----------------------- | ----- | ------------ | - | ------------------------- | - | - | ------ |  | - | ------ | -
|                                                                                              |  | 2009                |       
|                                                                                              |  | Less than 12 Months |        | 12 Months or More       |   | Total       |  
|                                                                                              |  | Fair
 Value         |        | Gross
 Unrealized
 Loss |   | Fair
 Value |   | Gross
 Unrealized
 Loss |       | Fair 
 Value |   | Gross 
 Unrealized 
 Loss |  
|                                                                                              |  |                     |        |                         |   |             |   |                         |       |              |   |                           |  
|United States Government and federal agency and U.S.
 Government sponsored enterprises (GSEs) |  | $                   | 39,012 |                         | $ | (745        | ) | $                       | 7     |              | $ | -0-                       |   | $ | 39,019 |  | $ | (745   | )
|State and Municipal                                                                           |  |                     | 17,114 |                         |   | (255        | ) |                         | 5,344 |              |   | (120                      | ) |   | 22,458 |  |   | (375   | )
|Collateralized mortgage obligations:                                                          |  |                     |        |                         |   |             |   |                         |       |              |   |                           |   |   |        |  |   |        |  
|GSE residential                                                                               |  |                     | 8,006  |                         |   | (58         | ) |                         | -0-   |              |   | -0-                       |   |   | 8,006  |  |   | (58    | )
|                                                                                              |  |                     |        |                         |   |             |   |                         |       |              |   |                           |   |   |        |  |   |        |  
|Total temporarily impaired                                                                    |  | $                   | 64,132 |                         | $ | (1,058      | ) | $                       | 5,351 |              | $ | (120                      | ) | $ | 69,483 |  | $ | (1,178 | )
|                                                                                              |  |                     |        |                         |   |             |   |                         |       |              |   |                           |   |   |        |  |   |        |  

18

---



|                                                                                              |  |                     |        |                         |   |             |   |                         |        |             |   |                         |   |   |        |  |   |        |  
|--------------------------------------------------------------------------------------------- |  | ------------------- | ------ | ----------------------- | - | ----------- | - | ----------------------- | ------ | ----------- | - | ----------------------- | - | - | ------ |  | - | ------ | -
|                                                                                              |  | 2008                |       
|                                                                                              |  | Less than 12 Months |        | 12 Months or More       |   | Total       |  
|                                                                                              |  | Fair
 Value         |        | Gross
 Unrealized
 Loss |   | Fair
 Value |   | Gross
 Unrealized
 Loss |        | Fair
 Value |   | Gross
 Unrealized
 Loss |  
|                                                                                              |  |                     |        |                         |   |             |   |                         |        |             |   |                         |  
|United States Government and federal agency and U.S. Government
 sponsored enterprises (GSEs) |  | $                   | 1,569  |                         | $ | (19         | ) | $                       | 461    |             | $ | (10                     | ) | $ | 2,030  |  | $ | (29    | )
|State and Municipal                                                                           |  |                     | 17,913 |                         |   | (679        | ) |                         | 22,082 |             |   | (770                    | ) |   | 39,995 |  |   | (1,449 | )
|Collateralized mortgage obligations                                                           |  |                     |        |                         |   |             |   |                         |        |             |   |                         |   |   |        |  |   |        |  
|GSE residential                                                                               |  |                     | 3,310  |                         |   | (12         | ) |                         | 3,308  |             |   | (15                     | ) |   | 6,618  |  |   | (27    | )
|                                                                                              |  |                     |        |                         |   |             |   |                         |        |             |   |                         |   |   |        |  |   |        |  
|Total temporarily impaired                                                                    |  | $                   | 22,792 |                         | $ | (710        | ) | $                       | 25,851 |             | $ | (795                    | ) | $ | 48,643 |  | $ | (1,505 | )
|                                                                                              |  |                     |        |                         |   |             |   |                         |        |             |   |                         |   |   |        |  |   |        |  

As
of December 31, 2009, the amount of securities with an unrealized loss of more
than twelve consecutive months is not material.

There
are 105 securities in an unrealized loss position in the investment portfolio
at December 31, 2009, all due to interest rate changes and not credit events.
These unrealized losses are considered temporary and, therefore, have not been
recognized into income, because the issuers are of high credit quality, and
management has the ability and intent to hold for the foreseeable future. The fair
value is expected to recover as the investments approach their maturity date or
there is a downward shift in interest rates.

The
carrying value of securities pledged as collateral, to secure public deposits
and for other purposes was $283,011 at December 31, 2009 and $234,525 at
December 31, 2008.

5. Loans

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

|                                    |  |      |         |      |   |         | 
|----------------------------------- |  | ---- | ------- | ---- | - | ------- | 
|                                    |  | 2009 |         | 2008 |  
|Mortgage loans on real estate       |  |      |         |      |   |         | 
|Residential 1-4 family              |  | $    | 123,374 |      | $ | 132,056 | 
|Agricultural                        |  |      | 61,022  |      |   | 64,212  | 
|Construction                        |  |      | 24,118  |      |   | 31,444  | 
|Commercial                          |  |      | 198,914 |      |   | 182,658 | 
|                                    |  |      |         |      |   |         | 
|Total mortgage loans on real estate |  |      | 407,428 |      |   | 410,370 | 
|                                    |  |      |         |      |   |         | 
|Commercial                          |  |      | 244,049 |      |   | 225,806 | 
|Agricultural                        |  |      | 76,918  |      |   | 79,536  | 
|Installment                         |  |      | 69,679  |      |   | 75,125  | 
|                                    |  |      |         |      |   |         | 
|Total                               |  | $    | 798,074 |      | $ | 790,837 | 
|                                    |  |      |         |      |   |         | 

At
December 31, 2009 and 2008, the Corporation held $198,914 and $182,658 in
commercial real estate of which $70,359 and $72,304 represent loans
collateralized by commercial and development real estate, respectively, which
are considered loan concentrations. Generally, those loans are collateralized
by the real estate being financed. The loans are expected to be repaid from
cash flows or from proceeds of sale of the real estate of the borrowers.

At
December 31, 2009 and 2008, the Corporation held $76,918 and $79,536 in
agricultural production loans and $61,022 and $64,212 in agricultural real
estate loans, respectively, which are considered loan concentrations.
Generally, those loans are collateralized by the assets of the borrower. The
loans are expected to be repaid from cash flows or from proceeds of sale of
selected assets of the borrowers.

During
2009, the Corporation experienced a higher level of charge-offs due in part to
the economic environment, particularly in the commercial sector. Accordingly,
with the higher charge-offs and the increased level of non-performing loans,
the Corporation recorded a provision for loan losses of $11,062 for 2009.
Changes in the allowance for loan losses for the years ended December 31 were
as follows:

|                                           |  |      |        |      |   |        |   |   |       |  
|------------------------------------------ |  | ---- | ------ | ---- | - | ------ | - | - | ----- | -
|                                           |  | 2009 |        | 2008 |   | 2007   |  
|Balance, January 1                         |  | $    | 5,064  |      | $ | 3,248  |   | $ | 3,053 |  
|Provision for loan losses                  |  |      | 11,062 |      |   | 2,968  |   |   | 640   |  
|Loans charged off                          |  |      | (4,256 | )    |   | (1,334 | ) |   | (664  | )
|Recoveries of loans previously charged off |  |      | 205    |      |   | 182    |   |   | 219   |  
|                                           |  |      |        |      |   |        |   |   |       |  
|Balance, December 31                       |  | $    | 12,075 |      | $ | 5,064  |   | $ | 3,248 |  
|                                           |  |      |        |      |   |        |   |   |       |  

Non-accrual
loans at December 31, 2009, 2008 and 2007 were $51,450, $30,383 and $7,361,
respectively. Interest income that would have been recorded on these loans, had
they remained current, was approximately $3,256, $1,449 and $734, respectively.
At December 31, 2009, 2008 and 2007, accruing loans delinquent 90 days or more
totaled $2,087, $2,655 and $73, respectively.

A
loan is considered impaired, in accordance with the impairment accounting
guidance (ASC 310-10-35-16), when based on current information and events, it
is probable the Corporation will be unable to collect all amounts due from the
borrower in accordance with the contractual terms of the loan. Impaired loans
include nonperforming commercial loans but also include loans modified in
troubled debt restructurings where concessions have been granted to borrowers

19

---



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

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.

Included
in certain loan categories in the impaired loans are troubled debt
restructurings that were classified as impaired. At December 31, 2009, the
Corporation had $8,857 of commercial loans that were modified in troubled debt
restructurings and impaired. In addition to these amounts, the Corporation had
troubled debt restructurings that were performing in accordance with their
modified terms of $5,011 in commercial loans and $73 of home equity loans at
December 31, 2009. There were no troubled debt restructured loans at December
31, 2008.

Impaired
loans at December 31, 2009, 2008 and 2007 totaled $42,038, $25,128 and $4,523,
respectively, and consist of commercial real estate, commercial real estate
development and residential real estate development loans. Of these totals,
$14,376, $1,976 and $540 of loans had valuation reserves totaling $2,905, $370
and $207 at December 31, 2009, 2008 and 2007, respectively. For the years ended
December 31, 2009, 2008 and 2007, the average recorded investment in impaired
loans was approximately $23,139, $10,414 and $3,301, respectively. Interest
recognized on impaired loans during the portion of the year that they were
impaired was not material.

The
Corporations subsidiary bank had loans outstanding to directors, executive
officers and to their related interests (related parties) of the Corporation
and its subsidiary of approximately $9,394, $6,356 and $8,275, at December 31,
2009, 2008 and 2007, respectively. These loans were made in the ordinary course
of business on substantially the same terms and conditions, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other customers and did not involve more than the normal risk
of collectibility. As a practice, the subsidiary bank does not make loans to
its executive officers. A summary of the activity in 2009 for loans made to
directors, executive officers or principal holders of common stock or to any
associate of such persons for which the aggregate to any such person exceeds
$60 at December 31, 2009 is as follows:

|                         |  |           |  |          |  |                         
|------------------------ |  | --------- |  | -------- |  | ------------------------
|Balance
 January 1, 2009 |  | Additions |  | Payments |  | BalanceDecember 31, 2009
|                         |  |           |  |          |  |                         
|$6,416                   |  | $5,393    |  | $(2,415) |  | $9,394                  

6.Premises and Equipment

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

|                                |  |      |        |      |   |        | 
|------------------------------- |  | ---- | ------ | ---- | - | ------ | 
|                                |  | 2009 |        | 2008 |  
|Land                            |  | $    | 6,170  |      | $ | 6,163  | 
|Buildings                       |  |      | 30,364 |      |   | 30,271 | 
|Furniture and Equipment         |  |      | 22,929 |      |   | 21,887 | 
|                                |  |      |        |      |   |        | 
|                                |  |      | 59,463 |      |   | 58,321 | 
|Less: accumulated
 depreciation |  |      | 31,194 |      |   | 29,024 | 
|                                |  |      |        |      |   |        | 
|Total                           |  | $    | 28,269 |      | $ | 29,297 | 
|                                |  |      |        |      |   |        | 

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

Depreciation
expense charged to operating expense for 2009, 2008 and 2007 was $2,170, $2,219
and $2,482, respectively.

7.Aquisition

On
February 23, 2007, the Corporation completed the acquisition of the Plainfield,
Illinois office of HomeStar Bank in Manteno, Illinois, for $10.2 million in
cash, including goodwill of $1.5 million, in order to expand its market
presence in the area. The Corporation purchased the existing facility for $4.5
million plus $17.0 million in loans (at book value) and assumed $12.9 million
in deposit liabilities. The Plainfield office operates as a branch of the
subsidiary bank.

The
transaction has been accounted for as a purchase, and the results of operations
of the Plainfield office since the acquisition date have been included in the
consolidated financial statements. The following table summarizes the estimated
fair values of the assets acquired and liabilities assumed at the date of this
transaction:

|                          |  |   |        | 
|------------------------- |  | - | ------ | 
|Cash and cash equivalents |  | $ | 93     | 
|Loans                     |  |   | 17,043 | 
|Premises and equipment    |  |   | 4,500  | 
|Goodwill                  |  |   | 1,492  | 
|Other assets              |  |   | 85     | 
|                          |  |   |        | 
|Total assets acquired     |  |   | 23,213 | 
|                          |  |   |        | 
|Deposits                  |  |   | 12,865 | 
|Other liabilities         |  |   | 145    | 
|                          |  |   |        | 
|Total liabilities assumed |  |   | 13,010 | 
|                          |  |   |        | 
|Net assets acquired       |  | $ | 10,203 | 
|                          |  |   |        | 

20

---



Transaction
costs related to the completion of the transaction were considered immaterial.
The total fair value of the assets and liabilities acquired exceeded the book
value, resulting in goodwill of $1,492 which is not subject to amortization.

The
following unaudited pro forma condensed combined financial information presents
the results of operations of the Corporation, including the effects of the
purchase accounting adjustments, had the acquisition taken place at the
beginning of each period:

|                                             |  |                                                  |   |           |  | 
|-------------------------------------------- |  | ------------------------------------------------ | - | --------- |  | 
|                                             |  | PRO FORMA
 For the year ended
 December 31, 2007 |  
|                                             |  |                                                  |  
|Net interest income                          |  |                                                  | $ | 27,094    |  | 
|Provision for loan losses                    |  |                                                  |   | 640       |  | 
|Non-interest income                          |  |                                                  |   | 11,333    |  | 
|Non-interest expense                         |  |                                                  |   | 29,580    |  | 
|                                             |  |                                                  |   |           |  | 
|Income before income taxes                   |  |                                                  |   | 404,141   |  | 
|Income tax expense                           |  |                                                  |   | 1,401     |  | 
|                                             |  |                                                  |   |           |  | 
|Net income                                   |  |                                                  | $ | 6,806     |  | 
|                                             |  |                                                  |   |           |  | 
|Earnings per share                           |  |                                                  |   |           |  | 
|Basic                                        |  |                                                  | $ | 2.05      |  | 
|Diluted                                      |  |                                                  |   | 2.04      |  | 
|                                             |  |                                                  |   |           |  | 
|Basic weighted average
 shares outstanding   |  |                                                  |   | 3,326,467 |  | 
|Diluted weighted average
 shares outstanding |  |                                                  |   | 3,334,406 |  | 

The
unaudited pro forma condensed combined financial statements do not reflect any
anticipated cost savings and revenue enhancements. Additionally, the income
statement for 2007 includes merger-related expenses. Accordingly, the pro forma
results of operations of the Corporation as of and after the merger may not be
indicative of the results that actually would have occurred if the merger had
been in effect during the periods presented or of the results that may be
attained in the future.

8.Goodwill

The
changes in carrying amount of goodwill for the years ended December 31, 2009
and 2008 were:

|                           |  |      |         |      |   |        | 
|-------------------------- |  | ---- | ------- | ---- | - | ------ | 
|                           |  | 2009 |         | 2008 |  
|                           |  |      |         |     
|Balance as of January 1    |  | $    | 24,521  |      | $ | 24,521 | 
|Goodwill impairment losses |  |      | (24,521 | )    |   | -0-    | 
|                           |  |      |         |      |   |        | 
|Balance as of December 31  |  | $    | -0-     |      | $ | 24,521 | 
|                           |  |      |         |      |   |        | 

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

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

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

21

---



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

9. Intangible Assets

The
balance of intangible assets, net of accumulated amortization, totaled $3,347
and $4,207 at December 31, 2009 and December 31, 2008, respectively. The
following table summarizes the Corporations intangible assets, which are
subject to amortization, as of December 31, 2009 and 2008:

|                        |  |                        |   |                           |  |                        |  |                           |        |   |  |  |   |       |  |  |  |   |        |   | 
|----------------------- |  | ---------------------- | - | ------------------------- |  | ---------------------- |  | ------------------------- | ------ | - |  |  | - | ----- |  |  |  | - | ------ | - | 
|                        |  | 2009                   |   | 2008                      | 
|                        |  | Gross Carrying
 Amount |   | Accumulated
 Amortization |  | Gross Carrying
 Amount |  | Accumulated
 Amortization |       
|                        |  |                        |   |                           |  |                        |  |                           |       
|Core deposit intangible |  |                        | $ | 9,004                     |  |                        |  | $                         | (5,715 | ) |  |  | $ | 9,004 |  |  |  | $ | (4,869 | ) | 
|Other acquisition costs |  |                        |   | 234                       |  |                        |  |                           | (176   | ) |  |  |   | 234   |  |  |  |   | (162   | ) | 
|                        |  |                        |   |                           |  |                        |  |                           |        |   |  |  |   |       |  |  |  |   |        |   | 
|Total                   |  |                        | $ | 9,238                     |  |                        |  | $                         | (5,891 | ) |  |  | $ | 9,238 |  |  |  | $ | (5,031 | ) | 
|                        |  |                        |   |                           |  |                        |  |                           |        |   |  |  |   |       |  |  |  |   |        |   | 

Intangible
asset amortization expense charged to operating expense for 2009, 2008 and 2007
was $816, $714 and $704, respectively. The following table shows the future
estimated amortization expense for the Corporations intangible assets based on
existing balances as of December 31, 2009:

Estimated
Amortization Expense for the years ended December 31:

|           |  |   |     | 
|---------- |  | - | --- | 
|2010       |  | $ | 816 | 
|2011       |  |   | 653 | 
|2012       |  |   | 549 | 
|2013       |  |   | 526 | 
|2014       |  |   | 504 | 
|Thereafter |  |   | 299 | 

Mortgage
servicing rights, which are included in other assets on the consolidated
balance sheets, are accounted for on an individual loan-by-loan basis.
Accordingly, amortization is recorded in proportion to the amount of principal
payment received on loans serviced. The mortgage servicing rights are subject
to periodic impairment testing. As of December 31, 2009, the Corporation
recognized a valuation allowance on mortgage servicing rights of $185. The
valuation allowance includes a first quarter impairment charge of $557 and a
recovery of $372 in the fourth quarter. During the years ended December 31,
2008 and 2007, no impairment had been recorded and the recorded value was determined
to approximate the fair market value. Changes in the carrying value of mortgage
servicing rights are summarized as follows:

|                                 |  |      |       |      |   |       |   |   |       |  
|-------------------------------- |  | ---- | ----- | ---- | - | ----- | - | - | ----- | -
|                                 |  | 2009 |       | 2008 |   | 2007  |  
|Balance, January 1               |  | $    | 2,936 |      | $ | 2,498 |   | $ | 2,079 |  
|Servicing rights capitalized     |  |      | 1,196 |      |   | 815   |   |   | 662   |  
|Amortization of servicing rights |  |      | (662  | )    |   | (377  | ) |   | (243  | )
|Valuation adjustment             |  |      | (185  | )    |   | -0-   |   |   | -0-   |  
|                                 |  |      |       |      |   |       |   |   |       |  
|Balance, December 31             |  | $    | 3,285 |      | $ | 2,936 |   | $ | 2,498 |  
|                                 |  |      |       |      |   |       |   |   |       |  

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

|                     |  |      |      |      |   |      |  |  |     | 
|-------------------- |  | ---- | ---- | ---- | - | ---- |  |  | --- | 
|                     |  | 2009 |      | 2008 |   | 2007 | 
|Balance, January 1   |  | $    | -0-  |      | $ | -0-  |  |  | -0- | 
|Additions            |  |      | 556  |      |   | -0-  |  |  | -0- | 
|Reductions           |  |      | (371 | )    |   | -0-  |  |  | -0- | 
|                     |  |      |      |      |   |      |  |  |     | 
|Balance, December 31 |  | $    | 185  |      |   | -0-  |  |  | -0- | 
|                     |  |      |      |      |   |      |  |  |     | 

The
following table shows the future estimated amortization expense for mortgage
servicing rights based on existing balances as of December 31, 2009. The
Corporations actual amortization expense in any given period may be
significantly different from the estimated amounts displayed, depending on the
amount of additional mortgage servicing rights, changes in mortgage interest
rates, estimated prepayment speeds and market conditions.

Estimated
Amortization Expense for the year ended December 31:

|           |  |   |       | 
|---------- |  | - | ----- | 
|2010       |  | $ | 326   | 
|2011       |  |   | 306   | 
|2012       |  |   | 287   | 
|2013       |  |   | 269   | 
|2014       |  |   | 252   | 
|2015       |  |   | 237   | 
|Thereafter |  |   | 1,608 | 

The
Corporation services loans for others with unpaid principal balances at
December 31, 2009, 2008 and 2007 of approximately $363,862, $304,551 and $268,391,
respectively.

10. Deposits

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

|                               |  |      |         |      |   |         |  |   |         | 
|------------------------------ |  | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                               |  | 2009 |         | 2008 |   | 2007    | 
|Amount                         |  | $    | 193,449 |      | $ | 232,811 |  | $ | 158,542 | 
|Interest expense for the
 year |  |      | 4,044   |      |   | 4,124   |  |   | 4,204   | 

22

---



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

|                         |  |      |        |      |   |        |  |   |        | 
|------------------------ |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                         |  | 2009 |        | 2008 |   | 2007   | 
|Interest-bearing
 demand |  | $    | 3,734  |      | $ | 3,647  |  | $ | 6,567  | 
|Savings                  |  |      | 55     |      |   | 67     |  |   | 249    | 
|Time                     |  |      | 15,431 |      |   | 20,068 |  |   | 23,508 | 
|                         |  |      |        |      |   |        |  |   |        | 
|Total                    |  | $    | 19,220 |      | $ | 23,782 |  | $ | 30,324 | 
|                         |  |      |        |      |   |        |  |   |        | 

At
December 31, 2009, the scheduled maturities of time deposits are as follows:

|           |  |   |         | 
|---------- |  | - | ------- | 
|2010       |  | $ | 433,049 | 
|2011       |  |   | 48,006  | 
|2012       |  |   | 12,558  | 
|2013       |  |   | 1,848   | 
|2014       |  |   | 1,104   | 
|Thereafter |  |   | 32      | 
|           |  |   |         | 
|Total      |  | $ | 496,597 | 
|           |  |   |         | 

11. Borrowings

As
of December 31, borrowings consisted of the following:

|                                                           |  |        |         |                         |  |        |   |                       |         |  |  |      |  
|---------------------------------------------------------- |  | ------ | ------- | ----------------------- |  | ------ | - | --------------------- | ------- |  |  | ---- | -
|                                                           |  | 2009   |         | 2008                    | 
|                                                           |  | Amount |         | Weighted
 Average
 Rate |  | Amount |   | Weighted
Average
Rate |        
|                                                           |  |        |         |                         |  |        |   |                       |        
|Customer
 repurchase agreements                            |  | $      | 47,327  |                         |  | 1.03   | % | $                     | 35,532  |  |  | 0.86 | %
|Advances
 from the Federal Home Loan                       |  |        |         |                         |  |        |   |                       |         |  |  |      |  
|Bank of Chicago due:                                       |  |        |         |                         |  |        |   |                       |         |  |  |      |  
|February 27, 2009                                          |  |        | -0-     |                         |  | n/a    |   |                       | 2,500   |  |  | 2.74 |  
|September 19, 2009                                         |  |        | -0-     |                         |  | n/a    |   |                       | 4,000   |  |  | 3.40 |  
|November 2, 2009                                           |  |        | -0-     |                         |  | n/a    |   |                       | 993     |  |  | 3.84 |  
|November 21, 2009                                          |  |        | -0-     |                         |  | n/a    |   |                       | 5,000   |  |  | 2.67 |  
|February 1, 2010                                           |  |        | 5,000   |                         |  | 2.87   |   |                       | 5,000   |  |  | 2.87 |  
|March 19, 2010                                             |  |        | 4,000   |                         |  | 3.45   |   |                       | 4,000   |  |  | 3.45 |  
|August 27, 2010                                            |  |        | 2,500   |                         |  | 2.00   |   |                       | -0-     |  |  | n/a  |  
|September 19, 2010                                         |  |        | 4,000   |                         |  | 3.60   |   |                       | 4,000   |  |  | 3.60 |  
|December 20, 2010                                          |  |        | 7,000   |                         |  | 2.19   |   |                       | 7,000   |  |  | 2.19 |  
|March 21, 2011                                             |  |        | 4,000   |                         |  | 1.23   |   |                       | -0-     |  |  | n/a  |  
|May 23, 2011                                               |  |        | 5,000   |                         |  | 0.99   |   |                       | -0-     |  |  | n/a  |  
|Federal
 funds purchased                                   |  |        | -0-     |                         |  | n/a    |   |                       | 6,500   |  |  | 0.45 |  
|Interest-bearing demand notes issued to the
 U.S. Treasury |  |        | 1,021   |                         |  | 0.00   |   |                       | 2,441   |  |  | 0.00 |  
|Trust
 preferred securities                                |  |        | 25,000  |                         |  | 5.68   |   |                       | 25,000  |  |  | 5.68 |  
|Note payable                                               |  |        | -0-     |                         |  | n/a    |   |                       | 16,050  |  |  | 4.50 |  
|                                                           |  |        |         |                         |  |        |   |                       |         |  |  |      |  
|Total                                                      |  | $      | 104,848 |                         |  | 2.51   | % | $                     | 118,016 |  |  | 2.91 | %
|                                                           |  |        |         |                         |  |        |   |                       |         |  |  |      |  

The
subsidiary bank has adopted a collateral pledge agreement whereby they agreed
to keep on hand at all times, free of all other pledges, liens and
encumbrances, first mortgages with unpaid principal balances aggregating no
less than 167% of the outstanding secured advances from the Federal Home Loan
Bank of Chicago (FHLB). The advances from the FHLB, which have fixed interest
rates ranging from 0.99% to 3.60% as of December 31, 2009, are subject to
restrictions or penalties in the event of prepayment. All stock in the FHLB is
also pledged as additional collateral for these advances.

On July 15,
2005, the Corporation, through its subsidiary PNBC Capital Trust I, issued
trust preferred securities in the amount of $25,000. These securities were
issued to help finance the acquisition of Somonauk FSB Bancorp, Inc.
Additionally, these securities have a maturity of thirty years and a fixed
interest rate of 5.68% for the first five years, which was the rate on December
31, 2009. The interest then adjusts to a floating rate at the three-month LIBOR
plus 154 basis points. While these securities are recorded as a liability for
financial reporting purposes, they qualify as Tier 1 capital for regulatory
purposes. According to the provisions of ASC Topic 810, Consolidation of
Variable Interest Entities, PNBC Capital Trust I is a variable interest entity
which is not required to be consolidated by the Corporation.

The
Corporation had a note payable with a balance of $16,050 at December 31, 2008.
The note payable was a demand note that carried a floating interest rate equal
to the higher of two-month LIBOR plus 200 basis points or 4.50% (4.50% at
December 31, 2008). The note, which was secured by the capital stock
certificates of the subsidiary bank, had a maturity of January 30, 2009 and contained
the covenant the subsidiary bank would maintain risk-based capital at a minimum
of 10% of risk-weighted assets. The loan was paid off on February 24, 2009 with
proceeds from the sale of preferred stock under the Capital Purchase Program.

Customer
repurchase agreements consist of obligations of the Bank to other parties. The
obligations are secured by government agency securities and mortgage-backed
securities and such collateral is held by the Bank. The maximum amount of
outstanding agreements at any month-end during 2009 and 2008 totaled $50,025
and $41,193, respectively, and the daily average of such agreements totaled
$37,921 and $36,918 for 2009 and 2008, respectively. The agreements at December
31, 2009 are ongoing and as such have no fixed maturity date.

23

---



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

12. Income Taxes

Income
tax expense (benefit) consisted of the following:

|                               |  |         |       |          |   |        |   |   |        |  
|------------------------------ |  | ------- | ----- | -------- | - | ------ | - | - | ------ | -
|                               |  | Current |       | Deferred |   | Total  |  
|                               |  |         |       |          |   |        |  
|Year ended December 31, 2009:  |  |         |       |          |   |        |   |   |        |  
|Federal                        |  | $       | 1,738 |          | $ | (3,191 | ) | $ | (1,453 | )
|State                          |  |         | 409   |          |   | (556   | ) |   | (147   | )
|                               |  |         |       |          |   |        |   |   |        |  
|Total                          |  | $       | 2,147 |          | $ | (3,747 | ) | $ | (1,600 | )
|                               |  |         |       |          |   |        |   |   |        |  
|                               |  |         |       |          |   |        |   |   |        |  
|Year ended
 December 31, 2008: |  |         |       |          |   |        |   |   |        |  
|Federal                        |  | $       | 1,690 |          | $ | (391   | ) | $ | 1,299  |  
|State                          |  |         | 609   |          |   | (211   | ) |   | 398    |  
|                               |  |         |       |          |   |        |   |   |        |  
|Total                          |  | $       | 2,299 |          | $ | (602   | ) | $ | 1,697  |  
|                               |  |         |       |          |   |        |   |   |        |  
|Year ended
 December 31, 2007: |  |         |       |          |   |        |   |   |        |  
|Federal                        |  | $       | 1,490 |          | $ | (440   | ) | $ | 1,050  |  
|State                          |  |         | 353   |          |   | (26    | ) |   | 327    |  
|                               |  |         |       |          |   |        |   |   |        |  
|Total                          |  | $       | 1,843 |          | $ | (466   | ) | $ | 1,377  |  
|                               |  |         |       |          |   |        |   |   |        |  

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

|                                                     |  |      |        |      |   |        |   |   |        |  
|---------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                     |  | 2009 |        | 2008 |   | 2007   |  
|Computed
 expected tax expense (benefit)           |  | $    | (7,727 | )    | $ | 3,068  |   | $ | 2,770  |  
|Increase
 (decrease) in income taxes resulting from: |  |      |        |      |   |        |   |   |        |  
|Tax-exempt income                                    |  |      | (1,891 | )    |   | (1,439 | ) |   | (1,499 | )
|Non-deductible interest expense                      |  |      | 118    |      |   | 131    |   |   | 203    |  
|State income taxes, net of federal tax
 benefit      |  |      | (63    | )    |   | 240    |   |   | 204    |  
|Bank-owned life insurance income                     |  |      | (350   | )    |   | (285   | ) |   | (271   | )
|Non-deductible goodwill impairment                   |  |      | 8,269  |      |   | -0-    |   |   | -0-    |  
|Other, net                                           |  |      | (44    | )    |   | (18    | ) |   | (30    | )
|                                                     |  |      |        |      |   |        |   |   |        |  
|                                                     |  | $    | (1,600 | )    | $ | 1,697  |   | $ | 1,377  |  
|                                                     |  |      |        |      |   |        |   |   |        |  

The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008
are presented below:

|                                                                         |  |      |        |      |   |        |  
|------------------------------------------------------------------------ |  | ---- | ------ | ---- | - | ------ | -
|                                                                         |  | 2009 |        | 2008 |  
|                                                                         |  |      |        |      |   |        |  
|Deferred tax
 assets:                                                    |  |      |        |      |   |        |  
|Deferred compensation                                                    |  | $    | 176    |      | $ | 164    |  
|Allowance for loan losses                                                |  |      | 4,687  |      |   | 1,966  |  
|Nonaccrual loan interest income                                          |  |      | 408    |      |   | 562    |  
|AMT credit carryforwards                                                 |  |      | 1,053  |      |   | -0-    |  
|Post-retirement health benefit plan accrual                              |  |      | 441    |      |   | 440    |  
|Stock option expense                                                     |  |      | 70     |      |   | -0-    |  
|Other, net                                                               |  |      | 55     |      |   | 110    |  
|                                                                         |  |      |        |      |   |        |  
|Total gross deferred tax assets                                          |  |      | 6,890  |      |   | 3,242  |  
|                                                                         |  |      |        |      |   |        |  
|Deferred tax
 liabilities:                                               |  |      |        |      |   |        |  
|Buildings and equipment, principally due to
 differences in depreciation |  |      | (589   | )    |   | (569   | )
|Accretion                                                                |  |      | (21    | )    |   | (39    | )
|Purchase accounting adjustments                                          |  |      | (2,069 | )    |   | (2,289 | )
|FHLB Stock dividends                                                     |  |      | (276   | )    |   | (276   | )
|Mortgage servicing rights                                                |  |      | (1,275 | )    |   | (1,140 | )
|Prepaid expenses                                                         |  |      | (66    | )    |   | (83    | )
|Unrealized gain on investment securities
 available-for-sale             |  |      | (1,986 | )    |   | (1,117 | )
|                                                                         |  |      |        |      |   |        |  
|Total gross deferred tax liabilities                                     |  |      | (6,282 | )    |   | (5,513 | )
|                                                                         |  |      |        |      |   |        |  
|Net deferred tax assets (liabilities)                                    |  | $    | 608    |      | $ | (2,271 | )
|                                                                         |  |      |        |      |   |        |  

At December
31, 2009, the Corporation has a $1,053,000 alternative minimum tax credit
carryforward that can be carried forward indefinitely. Management believes it
is more likely than not that the deferred tax assets will be realized.
Therefore, no valuation allowance has been recorded at December 31, 2009 and
2008.

24

---



|                         |                                                                          
|------------------------ | -------------------------------------------------------------------------
|13. Comprehensive Income
|                         |                                                                          
|                         | Other
 comprehensive income components and related taxes were as follows:

|                                                                   |  |      |        |      |   |       |   |   |       |  
|------------------------------------------------------------------ |  | ---- | ------ | ---- | - | ----- | - | - | ----- | -
|                                                                   |  | 2009 |        | 2008 |   | 2007  |  
|Net unrealized gains on securities
 available-for-sale             |  | $    | 4,089  |      | $ | 2,107 |   | $ | 2,211 |  
|Reclassification adjustment for realized
 gains included in income |  |      | (1,781 | )    |   | (405  | ) |   | (541  | )
|                                                                   |  |      |        |      |   |       |   |   |       |  
|                                                                   |  |      | 2,308  |      |   | 1,702 |   |   | 1,670 |  
|Defined benefit pension plan                                       |  |      |        |      |   |       |   |   |       |  
|Net prior service credit                                           |  |      | 62     |      |   | -0-   |   |   | 640   |  
|Amortization of transition obligation                              |  |      | -0-    |      |   | 16    |   |   | 16    |  
|Net loss                                                           |  |      | (88    | )    |   | -0-   |   |   | (197  | )
|                                                                   |  |      |        |      |   |       |   |   |       |  
|Other comprehensive income, before tax
 effect                     |  |      | 2,282  |      |   | 1,718 |   |   | 2,129 |  
|Tax expense                                                        |  |      | 868    |      |   | 660   |   |   | 825   |  
|                                                                   |  |      |        |      |   |       |   |   |       |  
|Other comprehensive income                                         |  | $    | 1,414  |      | $ | 1,058 |   | $ | 1,304 |  
|                                                                   |  |      |        |      |   |       |   |   |       |  

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

|                                                      |  |      |        |      |   |       |   |   |       |  
|----------------------------------------------------- |  | ---- | ------ | ---- | - | ----- | - | - | ----- | -
|                                                      |  | 2009 |        | 2008 |   | 2007  |  
|Net unrealized gain on securities
 available-for-sale |  | $    | 5,127  |      | $ | 2,820 |   | $ | 1,118 |  
|Net unrealized benefit obligations                    |  |      | (531   | )    |   | (540  | ) |   | (556  | )
|                                                      |  |      |        |      |   |       |   |   |       |  
|                                                      |  |      | 4,596  |      |   | 2,280 |   |   | 562   |  
|Tax effect                                            |  |      | (1,780 | )    |   | (878  | ) |   | (218  | )
|                                                      |  |      |        |      |   |       |   |   |       |  
|Net-of-tax amount                                     |  | $    | 2,816  |      | $ | 1,402 |   | $ | 344   |  
|                                                      |  |      |        |      |   |       |   |   |       |  

14. Regulatory Matters

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

Quantitative
measures established by regulation to ensure capital adequacy require the
Corporation and its subsidiary bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital to risk-weighted assets,
and of Tier 1 capital to average adjusted assets. As of December 31, 2009, the
subsidiary bank and the Corporation are categorized as well-capitalized for all
three ratios under the regulatory framework. The subsidiary bank was
categorized as well-capitalized for all three ratios under the regulatory
framework, while the Corporation was classified as well-capitalized for two
ratios and adequately-capitalized for one ratio at December 31, 2008.

The most
recent notifications, at December 31, 2009 and 2008, from the federal banking
agencies categorized the subsidiary bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Corporation and the subsidiary bank must maintain total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the
table that follows, at December 31, 2009.

The
Corporations and the subsidiary banks actual capital amounts and ratios as of
December 31, 2009 and 2008 are as follows:

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

25

---



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

|                                              |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|--------------------------------------------- |  | ------ | ------ | ---------------------------- |  | ----------------------------------------------------------------------------- | - | ----- | ------ | ------ |  | ----- | - | - | ------ |  |  | ----- | -
|                                              |  | Actual |        | Minimum Capital
 Requirement |  | Minimum
 To Be Well-
 Capitalized Under
 Prompt Corrective
 Action Provisions |  
|                                              |  | Amount |        | Ratio                        |  | Amount                                                                        |   | Ratio |        | Amount |  | Ratio |  
|                                              |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |  
|As of December 31, 2008:                      |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|                                              |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        | 
|Total Capital (to risk-weighted assets):      |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|Princeton National Bancorp, Inc.              |  | $      | 72,112 |                              |  | 8.30                                                                          | % | $     | 69,490 |        |  | 8.00  | % | $ | 86,862 |  |  | 10.00 | %
|Citizens First National Bank                  |  |        | 86,935 |                              |  | 10.00                                                                         | % |       | 69,528 |        |  | 8.00  | % |   | 86,909 |  |  | 10.00 | %
|                                              |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        | 
|Tier 1 Capital (to risk-weighted assets):     |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|Princeton National Bancorp, Inc.              |  | $      | 67,048 |                              |  | 7.72                                                                          | % | $     | 34,745 |        |  | 4.00  | % | $ | 52,117 |  |  | 6.00  | %
|Citizens First National Bank                  |  |        | 81,870 |                              |  | 9.42                                                                          | % |       | 34,764 |        |  | 4.00  | % |   | 52,146 |  |  | 6.00  | %
|                                              |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        | 
|Tier 1 Capital (to average adjusted
 assets): |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  
|Princeton National Bancorp, Inc.              |  | $      | 67,048 |                              |  | 6.22                                                                          | % | $     | 43,132 |        |  | 4.00  | % | $ | 53,916 |  |  | 5.00  | %
|Citizens First National Bank                  |  |        | 81,870 |                              |  | 7.59                                                                          | % |       | 43,127 |        |  | 4.00  | % |   | 53,909 |  |  | 5.00  | %
|                                              |  |        |        |                              |  |                                                                               |   |       |        |        |  |       |   |   |        |  |  |       |  

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

15. Employee, Officer and Director Benefit
Plans

The
subsidiary bank has a defined contribution investment 401(k) plan. Under this
plan employees could elect to contribute, on a tax-deferred basis, up to a
maximum of $17 ($23 for those employees eligible to make catch-up contributions).
In addition, the subsidiary bank will match employees contributions up to
three percent of each employees salary and match 50% of the next two percent
contributed. The subsidiary banks contribution to the defined contribution
investment 401(k) plan for 2009, 2008 and 2007 was $438, $404 and $410,
respectively.

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

The
subsidiary bank also has a profit sharing plan. Annual contributions to the
subsidiary banks plan are based on a formula. The total contribution is at the
discretion of the Board of Directors. The cost of the profit sharing plan
charged to operating expense was $142 in 2009, $409 in 2008 and $350 in 2007.

Stock Based Compensation Plan

Additionally,
the Corporation has non-qualified stock option plans (the plans) for the
benefit of employees and directors of the subsidiary bank, as well as directors
of the Corporation. The plans permit the grant of share options and shares for
up to 802,500 shares of common stock. The Corporation believes that such awards
better align the interests of its employees with those of its stockholders.
Option awards are granted with an exercise price equal to the market price of
the Corporations stock at the date of grant. The option awards generally vest
based on 3 years of continuous service and have 10-year contractual terms.

The fair
value of each option award is estimated on the date of grant using a
Black-Scholes closed-form model that uses the assumptions noted in the
following table. Expected volatility is based on historical volatility of the
Corporations stock and other factors. The Corporation uses historical data to
estimate option exercise and employee termination within the valuation model.
The expected term of the options granted is derived from the Corporations
historical option exercise experience and represents the period of time that
options granted are expected to be outstanding. The risk-free rate for periods
within the contractual life of the option is based on the U.S. Treasury yield
curve in effect at the time of the grant. The following assumptions were used
in estimating the fair value for options granted in 2009, 2008 and 2007:

|                          |  |  |        |   |  |        |   |  |        |  
|------------------------- |  |  | ------ | - |  | ------ | - |  | ------ | -
|                          |  |  | 2009   |   |  | 2008   |   |  | 2007   |  
|Expected
 volatility      |  |  | .380   |   |  | .180   |   |  | .110   |  
|Expected
 dividends       |  |  | 3.56   | % |  | 4.96   | % |  | 4.03   | %
|Expected
 term (in years) |  |  | 3 yrs. |   |  | 3 yrs. |   |  | 3 yrs. |  
|Risk-free
 rate           |  |  | 1.70   | % |  | 1.00   | % |  | 3.07   | %

A summary of
option activity under the Plan as of December 31, 2009, 2008 and 2007, and
changes during the years then ended, is presented as follows:

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

26

---



The
intrinsic value of the outstanding shares and the options exercisable noted
above excludes 523,211 shares and 375,994 shares, respectively, which were
anti-dilutive for 2009.

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

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

|                                 |  |        |         |                                    |   |                                                 |  |                             |           |  |   |     | 
|-------------------------------- |  | ------ | ------- | ---------------------------------- | - | ----------------------------------------------- |  | --------------------------- | --------- |  | - | --- | 
|                                 |  | 2007   |         |                                    |   |                                                 | 
|                                 |  | Shares |         | Weighted
 Average
 Exercise
 Price |   | Weighted
 Average
 Remaining
 Contractual
 Term |  | Aggregate
 Intrinsic
 Value |          
|                                 |  |        |         |                                    |   |                                                 |  |                             |          
|Outstanding,
 beginning of year  |  |        | 319,536 |                                    | $ | 29.61                                           |  |                             |           |  |   |     | 
|Granted                          |  |        | 86,750  |                                    |   | 24.84                                           |  |                             |           |  |   |     | 
|Exercised                        |  |        | (500    | )                                  |   | 21.15                                           |  |                             |           |  |   |     | 
|Forfeited or
 expired            |  |        | (1,600  | )                                  |   | 32.81                                           |  |                             |           |  |   |     | 
|                                 |  |        |         |                                    |   |                                                 |  |                             |           |  |   |     | 
|Outstanding,
 end of year        |  |        | 404,186 |                                    |   | 28.57                                           |  |                             | 7.86 yrs. |  | $ | 208 | 
|                                 |  |        |         |                                    |   |                                                 |  |                             |           |  |   |     | 
|Options
 exercisable end of year |  |        | 262,247 |                                    | $ | 29.01                                           |  |                             | 6.92 yrs. |  | $ | 208 | 
|                                 |  |        |         |                                    |   |                                                 |  |                             |           |  |   |     | 

The
intrinsic value of the outstanding shares and the options exercisable noted
above excludes 366,566 shares and 244,627 shares, respectively, which were
anti-dilutive for 2007.

The
weighted-average grant date fair value of options granted during the years
2009, 2008 and 2007 was $133, $31 and $103, respectively. The total intrinsic
value of options exercised during the years ended December 31, 2009, 2008 and
2007 was $0, $21 and $2, respectively.

A
summary of the status of the Corporations non-vested shares and changes during
the year ended December 31, 2009, 2008 and 2007 is presented below:

|                               |  |        |         |                                           |   |      | 
|------------------------------ |  | ------ | ------- | ----------------------------------------- | - | ---- | 
|                               |  | 2009   |        
|                               |  | Shares |         | Weighted
 Average
 Grant-Date
 Fair Value |  
|                               |  |        |         |                                           |  
|Non-vested, beginning of year  |  |        | 165,019 |                                           | $ | 0.59 | 
|Granted                        |  |        | 63,150  |                                           |   | 2.11 | 
|Vested                         |  |        | (80,952 | )                                         |   | 1.09 | 
|Forfeited                      |  |        | -0-     |                                           |   | n/a  | 
|                               |  |        |         |                                           |   |      | 
|Non-vested, end of year        |  |        | 147,217 |                                           | $ | 0.97 | 
|                               |  |        |         |                                           |   |      | 
|                               |  |        |         |                                           |   |      | 
|                               |  | 2008   |        
|                               |  | Shares |         | Weighted
 Average
 Grant-Date
 Fair Value |  
|                               |  |        |         |                                           |  
|Non-vested,
 beginning of year |  |        | 141,939 |                                           | $ | 1.43 | 
|Granted                        |  |        | 86,125  |                                           |   | 0.36 | 
|Vested                         |  |        | (37,495 | )                                         |   | 1.43 | 
|Forfeited                      |  |        | (25,550 | )                                         |   | 1.43 | 
|                               |  |        |         |                                           |   |      | 
|Non-vested,
 end of year       |  |        | 165,019 |                                           | $ | 0.59 | 
|                               |  |        |         |                                           |   |      | 

27

---



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

|                               |  |        |         |                                           |   |      | 
|------------------------------ |  | ------ | ------- | ----------------------------------------- | - | ---- | 
|                               |  | 2007   |        
|                               |  | Shares |         | Weighted
 Average
 Grant-Date
 Fair Value |  
|                               |  |        |         |                                           |  
|Non-vested,
 beginning of year |  |        | 83,783  |                                           | $ | 1.80 | 
|Granted                        |  |        | 86,750  |                                           |   | 1.19 | 
|Vested                         |  |        | (27,594 | )                                         |   | 1.80 | 
|Forfeited                      |  |        | (1,000  | )                                         |   | 1.80 | 
|                               |  |        |         |                                           |   |      | 
|Non-vested,
 end of year       |  |        | 141,939 |                                           | $ | 1.43 | 
|                               |  |        |         |                                           |   |      | 

As
of December 31, 2009, there was $188 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
plan. That cost is expected to be recognized over a weighted-average period of
3 years. The total fair value of shares vested during the years ended December
31, 2009, 2008, and 2007, was $88, $54 and $50, respectively.

16. Pension and Other Post-Retirement
Benefits

Employee Health Benefit Plan

The
Corporation does not have a defined benefit pension plan. The Corporation does
have a defined contribution investment plan which is discussed in footnote 15
(Employee, Officer, and Director Benefit Plans). The Corporation offers
certain retirees the opportunity to continue benefits in the subsidiary banks
Employee Health Benefit Plan. The Corporations level of contribution is based
upon an age, service formula, date of employment and retirement date. Employees
hired prior to October 1, 1994 who retired prior to July 1, 2008 were eligible
to receive benefits under the Banks Health Benefit Plan for life. All
employees hired on or before October 1, 1994 previously were allowed coverage
for life. The plan was amended on December 31, 2007 to require employees hired
on or before October 1, 1994 who retire after July 1, 2008 to convert to a
Medicare Supplement Plan at age 65. Coverage stops at age 65 for employees
hired after October 1, 1994. The Corporation uses a December 31 measurement
date for its plan. Information about the plans funded status follows:

|                                      |  |                                 |       |      |   |       |  
|------------------------------------- |  | ------------------------------- | ----- | ---- | - | ----- | -
|                                      |  | Post Retirement Health Benefits |      
|                                      |  | 2009                            |       | 2008 |  
|Change in
 benefit obligation         |  |                                 |       |      |   |       |  
|Beginning of year                     |  | $                               | 1,100 |      | $ | 1,096 |  
|Service cost                          |  |                                 | 23    |      |   | 20    |  
|Interest cost                         |  |                                 | 58    |      |   | 66    |  
|Amortization of transition obligation |  |                                 | (16   | )    |   | (16   | )
|Amortization of prior service cost    |  |                                 | (62   | )    |   | (62   | )
|Actuarial loss                        |  |                                 | 56    |      |   | 69    |  
|Benefits paid                         |  |                                 | (44   | )    |   | (73   | )
|                                      |  |                                 |       |      |   |       |  
|Funded status at end of year          |  | $                               | 1,115 |      | $ | 1,100 |  
|                                      |  |                                 |       |      |   |       |  

The
components of the 2009, 2008, and 2007 net periodic post-retirement benefit
cost are shown below:

|                                           |  |      |     |      |   |      |   |   |     | 
|------------------------------------------ |  | ---- | --- | ---- | - | ---- | - | - | --- | 
|                                           |  | 2009 |     | 2008 |   | 2007 |  
|Service cost                               |  | $    | 23  |      | $ | 20   |   | $ | 37  | 
|Interest
 cost                             |  |      | 58  |      |   | 66   |   |   | 92  | 
|Amortization
 of transition obligation     |  |      | -0- |      |   | -0-  |   |   | 16  | 
|Amortization
 of prior service cost        |  |      | (62 | )    |   | (62  | ) |   | -0- | 
|Amortization
 of net loss                  |  |      | 56  |      |   | 69   |   |   | 58  | 
|                                           |  |      |     |      |   |      |   |   |     | 
|Net periodic
 post-retirement benefit cost |  | $    | 75  |      | $ | 93   |   | $ | 203 | 
|                                           |  |      |     |      |   |      |   |   |     | 

Other
changes in benefit obligations recognized in other comprehensive income (loss):

|                                                                            |  |                                 |      |      |   |     |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ---- | ---- | - | --- | -
|                                                                            |  | Post Retirement Health Benefits |     
|                                                                            |  | 2009                            |      | 2008 |  
|                                                                            |  |                                 |      |      |  
|Net loss                                                                    |  | $                               | (88  | )    | $ | -0- |  
|Prior
 service cost recognized                                              |  |                                 | 62   |      |   | 16  |  
|                                                                            |  |                                 |      |      |   |     |  
|Total
 recognized in other comprehensive income (loss)                      |  |                                 | (26  | )    |   | 16  |  
|                                                                            |  |                                 |      |      |   |     |  
|Total
 recognized in net periodic benefit cost and other comprehensive loss |  | $                               | (101 | )    | $ | (77 | )
|                                                                            |  |                                 |      |      |   |     |  

The
estimated net loss, prior service cost and transition obligation for the
defined benefit plan that will be amortized from accumulated other
comprehensive income (loss) into net periodic benefit cost over the next fiscal
year is a net loss of $9.

28

---



Amounts
recognized in the balance sheets:

|            |  |                                 |       |      |   |       | 
|----------- |  | ------------------------------- | ----- | ---- | - | ----- | 
|            |  | Post Retirement Health Benefits |      
|            |  | 2009                            |       | 2008 |  
|            |  |                                 |       |      |  
|Liabilities |  | $                               | 1,115 |      | $ | 1,100 | 

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

|                               |  |                                 |     |      |   |     | 
|------------------------------ |  | ------------------------------- | --- | ---- | - | --- | 
|                               |  | Post Retirement Health Benefits |    
|                               |  | 2009                            |     | 2008 |  
|                               |  |                                 |     |      |  
|Net loss                       |  | $                               | (88 | )    |   | -0- | 
|Prior
 service cost recognized |  |                                 | 62  |      |   | -0- | 
|Transition
 obligation         |  |                                 | -0- |      |   | 16  | 
|                               |  |                                 |     |      |   |     | 
|                               |  | $                               | (26 | )    | $ | 16  | 
|                               |  |                                 |     |      |   |     | 

The
accumulated benefit obligation for all defined benefit plans was $1,115 and
$1,100 at December 31, 2009 and 2008, respectively. Significant assumptions
include:

|                                                                    |  |                                 |      |      |  |     |  
|------------------------------------------------------------------- |  | ------------------------------- | ---- | ---- |  | --- | -
|                                                                    |  | Post Retirement Health Benefits |     
|                                                                    |  | 2009                            |      | 2008 | 
|                                                                    |  |                                 |      |      | 
|Weighted average assumptions used to determine
 benefit obligation: |  |                                 |      |      |  |     |  
|Discount rate                                                       |  |                                 | 5.75 | %    |  | 6.0 | %
|Rate of compensation increase                                       |  |                                 | n/a  |      |  | n/a |  
|                                                                    |  |                                 |      |      |  |     |  
|Weighted average assumptions used to
 determine benefit cost:       |  |                                 |      |      |  |     |  
|Discount rate                                                       |  |                                 | 5.75 | %    |  | 6.0 | %
|Expected return on plan assets                                      |  |                                 | n/a  |      |  | n/a |  
|Rate of compensation increase                                       |  |                                 | n/a  |      |  | n/a |  

For
measurement purposes, a 7.0% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2009 and 2008, respectively. The
rate was assumed to decrease gradually to 5.00% by the year 2014 and remain at
that level thereafter.

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

|                                                         |  |                               |   |                               |  |  |  |   |     |   | 
|-------------------------------------------------------- |  | ----------------------------- | - | ----------------------------- |  |  |  | - | --- | - | 
|                                                         |  | 1-Percentage-
 Point Increase |   | 1-Percentage-
 Point Decrease | 
|Effect on
 total of service and interest cost components |  |                               | $ | 8                             |  |  |  | $ | (7  | ) | 
|Effect on
 post-retirement benefit obligation            |  |                               |   | 81                            |  |  |  |   | (72 | ) | 

The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid as of December 31, 2009:

|          |  |                                  |   |     |  | 
|--------- |  | -------------------------------- | - | --- |  | 
|          |  | Post Retirement
 Health Benefits |  
|          |  |                                  |  
|2010      |  |                                  | $ | 51  |  | 
|2011      |  |                                  |   | 59  |  | 
|2012      |  |                                  |   | 48  |  | 
|2013      |  |                                  |   | 59  |  | 
|2014      |  |                                  |   | 67  |  | 
|2015-2019 |  |                                  |   | 485 |  | 

Split Dollar Life Insurance

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

17. Fair Value of Financial Instruments

Effective
January 1, 2008, the Corporation adopted Financial Accounting Standards Board
Accounting Standards Codification 820 (ASC 820), Fair Value Measurements. ASC
820 defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. ASC 820 has been applied
prospectively as of the beginning of the period.

29

---



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

ASC
820 defines the fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. ASC 820 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.

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

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

Following is a description of the
valuation methodologies used for instruments measured at fair value on a
recurring basis and recognized in the accompanying consolidated balance
sheets.

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

The
following table presents the Corporations assets that are measured at fair
value on a recurring basis and the level within the ASC 820 hierarchy in which
the fair value measurements fall as of December 31, 2009 and 2008:

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

|                                                                                             |  |            |         |                                                                |                               |                                               |     |                                           |  |  |   |         |  |  |  |   |     |  | 
|-------------------------------------------------------------------------------------------- |  | ---------- | ------- | -------------------------------------------------------------- | ----------------------------- | --------------------------------------------- | --- | ----------------------------------------- |  |  | - | ------- |  |  |  | - | --- |  | 
|                                                                                             |  |            |         |                                                                | Fair Value Measurements Using |                                               |     |                                           | 
|                                                                                             |  |            |         |                                                                |                               |                                               |     |                                           | 
|December 31, 2008                                                                            |  | Fair
Value |         | Quoted
Prices in
Active Markets for
Identical Assets
(Level 1) |                               | Significant
Other
Observable Inputs
(Level 2) |     | Significant
Unobservable
Inputs
(Level 3) | 
|                                                                                             |  |            |        
|Available-for-sale:                                                                          |  |            |         |                                                                |                               |                                               |     |                                           |  |  |   |         | 
|United States Government and Federal agency and U.S. Government
sponsored enterprises (GSEs) |  | $          | 92,198  |                                                                |                               | $                                             | -0- |                                           |  |  | $ | 92,198  |  |  |  | $ | -0- |  | 
|State and Municipal                                                                          |  |            | 89,728  |                                                                |                               |                                               | -0- |                                           |  |  |   | 89,728  |  |  |  |   | -0- |  | 
|Collateralized mortgage obligations:                                                         |  |            |         |                                                                |                               |                                               |     |                                           |  |  |   |         |  |  |  |   |     |  | 
|GSE Residential                                                                              |  |            | 54,957  |                                                                |                               |                                               | -0- |                                           |  |  |   | 54,957  |  |  |  |   | -0- |  | 
|                                                                                             |  |            |         |                                                                |                               |                                               |     |                                           |  |  |   |         |  |  |  |   |     |  | 
|Total                                                                                        |  | $          | 236,883 |                                                                |                               | $                                             | -0- |                                           |  |  | $ | 236,883 |  |  |  | $ | -0- |  | 
|                                                                                             |  |            |         |                                                                |                               |                                               |     |                                           |  |  |   |         |  |  |  |   |     |  | 

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

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

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

Impaired loans that are collateral dependent are
classified within Level 3 of the fair value hierarchy when impairment is
determined using the fair value method.

Mortgage Servicing Rights - The fair value
used to determine the valuation allowance is estimated using discounted cash
flow models. Due to the nature of the valuation inputs, mortgage servicing
rights are classified within Level 3 of the hierarchy.

30

---



Goodwill -The fair value is estimated
using recent market transactions on similar assets and discounted cash flows that are observable or
that can be corrobrated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy.

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

The
following table presents the fair value measurement of assets and liabilities
measured at fair value on a nonrecurring basis and the level within the ASC 820
fair value hierarchy in which the fair value measurements fall at December 31,
2009 and 2008:

|                                      |  |            |        |                                                                |                               |                                               |  |                                           |        |  |  |   |        |  | 
|------------------------------------- |  | ---------- | ------ | -------------------------------------------------------------- | ----------------------------- | --------------------------------------------- |  | ----------------------------------------- | ------ |  |  | - | ------ |  | 
|                                      |  |            |        |                                                                | Fair Value Measurements Using |                                               |  |                                           |       
|                                      |  |            |        |                                                                |                               |                                               |  |                                           |       
|December
31, 2009                     |  | Fair Value |        | Quoted Prices in
Active Markets for
Identical Assets
(Level 1) |                               | Significant Other
Observable Inputs
(Level 2) |  | Significant
Unobservable
Inputs
(Level 3) |       
|                                      |  |            |       
|Impaired loans (collateral
dependent) |  | $          | 7,970  |                                                                |                               | -0-                                           |  |                                           | -0-    |  |  | $ | 7,970  |  | 
|Mortgage servicing rights             |  |            | 3,285  |                                                                |                               | -0-                                           |  |                                           | -0-    |  |  |   | 3,285  |  | 
|Other real estate owned               |  |            | 17,658 |                                                                |                               | -0-                                           |  |                                           | -0-    |  |  |   | 17,658 |  | 
|Goodwill                              |  |            | 24,521 |                                                                |                               | -0-                                           |  |                                           | 24,521 |  |  |   | -0-    |  | 

|                                      |  |            |       |                                                                |                               |                                               |  |                                           |     |  |  |         | 
|------------------------------------- |  | ---------- | ----- | -------------------------------------------------------------- | ----------------------------- | --------------------------------------------- |  | ----------------------------------------- | --- |  |  | ------- | 
|                                      |  |            |       |                                                                | Fair Value Measurements Using |                                               |  |                                           |    
|                                      |  |            |       |                                                                |                               |                                               |  |                                           |    
|December
31, 2008                     |  | Fair Value |       | Quoted Prices in
Active Markets for
Identical Assets
(Level 1) |                               | Significant Other
Observable Inputs
(Level 2) |  | Significant
Unobservable
Inputs
(Level 3) |    
|                                      |  |            |      
|Impaired loans (collateral
dependent) |  | $          | 2,494 |                                                                |                               | -0-                                           |  |                                           | -0- |  |  | $ 2,494 | 

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

Estimated
fair values have been determined by the Corporation using the best available
data and an estimation methodology suitable for each category of financial
instruments. For those loans and deposits with floating interest rates, it is
presumed that estimated fair values generally approximate the recorded book
balances. The estimation methodologies used, the estimated fair values and the
recorded book balances at December 31, 2009 and 2008, were as follows:

|                                                            |  |                   |           |                   |   |                |  |            |           |  |   |           | 
|----------------------------------------------------------- |  | ----------------- | --------- | ----------------- | - | -------------- |  | ---------- | --------- |  | - | --------- | 
|                                                            |  | December 31, 2009 |           | December 31, 2008 |  
|                                                            |  |                   |           |                   |  
|                                                            |  | Carrying
Value    |           | Fair
Value        |   | Carrying
Value |  | Fair
Value |          
|                                                            |  |                   |           |                   |   |                |  |            |          
|                                                            |  |                   |           |                   |   |                |  |            |           |  |   |           | 
|Financial
Assets:                                           |  |                   |           |                   |   |                |  |            |           |  |   |           | 
|Cash and due from banks                                     |  | $                 | 15,546    |                   | $ | 15,546         |  | $          | 19,943    |  | $ | 19,943    | 
|Interest-bearing deposits in financial institutions         |  |                   | 55,527    |                   |   | 55,527         |  |            | 98        |  |   | 98        | 
|Investment securities                                       |  |                   | 301,267   |                   |   | 301,805        |  |            | 251,115   |  |   | 251,344   | 
|Loans, net, including loans held-for-sale                   |  |                   | 789,295   |                   |   | 793,674        |  |            | 787,928   |  |   | 793,411   | 
|Accrued interest receivable                                 |  |                   | 9,267     |                   |   | 9,267          |  |            | 9,693     |  |   | 9,693     | 
|                                                            |  |                   |           |                   |   |                |  |            |           |  |   |           | 
|Total Financial Assets                                      |  | $                 | 1,170,902 |                   | $ | 1,175,819      |  | $          | 1,068,777 |  | $ | 1,074,489 | 
|                                                            |  |                   |           |                   |   |                |  |            |           |  |   |           | 
|                                                            |  |                   |           |                   |   |                |  |            |           |  |   |           | 
|Financial
Liabilities:                                      |  |                   |           |                   |   |                |  |            |           |  |   |           | 
|Non-interest-bearing demand deposits                        |  | $                 | 136,026   |                   | $ | 136,026        |  | $          | 110,559   |  | $ | 110,559   | 
|Interest-bearing deposits                                   |  |                   | 939,513   |                   |   | 945,637        |  |            | 851,573   |  |   | 862,165   | 
|Borrowings                                                  |  |                   | 104,848   |                   |   | 119,301        |  |            | 118,016   |  |   | 127,816   | 
|Accrued interest payable                                    |  |                   | 2,999     |                   |   | 2,999          |  |            | 4,472     |  |   | 4,472     | 
|                                                            |  |                   |           |                   |   |                |  |            |           |  |   |           | 
|Total Financial Liabilities                                 |  | $                 | 1,183,386 |                   | $ | 1,203,963      |  | $          | 1,084,620 |  | $ | 1,105,012 | 
|Unrecognized financial instruments (net of contract amount) |  |                   |           |                   |   |                |  |            |           |  |   |           | 
|Commitments to originate loans                              |  |                   | -0-       |                   |   | -0-            |  |            | -0-       |  |   | -0-       | 
|Lines of credit                                             |  |                   | -0-       |                   |   | -0-            |  |            | -0-       |  |   | -0-       | 
|                                                            |  |                   |           |                   |   |                |  |            |           |  |   |           | 

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

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

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

31

---



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

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.

18. Undistributed Earnings of Subsidiary Bank

National
banking regulations and capital guidelines limit the amount of dividends that
may be paid by banks. At December 31, 2009, the subsidiary bank had $0
available for dividends. Additionally, according to the guidelines, at January
1, 2010, the subsidiary bank had $0 available for dividends. Future dividend
payments by the subsidiary bank will be dependent upon individual regulatory
capital requirements and levels of profitability. Since the Corporation is a
legal entity, separate and distinct from the bank, the dividends of the
Corporation are not subject to such bank regulatory guidelines.

19. Commitments, Contingencies and Credit Risk

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

Foreclosed
assets held for sale include residential real estate and commercial and
residential real estate development properties. Of the $17,658 held in
foreclosed assets as of December 31, 2009, $11,927 was commercial real estate
development; $4,404 was residential real estate; $750 was residential real
estate development; and $577 was commercial. The carrying value reflects
managements best estimate of the amount to be realized from the sale of the
property. While the estimate is based on a valuation by an independent
appraiser, there have been no recent sales of comparable properties in the area
to consider in preparing the valuation, and the market for such properties is
limited. Therefore, the amount that the Corporation realizes from the sale of
the property could differ materially in the near term from the carrying value
reflected in these financial statements.

The current protracted economic
decline continues to present financial institutions with circumstances and
challenges, which in some cases have resulted in large and unanticipated
declines in fair values of investments and other assets, constraints on
liquidity and capital and significant credit quality problems, including severe
volatility in the valuation of real estate and other collateral supporting
loans.

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

Also
as discussed further in Note 5, the Corporation has concentrations in
agricultural production loans and agricultural real estate loans. During 2009,
prices for corn, soybeans and livestock remained lower than previous years and,
due to weather patterns in Illinois, crops were late in being harvested. These
issues could significantly affect the repayment ability for many agricultural
loan customers.

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

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

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

The
subsidiary banks exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional amount
of those instruments. The subsidiary bank uses the same credit policies in
making commitments and conditional obligations as they do for on-balance-sheet
instruments. At December 31, 2009, commitments to extend credit and standby
letters of credit were approximately $129,142 and $3,970, respectively. At
December 31, 2008, commitments to extend credit and standby letters of credit
were approximately $155,603 and $5,886, respectively.

Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The subsidiary bank evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary, by the subsidiary bank upon extension of credit is based on
managements credit evaluation of the counterparty. Collateral held varies, but
may include real estate, accounts receivable, inventory, property, plant and
equipment and income-producing properties.

32

---



Standby
letters of credit are conditional commitments issued by the subsidiary bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that
involved in extending loan facilities to customers. The subsidiary bank secures
the standby letters of credit with the same collateral used to secure the loan.
The maximum amount of credit that would be extended under standby letters of
credit is equal to the off-balance sheet contract amount. At December 31, 2009
and 2008, the standby letters of credit had terms that expire in one year or
less.

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

20. FDIC One-Time Assessment Credit

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

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

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

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

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

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

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

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

Based
on a Black-Scholes options pricing model, the common stock warrants have been
assigned a fair value of $0.97 per warrant, or $150,000 in the aggregate, as of
January 23, 2009. As a result, $150,000 has been recorded as the discount on
the preferred stock obtained above and will be accreted as a reduction in net
income available for common stockholders over the next five years at
approximately $30,000 per year. For purposes of these calculations, the fair
value of the common stock warrants as of January 23, 2009 was estimated using
the Black-Scholes option pricing model and the following assumptions:

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

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

33

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

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

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

Condensed Balance Sheets

|                                                   |  |             |         |      |   |         |  
|-------------------------------------------------- |  | ----------- | ------- | ---- | - | ------- | -
|                                                   |  | December 31 |        
|                                                   |  | 2009        |         | 2008 |  
|Assets                                             |  |             |         |      |   |         |  
|Cash                                               |  | $           | 840     |      | $ | 663     |  
|Interest-bearing deposits in subsidiary bank       |  |             | 554     |      |   | 180     |  
|Other assets                                       |  |             | 1,058   |      |   | 1,423   |  
|Investment in subsidiary bank                      |  |             | 97,425  |      |   | 112,156 |  
|                                                   |  |             |         |      |   |         |  
|Total assets                                       |  |             | 99,877  |      |   | 114,422 |  
|                                                   |  |             |         |      |   |         |  
|Liabilities                                        |  |             |         |      |   |         |  
|Borrowings                                         |  | $           | 25,000  |      | $ | 41,050  |  
|Other liabilities                                  |  |             | 217     |      |   | 901     |  
|                                                   |  |             |         |      |   |         |  
|Total liabilities                                  |  |             | 25,217  |      |   | 41,951  |  
|                                                   |  |             |         |      |   |         |  
|Stockholders Equity                               |  |             |         |      |   |         |  
|Preferred stock                                    |  |             | 24,958  |      |   | -0-     |  
|Common stock                                       |  |             | 22,391  |      |   | 22,391  |  
|Common stock warrants                              |  |             | 150     |      |   | -0-     |  
|Surplus                                            |  |             | 18,423  |      |   | 18,420  |  
|Retained earnings                                  |  |             | 29,851  |      |   | 54,329  |  
|Accumulated other comprehensive income, net of tax |  |             | 2,816   |      |   | 1,402   |  
|Less: Cost of treasury shares                      |  |             | (23,929 | )    |   | (24,071 | )
|                                                   |  |             |         |      |   |         |  
|Total stockholders equity                         |  |             | 74,660  |      |   | 72,471  |  
|                                                   |  |             |         |      |   |         |  
|Total liabilities and stockholders equity         |  | $           | 99,877  |      | $ | 114,422 |  
|                                                   |  |             |         |      |   |         |  

Condensed Statements of Income

|                                                                                  |  |                                 |         |      |   |       |   |   |       |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- | - | ----- | - | - | ----- | -
|                                                                                  |  | For the Years Ended December 31 |        
|                                                                                  |  | 2009                            |         | 2008 |   | 2007  |  
|Income                                                                            |  |                                 |         |      |   |       |   |   |       |  
|Dividends received from subsidiary bank                                           |  | $                               | 5,200   |      | $ | 5,600 |   | $ | 4,300 |  
|Interest income                                                                   |  |                                 | 54      |      |   | 5     |   |   | 7     |  
|Other income                                                                      |  |                                 | 44      |      |   | 43    |   |   | 24    |  
|                                                                                  |  |                                 |         |      |   |       |   |   |       |  
|Total income                                                                      |  |                                 | 5,298   |      |   | 5,648 |   |   | 4,331 |  
|                                                                                  |  |                                 |         |      |   |       |   |   |       |  
|Expenses                                                                          |  |                                 |         |      |   |       |   |   |       |  
|Interest expense                                                                  |  |                                 | 1,517   |      |   | 2,100 |   |   | 2,209 |  
|Amortization and depreciation                                                     |  |                                 | 5       |      |   | 7     |   |   | 7     |  
|Other expenses                                                                    |  |                                 | 521     |      |   | 253   |   |   | 264   |  
|                                                                                  |  |                                 |         |      |   |       |   |   |       |  
|Total expenses                                                                    |  |                                 | 2,043   |      |   | 2,360 |   |   | 2,480 |  
|                                                                                  |  |                                 |         |      |   |       |   |   |       |  
|Income before income taxes and equity in undistributed income of
 subsidiary bank |  |                                 | 3,255   |      |   | 3,288 |   |   | 1,851 |  
|Applicable income tax benefit                                                     |  |                                 | (699    | )    |   | (892  | ) |   | (924  | )
|                                                                                  |  |                                 |         |      |   |       |   |   |       |  
|Income before equity in undistributed income of subsidiary bank                   |  |                                 | 3,954   |      |   | 4,180 |   |   | 2,775 |  
|Equity in undistributed income of subsidiary bank                                 |  |                                 | (25,080 | )    |   | 3,146 |   |   | 3,995 |  
|                                                                                  |  |                                 |         |      |   |       |   |   |       |  
|Net income (loss)                                                                 |  |                                 | (21,126 | )    | $ | 7,326 |   | $ | 6,770 |  
|                                                                                  |  |                                 |         |      |   |       |   |   |       |  
|Dividends on preferred shares                                                     |  |                                 | 1,178   |      |   | -0-   |   |   | -0-   |  
|Accretion of preferred stock discount                                             |  |                                 | 25      |      |   | -0-   |   |   | -0-   |  
|                                                                                  |  |                                 |         |      |   |       |   |   |       |  
|Net income (loss) available to common stockholders                                |  | $                               | (22,329 | )    | $ | 7,326 |   | $ | 6,770 |  
|                                                                                  |  |                                 |         |      |   |       |   |   |       |  

34

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Condensed Statements of Cash Flows

|                                                                                          |  |                                 |         |      |   |        |   |   |         |  
|----------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- | - | ------ | - | - | ------- | -
|                                                                                          |  | For the Years Ended December 31 |        
|                                                                                          |  | 2009                            |         | 2008 |   | 2007   |  
|Operating activities:                                                                     |  |                                 |         |      |   |        |   |   |         |  
|Net income (loss)                                                                         |  | $                               | (21,126 | )    | $ | 7,326  |   | $ | 6,770   |  
|Adjustments to reconcile net income (loss) to net cash provided by
 operating activities: |  |                                 |         |      |   |        |   |   |         |  
|Equity in undistributed income (loss) of subsidiary bank                                  |  |                                 | 25,080  |      |   | (3,146 | ) |   | (3,995  | )
|Amortization of other intangible assets                                                   |  |                                 | 5       |      |   | 7      |   |   | 7       |  
|(Increase) decrease in other assets                                                       |  |                                 | (8,481  | )    |   | (1,882 | ) |   | 5,148   |  
|(Decrease) increase in other liabilities                                                  |  |                                 | (683    | )    |   | 747    |   |   | (208    | )
|                                                                                          |  |                                 |         |      |   |        |   |   |         |  
|Net
 cash provided by (used in) operating activities                                      |  |                                 | (5,205  | )    |   | 3,052  |   |   | 7,722   |  
|                                                                                          |  |                                 |         |      |   |        |   |   |         |  
|Investing Activities:                                                                     |  |                                 |         |      |   |        |   |   |         |  
|Payments related to acquisitions, net of cash and cash equivalents
 acquired              |  |                                 | -0-     |      |   | -0-    |   |   | (10,182 | )
|                                                                                          |  |                                 |         |      |   |        |   |   |         |  
|Net
 cash used in investing activities                                                    |  |                                 | -0-     |      |   | -0-    |   |   | (10,182 | )
|                                                                                          |  |                                 |         |      |   |        |   |   |         |  
|Financing activities:                                                                     |  |                                 |         |      |   |        |   |   |         |  
|Net increase (decrease) in borrowings                                                     |  |                                 | (16,050 | )    |   | 1,500  |   |   | 6,050   |  
|Proceeds from issuance of preferred stock and common stock warrants,
 net of expenses     |  |                                 | 25,020  |      |   | -0-    |   |   | -0-     |  
|Dividends paid on preferred stock                                                         |  |                                 | (1,017  | )    |   | -0-    |   |   | -0-     |  
|Dividends paid on common stock                                                            |  |                                 | (2,311  | )    |   | (3,696 | ) |   | (3,597  | )
|Sale of treasury stock                                                                    |  |                                 | 114     |      |   | 124    |   |   | 175     |  
|Purchase of treasury stock                                                                |  |                                 | -0-     |      |   | (553   | ) |   | (1,459  | )
|Exercise of stock options and issuance of treasury stock                                  |  |                                 | -0-     |      |   | 101    |   |   | 12      |  
|                                                                                          |  |                                 |         |      |   |        |   |   |         |  
|Net
 cash provided by (used in) financing activities                                      |  |                                 | 5,756   |      |   | (2,524 | ) |   | 1,181   |  
|                                                                                          |  |                                 |         |      |   |        |   |   |         |  
|Increase (decrease) in cash and cash equivalents                                          |  |                                 | 551     |      |   | 528    |   |   | (1,279  | )
|Cash and cash equivalents at beginning of year                                            |  |                                 | 843     |      |   | 315    |   |   | 1,594   |  
|                                                                                          |  |                                 |         |      |   |        |   |   |         |  
|Cash and cash equivalents at end of year                                                  |  | $                               | 1,394   |      | $ | 843    |   | $ | 315     |  
|                                                                                          |  |                                 |         |      |   |        |   |   |         |  

35

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

The
following discussion and analysis provides information about the Corporations
financial condition and results of operations for the years ended December 31,
2009, 2008, and 2007. This discussion and analysis should be read in
conjunction with Selected Statistical Data, and the Corporations
Consolidated Financial Statements and the Notes thereto included in this
report.

Overview

The
Corporation reported a net loss available to common stockholders of $(22,329)
for 2009, a decrease of $29,700 (or 404.8%) when compared to net income
available to common stockholders of $7,326 in 2008. Earnings were negatively
impacted throughout the year by the impairment of goodwill of $24,521, an
increase in the provision for loan losses ($11,062 in 2009 versus $2,968 in
2008), an increase in the amount of deposit insurance assessments ($2,584 in
2009 versus $845 in 2008) and an increase in OREO expenses ($1,064 in 2009
versus $201 in 2008). Additionally, the Corporation paid $1,017 in dividends on
preferred stock in 2009, compared to $0 in 2008. Partially offsetting these
items, there was an increase in net interest income and additional gains from
the sales of available-for-sale securities. The following represents the
Corporations net income (loss) available to common stockholders, earnings
(loss) per share and provision for loan loss expense for each quarter of 2009:

|            |  |                   |   |                           |   |           |  |   |       |   |  |  |   |       |  | 
|----------- |  | ----------------- | - | ------------------------- | - | --------- |  | - | ----- | - |  |  | - | ----- |  | 
|            |  | Net Income (Loss) |   | Earnings (Loss) per Share |   | Provision | 
|            |  |                   |   |                           |   |           | 
|1st Quarter |  |                   | $ | 914                       |   |           |  | $ | 0.28  |   |  |  | $ | 1,170 |  | 
|2nd Quarter |  |                   |   | 1,575                     |   |           |  |   | 0.48  |   |  |  |   | 1,465 |  | 
|3rd Quarter |  |                   |   | 440                       |   |           |  |   | 0.13  |   |  |  |   | 2,410 |  | 
|4th Quarter |  |                   |   | (25,258                   | ) |           |  |   | (7.65 | ) |  |  |   | 6,017 |  | 

The
increase in the provision for loan losses in the fourth quarter was the result
of further deterioration of credit and the receipt of updated appraisals in the
Northeast markets, comprised of the following counties: Dekalb, Grundy and
Kane.

Non-interest
expenses, other than the three categories mentioned in the first paragraph,
were less than budget again in 2009. After subtracting the goodwill impairment
loss, total non-interest expense as a percentage of average assets, decreased
to 2.80% in 2009 from 2.81% in 2008. This continues a positive trend over the
past few years and is the lowest level of non-interest expense the Corporation
has seen since the 2.78% recorded in 1989. Non-interest income improved to
1.06% of average total assets for 2009, compared to 1.05% in 2008. Most
categories were down year over year, reflecting an industry trend of lower
service charge income. However, mortgage banking revenue grew by $1,208 over
the past twelve months (due to increased loan production as well as servicing
income from a larger portfolio) and gains from the sale of available-for-sale
securities increased by $1,376 (due to an increase in the number of sales from
re-positioning the portfolio).

In
2009, the Corporation experienced asset growth of $97,600 (or 8.39%), ending
the year at $1,261,000 in total assets. With loan demand somewhat tempered
during the year, the majority of the growth came in the investment portfolio
(increase of $50,200) and in the Corporations liquidity (increase of $54,100).
Additionally, the Corporations other real estate owned increased by $15,200.
On the liability side, total deposits grew by $113,400 (or 11.8%).

Total
stockholders equity increased by $2,189 from $72,471 in 2008 to a year-end
balance of $74,660. There was an increase of $25,083 in 2009 due to the
issuance of preferred shares to the U.S. Treasury in conjunction with the
Capital Purchase Program/Troubled Asset Relief Program (TARP). See Note 21 in
the Notes to Consolidated Financial Statements for additional details.
Offsetting this increase was the net loss resulting from the impairment of
goodwill. The goodwill impairment was due in part to the market in general and
partly to the increase in non-performing loans. Management believes the
allowance for loan losses is sufficient to cover potential losses in the loan
portfolio based on facts known at this time. However, the impact on future
earnings will be dependent on the future economic factors.

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

|     |  |                     |           |                 |  |                     |   |                 |        |                                                      |  |                 |   |  |   |         |   |  |  |         |   
|---- |  | ------------------- | --------- | --------------- |  | ------------------- | - | --------------- | ------ | ---------------------------------------------------- |  | --------------- | - |  | - | ------- | - |  |  | ------- | --
|     |  | Assets at
 Year-End |           | Percent
 Change |  | Equity at
 Year-End |   | Percent
 Change |        | Net Income (Loss)
 available to
 common stockholders |  | Percent
 Change |  
|     |  |                     |           |                 |  |                     |   |                 |        |                                                      |  |                 |  
|2009 |  | $                   | 1,260,730 |                 |  | 8.39                | % | $               | 74,660 |                                                      |  | 3.02            | % |  | $ | (22,329 | ) |  |  | (404.79 | )%
|2008 |  |                     | 1,163,130 |                 |  | 7.63                |   |                 | 72,471 |                                                      |  | 5.63            |   |  |   | 7,326   |   |  |  | 8.21    |   
|2007 |  |                     | 1,080,702 |                 |  | 4.72                |   |                 | 68,607 |                                                      |  | 4.98            |   |  |   | 6,770   |   |  |  | 4.35    |   

Critical Accounting Policies and Use of Significant Estimates

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

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

We
estimate the appropriate level of allowance for loan losses by separately
evaluating impaired and non-impaired loans. A specific allowance is assigned to
an impaired loan when expected cash flows or collateral do not justify the
carrying amount of the loan. The methodology used to assign an allowance to a
non-

36

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impaired loan is more subjective. Generally, the allowance assigned to
non-impaired loans is determined by applying historical loss rates to existing
loans with similar risk characteristics, adjusted for qualitative factors
including the volume and severity of identified classified loans, changes in
economic conditions, changes in credit policies or underwriting standards, and
changes in the level of credit risk associated with specific industries and
markets. Because the economic and business climate in any given industry or
market, and its impact on any given borrower, can change rapidly, the risk
profile of the loan portfolio is continually assessed and adjusted when
appropriate. Notwithstanding these procedures, there still exists the
possibility that our assessment could prove to be significantly incorrect and
that an immediate adjustment to the allowance for loan losses would be
required.

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

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

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

Impairment
of Goodwill and Intangible Assets -Core deposit and
customer relationships, which are intangible assets with a finite life, are
recorded on our balance sheets. These intangible assets were capitalized as a
result of past acquisitions and are being amortized over their estimated useful
lives of up to 15 years. Core deposit intangible assets, with finite lives will
be tested for impairment when changes in events or circumstances indicate that
its carrying amount may not be recoverable. Core deposit intangible assets were
tested for impairment during 2009 and 2008, as part of the goodwill impairment
test and no impairment was deemed necessary.

As a result
of our acquisition activity, goodwill, an intangible asset with an indefinite
life, was reflected on our balance sheet in prior periods. Goodwill is
evaluated for impairment annually, unless there are factors present that
indicate a potential impairment, in which case, the goodwill impairment test is
performed more frequently than annually. Accordingly, as the Corporations
stock price at December 31, 2009 decreased below book value, a goodwill
impairment test was performed and full impairment was deemed necessary (see
Note 8  Goodwill in the Notes to Consolidated Financial Statements).

Mortgaging Service Rights (MSRs) -MSR fair
values are very sensitive to movements in interest rates as expected future net
servicing income depends on the projected outstanding principal balances of the
underlying loans, which can be greatly reduced by prepayments. Prepayments
usually increase when mortgage interest rates decline and decrease when
mortgage interest rates rise. For discussion regarding the impairment of MSRs,
see Note 9  Intangible Assets in the Notes to Consolidated Financial
Statements.

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

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

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

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

Analysis of Results of Operations

Net
Income (Loss).Net income (loss) available to common
stockholders for 2009 decreased by $29,700 (or 404.8%) to $(22,329) (or $(6.76)
per basic and diluted earnings per share available to common stockholders),
from $7,326 (or $2.22 per basic earnings per share available to common
stockholders and $2.21 per diluted earnings per share available to common
stockholders) in 2008. The lower results are due in part to the impairment of
goodwill of $24,521, an increase in provision for loan losses of $6.2 million
and an increase in federal deposit insurance assessments of $1.7 million. In
addition the Corporation paid $1,017 in dividends on preferred stock in 2009,
compared to $0 in 2008. These were partially offset by a $3.1 million
improvement in net interest income and a $1.7 million increase in non-interest
income. For a more detailed review of net interest income, non-interest income
and non-interest expense please refer to those sections contained in this
Managements Discussion and Analysis.

Net income
available to common stockholders for 2008 increased by $556 (or 8.2%) to $7,326
(or $2.22 per basic and $2.21 per diluted earnings per share available to
common stockholders), from $6,770 (or $2.04 basic earnings per share available
to common stockholders and $2.03 diluted earnings per share

37

---



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

available to common stockholders ) in 2007. This increase is due to an
improved net interest margin, which generated an additional $4.5 million in net
interest income when compared to the prior year. This more than offset the
increase in provision for loan losses of $2.3 million.

Net
Interest Income.The Corporation experienced a $3,800
improvement in net interest income, on a taxable-equivalent basis, during 2009,
increasing to $37,525 from $33,739 in 2008, representing an improvement of
11.2%. This positive change was made possible through growth in the balance
sheet and, more importantly, continued emphasis on reducing the Corporations
cost of funds with the lower interest rate environment. Average
interest-earning assets during 2009 increased to $1,092,000 from $980,800 in
2008, representing growth of $111,400 (or 11.4%). As loan demand weakened in
2009, the asset mix of the balance sheet shifted more to investments with the
average balance of investment securities increasing by $62,600 (or 26.3%),
while the average balance of net loans increased just $9,200 (or 1.3%). In
addition, the average balance of interest-bearing deposits increased $45,000 (or
1,614.9%) in 2009, as a result of the Corporations successful efforts to build
liquidity into the balance sheet.

However, on
the liability side, although average interest-bearing liabilities increased by
$105,000 (10.4%) to $1,030,000, the interest expense paid for those liabilities
decreased from $27,301 in 2008 to $22,085 in 2009, a reduction of $5,200 (or
19.1%). This was due to controlled pricing and the efficient use of other
borrowings, along with normal repricing from the low interest-rate environment.
The net yield on interest-earning assets for 2009 remained at the same rate of
3.44% from 2008.

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

|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|--------------------------------------------------------------- |  | -------------------------------- | --------- | -------- | - | ------------ |  | ---------------- | ---- | -------- | - | ------------ |  | ---------------- | ------ | -------- |  | ------------ | - | - | --------- |  | - | ------ |  |  | ---- | -
|                                                                |  | For the Years Ending December 31 |          
|                                                                |  |                                  |          
|                                                                |  | 2009                             |           | 2008     |   | 2007         | 
|                                                                |  | Average
 Balance                 |           | Interest |   | Yield/
 Cost |  | Average
 Balance |      | Interest |   | Yield/
 Cost |  | Average
 Balance |        | Interest |  | Yield/
 Cost |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Average Interest-Earning Assets                                 |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Interest-bearing deposits                                       |  | $                                | 47,760    |          | $ | 114          |  |                  | 0.24 | %        | $ | 2,785        |  | $                | 55     |          |  | 1.97         | % | $ | 2,456     |  | $ | 122    |  |  | 4.97 | %
|Taxable investment securities                                   |  |                                  | 176,871   |          |   | 7,607        |  |                  | 4.30 |          |   | 143,108      |  |                  | 6,834  |          |  | 4.78         |   |   | 152,220   |  |   | 6,822  |  |  | 4.48 |  
|Tax-exempt investment securities (a)                            |  |                                  | 123,723   |          |   | 8,025        |  |                  | 6.49 |          |   | 94,926       |  |                  | 6,284  |          |  | 6.62         |   |   | 89,989    |  |   | 6,518  |  |  | 7.24 |  
|Federal funds sold                                              |  |                                  | 5         |          |   | -0-          |  |                  | 0.00 |          |   | 5,316        |  |                  | 71     |          |  | 1.34         |   |   | 6,706     |  |   | 332    |  |  | 4.95 |  
|Net loans (a) (b)                                               |  |                                  | 743,887   |          |   | 43,864       |  |                  | 5.90 |          |   | 734,672      |  |                  | 47,796 |          |  | 6.51         |   |   | 666,853   |  |   | 50,072 |  |  | 7.51 |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Total interest-earning assets                                   |  |                                  | 1,092,246 |          |   | 59,610       |  |                  | 5.46 |          |   | 980,807      |  |                  | 61,040 |          |  | 6.22         |   |   | 918,224   |  |   | 63,866 |  |  | 6.96 |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Average non-interest-earning assets                             |  |                                  | 156,998   |          |   |              |  |                  |      |          |   | 126,526      |  |                  |        |          |  |              |   |   | 118,000   |  |   |        |  |  |      |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Total average assets                                            |  | $                                | 1,249,244 |          |   |              |  |                  |      |          | $ | 1,107,333    |  |                  |        |          |  |              |   | $ | 1,036,224 |  |   |        |  |  |      |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Average Interest-Bearing Liabilities                            |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Interest-bearing demand deposits                                |  | $                                | 301,035   |          |   | 3,734        |  |                  | 1.24 | %        | $ | 253,982      |  |                  | 3,647  |          |  | 1.44         | % | $ | 238,568   |  |   | 6,567  |  |  | 2.75 | %
|Savings deposits                                                |  |                                  | 66,040    |          |   | 55           |  |                  | 0.08 |          |   | 61,815       |  |                  | 67     |          |  | 0.11         |   |   | 63,357    |  |   | 249    |  |  | 0.39 |  
|Time deposits                                                   |  |                                  | 563,901   |          |   | 15,431       |  |                  | 2.74 |          |   | 506,663      |  |                  | 20,068 |          |  | 3.96         |   |   | 481,725   |  |   | 23,509 |  |  | 4.88 |  
|Interest-bearing demand notes issued to the U.S. Treasury       |  |                                  | 924       |          |   | 0            |  |                  | 0.00 |          |   | 1,099        |  |                  | 15     |          |  | 1.36         |   |   | 1,035     |  |   | 49     |  |  | 4.73 |  
|Federal funds purchased and customer repurchase agreements      |  |                                  | 38,175    |          |   | 424          |  |                  | 1.11 |          |   | 41,584       |  |                  | 757    |          |  | 1.82         |   |   | 34,622    |  |   | 1,556  |  |  | 4.49 |  
|Advances from Federal Home Loan Bank                            |  |                                  | 32,332    |          |   | 924          |  |                  | 2.86 |          |   | 19,362       |  |                  | 647    |          |  | 3.34         |   |   | 6,976     |  |   | 366    |  |  | 5.25 |  
|Trust preferred securities                                      |  |                                  | 25,000    |          |   | 1,420        |  |                  | 5.68 |          |   | 25,000       |  |                  | 1,420  |          |  | 5.68         |   |   | 25,000    |  |   | 1,420  |  |  | 5.68 |  
|Note payable                                                    |  |                                  | 2,375     |          |   | 97           |  |                  | 4.08 |          |   | 15,296       |  |                  | 680    |          |  | 4.45         |   |   | 11,224    |  |   | 789    |  |  | 7.03 |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Total interest-bearing liabilities                              |  |                                  | 1,029,782 |          |   | 22,085       |  |                  | 2.14 |          |   | 924,801      |  |                  | 27,301 |          |  | 2.95         |   |   | 862,507   |  |   | 34,505 |  |  | 4.00 |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Net taxable equivalent yield on average interest-earning assets |  |                                  |           |          | $ | 37,525       |  |                  | 3.44 | %        |   |              |  | $                | 33,739 |          |  | 3.44         | % |   |           |  | $ | 29,361 |  |  | 3.20 | %
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Average non-interest-bearing liabilities                        |  |                                  | 121,578   |          |   |              |  |                  |      |          |   | 113,348      |  |                  |        |          |  |              |   |   | 108,093   |  |   |        |  |  |      |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Average stockholders equity                                    |  |                                  | 97,884    |          |   |              |  |                  |      |          |   | 69,184       |  |                  |        |          |  |              |   |   | 65,624    |  |   |        |  |  |      |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  
|Total average liabilities and stockholders equity              |  | $                                | 1,249,316 |          |   |              |  |                  |      |          | $ | 1,107,333    |  |                  |        |          |  |              |   | $ | 1,036,224 |  |   |        |  |  |      |  
|                                                                |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |           |  |   |        |  |  |      |  

|    |                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Interest income on non-taxable investment securities and non-taxable
 loans includes the effects of taxable-equivalent adjustments, using a tax
 rate of 34% in adjusting interest on tax-exempt securities and tax-exempt
 loans to a taxable equivalent basis. The amount of taxable equivalent adjustments
 were $2,874 in 2009, $2,218 in 2008 and $2,307 in 2007.
|    |                                                                                                                                                                                                                                                                                                                                                                       
|(b) | Includes $(167) in 2009, $32 in 2008 and $165 in 2007 attributable to
 interest from non-accrual loans.                                                                                                                                                                                                                                                               

38

---



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

|                                          |  |      |        |      |   |        |  |   |        | 
|----------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                                          |  | 2009 |        | 2008 |   | 2007   | 
|                                          |  |      |        |      |   |        | 
|Net interest
 income as stated            |  | $    | 34,651 |      | $ | 31,521 |  | $ | 27,054 | 
|Taxable-equivalent adjustment-investments |  |      | 2,729  |      |   | 2,137  |  |   | 2,216  | 
|Taxable-equivalent adjustment-loans       |  |      | 145    |      |   | 81     |  |   | 91     | 
|                                          |  |      |        |      |   |        |  |   |        | 
|Taxable-equivalent
 net interest income   |  | $    | 37,525 |      | $ | 33,739 |  | $ | 29,361 | 
|                                          |  |      |        |      |   |        |  |   |        | 

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

|                                                         |  |      |      |      |  |      |   |  |      |  
|-------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | - |  | ---- | -
|                                                         |  | 2009 |      | 2008 |  | 2007 |  
|                                                         |  |      |      |      |  |      |  
|Net yield on
 interest-earning assets                    |  |      | 3.17 | %    |  | 3.21 | % |  | 2.95 | %
|Taxable equivalent adjustment-investments                |  |      | 0.25 |      |  | 0.22 |   |  | 0.24 |  
|Taxable equivalent adjustment-loans                      |  |      | 0.02 |      |  | 0.01 |   |  | 0.01 |  
|                                                         |  |      |      |      |  |      |   |  |      |  
|Taxable
 equivalent net yield on interest-earning assets |  |      | 3.44 | %    |  | 3.44 | % |  | 3.20 | %
|                                                         |  |      |      |      |  |      |   |  |      |  

During
2008, the Corporation experienced a $4,400 improvement in net interest income,
on a taxable-equivalent basis, increasing to $33,739 from $29,361 in 2007,
representing an improvement of 14.9%. This positive change was made possible
through growth in the balance sheet and an increased focus on reducing the Corporations
cost of funds. Average interest-earning assets during 2008 increased to
$980,800 from $918,200 in 2007, representing growth of $62,600 (or 6.8%). The
asset mix of the balance sheet continued to shift more to loans, as the average
balance of net loans increased $67,800 (or 10.1%), while the average balance of
total investments fell $4,200 (or 1.8%). However, on the liability side,
although average interest-bearing liabilities increased by $62,300 (7.2%) to
$924,800, the interest expense paid for those liabilities decreased from
$34,505 in 2007 to $27,301 in 2008, a reduction of $7,200 (or 20.9%). This was
due to controlled pricing and the efficient use of other borrowings.
Accordingly, the net yield on interest-earning assets, increased from 3.20% in
2007 to 3.44% in 2008. The net yield on interest-earning assets improved during
the first three quarters: from 3.39% in the first quarter, to 3.49% in the
second quarter, to 3.50% in the third quarter. The net yield in the fourth
quarter of 3.38% was negatively impacted by the reversal of interest for loans
that were placed in non-accrual.

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

|                                                             |  |                        |       |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |       |   |   |       |  
|------------------------------------------------------------ |  | ---------------------- | ----- | --------------------- | - | --------------------- | - | --------- | ------ | ------- | - | ----- | - | --------- | ------ | ------- | - | ------ | - | - | ----- | - | - | ----- | - | - | ----- | -
|                                                             |  | Year ended December 31 |      
|                                                             |  |                        |      
|                                                             |  | 2009 compared to 2008  |       | 2008 compared to 2007 |   | 2007 compared to 2006 |  
|                                                             |  | Volume(a)              |       | Rate(a)               |   | Net                   |   | Volume(a) |        | Rate(a) |   | Net   |   | Volume(a) |        | Rate(a) |   | Net    |  
|                                                             |  |                        |       |                       |   |                       |  
|Interest from interest-earning assets                        |  |                        |       |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |       |   |   |       |  
|                                                             |  |                        |       |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |       |   |   |       |  
|Interest-bearing time deposits                               |  | $                      | 498   |                       | $ | (439                  | ) | $         | 59     |         | $ | 11    |   | $         | (78    | )       | $ | (67    | ) | $ | 11    |   | $ | (3    | ) | $ | 8     |  
|Taxable investment securities                                |  |                        | 1,532 |                       |   | (759                  | ) |           | 773    |         |   | (422  | ) |           | 434    |         |   | 12     |   |   | (101  | ) |   | 553   |   |   | 452   |  
|Tax-exempt investment securities (b)                         |  |                        | 1,887 |                       |   | (146                  | ) |           | 1,741  |         |   | 342   |   |           | (576   | )       |   | (234   | ) |   | (748  | ) |   | 265   |   |   | (483  | )
|Federal funds sold                                           |  |                        | (35   | )                     |   | (36                   | ) |           | (71    | )       |   | (44   | ) |           | (217   | )       |   | (261   | ) |   | (154  | ) |   | (13   | ) |   | (167  | )
|Net loans (c)                                                |  |                        | 571   |                       |   | (4,503                | ) |           | (3,932 | )       |   | 4,752 |   |           | (7,028 | )       |   | (2,276 | ) |   | 5,983 |   |   | 2,064 |   |   | 8,047 |  
|                                                             |  |                        |       |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |       |   |   |       |  
|Total income from interest-earning assets                    |  |                        | 4,453 |                       |   | (5,883                | ) |           | (1,430 | )       |   | 4,639 |   |           | (7,465 | )       |   | (2,826 | ) |   | 4,991 |   |   | 2,866 |   |   | 7,857 |  
|                                                             |  |                        |       |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |       |   |   |       |  
|                                                             |  |                        |       |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |       |   |   |       |  
|Expense of interest-bearing liabilities                      |  |                        |       |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |       |   |   |       |  
|                                                             |  |                        |       |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |       |   |   |       |  
|Interest-bearing demand deposits                             |  |                        | 630   |                       |   | (543                  | ) |           | 87     |         |   | 323   |   |           | (3,243 | )       |   | (2,920 | ) |   | 551   |   |   | 1,139 |   |   | 1,690 |  
|Savings deposits                                             |  |                        | 4     |                       |   | (16                   | ) |           | (12    | )       |   | (4    | ) |           | (178   | )       |   | (182   | ) |   | (31   | ) |   | (46   | ) |   | (77   | )
|Time deposits                                                |  |                        | 1,917 |                       |   | (6,554                | ) |           | (4,637 | )       |   | 1,102 |   |           | (4,543 | )       |   | (3,441 | ) |   | 2,327 |   |   | 2,542 |   |   | 4,869 |  
|Interest-bearing demand notes issued to the U.S. Treasury    |  |                        | (1    | )                     |   | (14                   | ) |           | (15    | )       |   | 2     |   |           | (36    | )       |   | (34    | ) |   | 9     |   |   | 1     |   |   | 10    |  
|Federal funds purchased and securities repurchase agreements |  |                        | (50   | )                     |   | (283                  | ) |           | (333   | )       |   | 220   |   |           | (1,019 | )       |   | (799   | ) |   | 100   |   |   | (30   | ) |   | 70    |  
|Advances from Federal Home Loan Bank                         |  |                        | 402   |                       |   | (125                  | ) |           | 277    |         |   | 532   |   |           | (251   | )       |   | 281    |   |   | (35   | ) |   | 26    |   |   | (9    | )
|Trust preferred securities                                   |  |                        | -0-   |                       |   | -0-                   |   |           | -0-    |         |   | -0-   |   |           | -0-    |         |   | -0-    |   |   | -0-   |   |   | 10    |   |   | 10    |  
|Note payable                                                 |  |                        | (551  | )                     |   | (32                   | ) |           | (583   | )       |   | 234   |   |           | (343   | )       |   | (109   | ) |   | 328   |   |   | (16   | ) |   | 312   |  
|                                                             |  |                        |       |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |       |   |   |       |  
|Total expense from interest-bearing liabilities              |  |                        | 2,351 |                       |   | (7,567                | ) |           | (5,216 | )       |   | 2,409 |   |           | (9,613 | )       |   | (7,204 | ) |   | 3,249 |   |   | 3,626 |   |   | 6,875 |  
|                                                             |  |                        |       |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |       |   |   |       |  
|                                                             |  |                        |       |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |       |   |   |       |  
|Net difference                                               |  | $                      | 2,102 |                       | $ | 1,684                 |   | $         | 3,786  |         | $ | 2,230 |   | $         | 2,148  |         | $ | 4,378  |   | $ | 1,742 |   | $ | (760  | ) | $ | 982   |  
|                                                             |  |                        |       |                       |   |                       |   |           |        |         |   |       |   |           |        |         |   |        |   |   |       |   |   |       |   |   |       |  

|    |                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The change
 in interest due both to rate and volume has been allocated equally.                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                           
|(b) | Interest income on non-taxable investment securities and non-taxable
 loans includes the effects of taxable-equivalent adjustments using a tax rate
 of 34% in adjusting interest on tax-exempt securities and tax-exempt loans to
 a taxable-equivalent basis. The amount of taxable-equivalent adjustments were
 $2,874 in 2009, $2,218 in 2008 and $2,307 in 2007.                     
|    |                                                                                                                                                                                                                                                                                                                                                                                           
|(c) | Includes loan fees of $734 in 2009, $996 in 2008 and $1,287 in 2007.
 Interest income on loans includes the effect of taxable-equivalent
 adjustments for non-taxable loans using a tax rate of 34% in adjusting
 interest on tax-exempt loans to a taxable-equivalent basis. Includes
 non-accrual loans, with year-end balances of $44,768 in 2009, $30,383 in 2008
 and $7,361 in 2007.

Non-interest
Income.Total non-interest income increased in 2009 by
$1,651, or 14.2%, to $13,244 from the 2008 total of $11,593. The Corporation
recorded $1,781 in net gains from the sale of investment securities in 2009,
compared to $405 in 2008, an increase of $1,376 or 339.8%. This was due largely
to sales of shorter-term securities to reposition cash flows in the portfolio.
Significant earnings improvement was seen in the category of mortgage banking
income, which

39

---



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

increased
by $1,208 or 113.0%, due to increased loan production as well as servicing
income from a larger portfolio. Service charges on deposits decreased by $447,
(or 10.1%) due largely to a decrease in the number of overdrafts. The remaining
categories of non-interest income showed either slight increases or decreases
over the prior year.

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

|                                               |  |                                 |        |      |   |        |   |   |        |  
|---------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                               |  | For the Years ended December 31 |       
|                                               |  |                                 |       
|                                               |  | 2009                            |        | 2008 |   | 2007   |  
|                                              
|Trust and farm management fees                 |  | $                               | 1,334  |      | $ | 1,530  |   | $ | 1,507  |  
|Service charges on deposit accounts            |  |                                 | 3,961  |      |   | 4,408  |   |   | 4,431  |  
|Other service charges                          |  |                                 | 1,954  |      |   | 2,137  |   |   | 1,966  |  
|Gain on sales of securities available-for-sale |  |                                 | 1,781  |      |   | 405    |   |   | 541    |  
|Brokerage fee income                           |  |                                 | 857    |      |   | 913    |   |   | 920    |  
|Mortgage banking income                        |  |                                 | 2,277  |      |   | 1,069  |   |   | 903    |  
|Bank-owned life insurance income               |  |                                 | 941    |      |   | 874    |   |   | 816    |  
|Other operating income                         |  |                                 | 139    |      |   | 257    |   |   | 214    |  
|                                               |  |                                 |        |      |   |        |   |   |        |  
|Total non-interest income                      |  | $                               | 13,244 |      | $ | 11,593 |   | $ | 11,298 |  
|                                               |  |                                 |        |      |   |        |   |   |        |  
|Non-interest income to average total assets    |  |                                 | 1.06   | %    |   | 1.05   | % |   | 1.09   | %

Total
non-interest income increased in 2008 by $295, or 2.6%, to $11,593 from the
2007 total of $11,298. The largest increases were seen in the categories of
other service charges and mortgage banking income, which increased by $171
(8.7%) and $166 (18.4%), respectively. Other service charges went up because of
an increase in debit card income (usage), while mortgage banking income
increased because of servicing income generated from a larger portfolio. The remaining
categories of non-interest income showed either slight increases or decreases
over the prior year. The Corporation recorded $405 in net gains from the sale
of investment securities in 2008, compared to $541 in 2007, a decrease of $136
(or 25.1%).

Non-interest Expense. Total non-interest
expense increased to $59,559 in 2009 from $31,123 in 2008 (an increase of
$28,436 or 91.37%). The majority of the increase resulted in the goodwill
impairment losses, along with the categories of Federal insurance assessments
and other real estate owned expense, which increased by $1,739 (205.8%) and
$861 (424.1%), respectively. For more information regarding goodwill, see Note
8 - Goodwill in the Notes to Consolidated Financial Statements. The Federal insurance
assessments increased to $2,584 in 2009 from $845 in 2008 due to the special
assessment as well as an increase in the quarterly multiplier rate and an
increase in the balance of deposit liabilities. The other real estate expense
increased to $1,064 in 2009 from $203 in 2008, due to an increase in the
balance of other real estate from 2008 to 2009. In addition, the categories of
salaries and employee benefits and other operating expense increased by $319
(or 1.8%) and $597 (or 17.9%), respectively, from 2008 to 2009. As a percentage
of average total assets, however, non-interest expense, after subtracting the
goodwill impairment losses continued to decrease to 2.80% in 2009, compared to
2.81% in 2008.

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

|                                             |  |                                 |        |      |   |        |   |   |        |  
|-------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                             |  | For the Years ended December 31 |       
|                                             |  |                                 |       
|                                             |  | 2009                            |        | 2008 |   | 2007   |  
|                                            
|Salaries and employee benefits               |  | $                               | 18,011 |      | $ | 17,692 |   | $ | 16,874 |  
|Occupancy                                    |  |                                 | 1,903  |      |   | 1,890  |   |   | 1,707  |  
|Equipment expense                            |  |                                 | 3,071  |      |   | 2,996  |   |   | 3,158  |  
|Federal insurance assessments                |  |                                 | 2,584  |      |   | 845    |   |   | 338    |  
|Goodwill impairment losses                   |  |                                 | 24,521 |      |   | -0-    |   |   | -0-    |  
|Intangible assets amortization               |  |                                 | 816    |      |   | 714    |   |   | 704    |  
|Data processing                              |  |                                 | 1,290  |      |   | 1,151  |   |   | 1,101  |  
|Advertising                                  |  |                                 | 751    |      |   | 742    |   |   | 722    |  
|Postage                                      |  |                                 | 544    |      |   | 547    |   |   | 542    |  
|Property taxes                               |  |                                 | 695    |      |   | 669    |   |   | 686    |  
|Supplies                                     |  |                                 | 386    |      |   | 347    |   |   | 448    |  
|Other real estate owned expense              |  |                                 | 1,064  |      |   | 203    |   |   | 157    |  
|Other operating expense                      |  |                                 | 3,923  |      |   | 3,327  |   |   | 3,128  |  
|                                             |  |                                 |        |      |   |        |   |   |        |  
|Total non-interest expense                   |  | $                               | 59,559 |      | $ | 31,123 |   | $ | 29,565 |  
|                                             |  |                                 |        |      |   |        |   |   |        |  
|Non-interest expense to average total assets |  |                                 | 4.77   | %    |   | 2.81   | % |   | 2.85   | %

Total
non-interest expense increased to $31,123 in 2008 from $29,565 in 2007 (an
increase of $1,558 or 5.3%). The majority of the increase resulted in the
category of salaries and employee benefits, which increased $818 or 4.8% (from
$16,874 at December 31, 2007 to $17,692 at December 31, 2008). Additionally,
the category of Federal deposit insurance assessments increased to $845 in 2008
from $338 in 2007 (an increase of $507, or 150.0%) due to expiration of credits
and a truing up of the FDIC accrued premiums. In addition, the categories of
occupancy expense and other operating expense increased by $183 (or 10.7%) and
$199 (or 6.4%), respectively, from 2007 to 2008. As a percentage of average
total assets, however, non-interest expense continued to decrease to 2.81% in
2008, compared to 2.85% in 2007.

Income Taxes. The income tax benefit in
2009 was $(1,600), while income tax expense totaled $1,697 in 2008 and $1,377
in 2007. The income tax benefit in 2009 was generated from lower pre-tax
earnings of $1,795 ($9,023 in 2008), without regard to the goodwill impairment
loss, which was a non-tax event of $24,521, coupled with tax-free income of
$6,237 from tax-exempt investments and bank-owned life insurance. The effective
tax rates were (8.9%), 18.8% and 16.9% for the respective years then ended.

40

---



Analysis of Financial Condition

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

|                      |  |             |           |             |  |        |       |             |  |        |           |             |  |        |       |             |  |        |           |             |  |  |       |   |  |   |           |  |  |  |       |   |  |   |         |  |  |  |       |   | 
|--------------------- |  | ----------- | --------- | ----------- |  | ------ | ----- | ----------- |  | ------ | --------- | ----------- |  | ------ | ----- | ----------- |  | ------ | --------- | ----------- |  |  | ----- | - |  | - | --------- |  |  |  | ----- | - |  | - | ------- |  |  |  | ----- | - | 
|                      |  | December 31 |          
|                      |  |             |          
|                      |  | 2009        |           | 2008        |  | 2007   |       | 2006        |  | 2005   |          
|                      |  | Amount      |           | % of
 Total |  | Amount |       | % of
 Total |  | Amount |           | % of
 Total |  | Amount |       | % of
 Total |  | Amount |           | % of
 Total | 
|                      |  |             |           |             |  |        |       |             |  |        |           |             |  |        |       |             |  |        |           |             | 
|Agricultural          |  | $           | 76,918    |             |  |        | 9.6   | %           |  | $      | 79,536    |             |  |        | 10.1  | %           |  | $      | 85,571    |             |  |  | 11.8  | % |  | $ | 83,610    |  |  |  | 13.3  | % |  | $ | 73,884  |  |  |  | 12.7  | % | 
|Commercial            |  |             | 244,049   |             |  |        | 30.6  |             |  |        | 225,806   |             |  |        | 28.5  |             |  |        | 168,936   |             |  |  | 23.4  |   |  |   | 134,402   |  |  |  | 21.4  |   |  |   | 114,342 |  |  |  | 19.7  |   | 
|Real Estate           |  |             |           |             |  |        |       |             |  |        |           |             |  |        |       |             |  |        |           |             |  |  |       |   |  |   |           |  |  |  |       |   |  |   |         |  |  |  |       |   | 
|1-4 family residences |  |             | 123,374   |             |  |        | 15.4  |             |  |        | 132,056   |             |  |        | 16.7  |             |  |        | 127,656   |             |  |  | 17.7  |   |  |   | 120,585   |  |  |  | 19.1  |   |  |   | 138,959 |  |  |  | 23.9  |   | 
|Agricultural          |  |             | 61,022    |             |  |        | 7.6   |             |  |        | 64,212    |             |  |        | 8.1   |             |  |        | 61,158    |             |  |  | 8.5   |   |  |   | 61,511    |  |  |  | 9.8   |   |  |   | 56,069  |  |  |  | 9.6   |   | 
|Construction          |  |             | 24,118    |             |  |        | 3.0   |             |  |        | 31,444    |             |  |        | 4.0   |             |  |        | 46,874    |             |  |  | 6.5   |   |  |   | 42,991    |  |  |  | 6.8   |   |  |   | 37,286  |  |  |  | 6.4   |   | 
|Commercial            |  |             | 198,914   |             |  |        | 24.9  |             |  |        | 182,658   |             |  |        | 23.1  |             |  |        | 160,106   |             |  |  | 22.2  |   |  |   | 130,302   |  |  |  | 20.7  |   |  |   | 113,110 |  |  |  | 19.4  |   | 
|                      |  |             |           |             |  |        |       |             |  |        |           |             |  |        |       |             |  |        |           |             |  |  |       |   |  |   |           |  |  |  |       |   |  |   |         |  |  |  |       |   | 
|Real Estate Total     |  |             | 407,428   |             |  |        | 51.1  |             |  |        | 410,370   |             |  |        | 51.9  |             |  |        | 395,794   |             |  |  | 54.8  |   |  |   | 355,389   |  |  |  | 56.4  |   |  |   | 345,424 |  |  |  | 59.3  |   | 
|Installment           |  |             | 69,679    |             |  |        | 8.7   |             |  |        | 75,125    |             |  |        | 9.5   |             |  |        | 72,346    |             |  |  | 10.0  |   |  |   | 56,071    |  |  |  | 8.9   |   |  |   | 48,074  |  |  |  | 8.3   |   | 
|                      |  |             |           |             |  |        |       |             |  |        |           |             |  |        |       |             |  |        |           |             |  |  |       |   |  |   |           |  |  |  |       |   |  |   |         |  |  |  |       |   | 
|Total loans           |  | $           | 798,074   |             |  |        | 100.0 | %           |  | $      | 790,837   |             |  |        | 100.0 | %           |  | $      | 722,647   |             |  |  | 100.0 | % |  | $ | 629,472   |  |  |  | 100.0 | % |  | $ | 581,724 |  |  |  | 100.0 | % | 
|                      |  |             |           |             |  |        |       |             |  |        |           |             |  |        |       |             |  |        |           |             |  |  |       |   |  |   |           |  |  |  |       |   |  |   |         |  |  |  |       |   | 
|Total assets          |  | $           | 1,260,730 |             |  |        |       |             |  | $      | 1,163,130 |             |  |        |       |             |  | $      | 1,080,702 |             |  |  |       |   |  | $ | 1,031,959 |  |  |  |       |   |  | $ | 945,263 |  |  |  |       |   | 
|Loans to total assets |  |             |           |             |  |        | 63.3  | %           |  |        |           |             |  |        | 68.0  | %           |  |        |           |             |  |  | 66.9  | % |  |   |           |  |  |  | 61.0  | % |  |   |         |  |  |  | 61.6  | % | 

Total
loans increased $7,200 (or 0.5%) in 2009 as compared to an increase of $68,200
(9.4%) in 2008. There were no acquisitions in 2009. The minimal increase
reflects the recessionary environment where business and consumer borrowers
have reduced demand and capacity for new indebtedness.

Commercial
loans increased $18,240 (or 8.1%) in 2009, which compares to an increase of
$56,900 (or 33.7%) in 2008. Building relationships with commercial businesses
has been the largest component of loan growth in recent years. Increases
occurred in both higher growth areas and established markets served by the
subsidiary bank. The competitive environment has lessened as many financial
institutions are restricting lending activities.

Loans
to agricultural operations decreased $2,600 (or 3.3%) in 2009, which compares
to a decrease of $6,000 (or 7.1%) in 2008. Short term agricultural loans are
seasonal in nature with paydown from grain sales occurring near the beginning
and end of each year. Rapid growth in the bio-fuels industry (primarily
ethanol) and rising worldwide food demand have dramatically influenced corn
prices since the latter part of 2006. Rising corn prices have influenced
soybean prices as the two commodities compete for planted acreage. Corn and
soybeans are the two primary crops of the Corporations market area. Selling
prices were somewhat lower in 2009, while crop input costs where higher. This
combination reduced overall profitability compared to 2008 but was still well
above historic averages. The balance sheet of local agriculture remains strong
both in terms of equity and liquidity. Agriculture remains the largest single
loan industry concentration of the Corporation. The highly experienced
agricultural staff continues to effectively manage risk and seek opportunities
in this portfolio. Agricultural loans as a percentage of total loans were 9.7%
at year-end 2009, compared to 10.1% at year-end 2008.

Real
estate loans decreased $2,900 (or .72%) in 2009 compared to an increase of
$20,600 (or 3.7%) in 2008. Commercial real estate lending increased marginally
in 2009. This was offset by decreases in residential and construction lending.
Residential real estate loans with fixed rates of more than 5 years are
generally sold into the secondary market. The Corporation retains the servicing
of sold loans, maintaining the local relationship with customers and generating
servicing fee income. With home mortgage rates at their lowest level in 50
years, many borrowers refinanced adjustable rate loans into fixed rate loans
that were sold. Total home mortgage closings were $175,000 in 2009, a record
level of activity. Construction loans decreased $9,600 (or 30.6%) reflecting
the significant decline in building activity due to present economic
conditions.

Consumer
installment loans decreased $5,400 (or 7.2%) in 2009 from 2008. This follows an
increase of $2,800 (or 3.8%) in 2008. Home equity lending comprises over two
thirds of the installment portfolio.

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

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

Non-performing Loans and Other Real Estate Owned.
Non-performing loans amounted to 7.35% of total loans at year-end 2009 compared
to 4.18% at year-end 2008. The increase reflects a higher level of stress in
construction/development, commercial real estate and the general economy. The primary
components of the non-accrual total are in two industries. One is the
construction/development industry, primarily in the Corporations northern and
eastern market areas. Non-performing construction/development credits comprise
approximately 60% of the Corporations total non-performing loans as of
December 31, 2009. As sales have dramatically decreased, builders and
developers are facing difficulty in making interest payments, creating the
non-performing status. The other largest category of non-performing loans is
commercial real estate projects, which comprise approximately 20% of the year
end 2009 non-performing total. These are comprised of owner-occupied facilities
and leased facilities and are located throughout the Corporations market area.
The balance of non-performing loans is comprised primarily of residential real
estate and home equity credits. Restructured loans at the end of 2009 were
$13,941 compared to zero as of year end 2008. The total was comprised primarily
of two commercial real estate projects that are not fully leased. In both
instances, the loan maturity was extended to improve the cash flow of the
projects. In the present economic downturn, the vast majority of non-performing
assets are secured by real estate. The

41

---



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

Corporation has been
proactive in obtaining updated appraisals for non-performing loans that are
secured by real estate. Specific loss provisions of $4,472 have been
established for non-performing loans. The primary components of loan charge
offs in 2009 were construction/development loans, home equity loans and
commercial real estate loans.

Problem
credits are closely monitored by the lending staff, and an independent loan
review staff provides further assistance in identifying problem situations.
Loans over 90 days past due are normally either charged off, or if well secured
and in the process of collection, placed on a non-accrual status. Problem
credits have a life cycle. They either improve or they move through a
workout/liquidation process. The workout/liquidation process often includes
non-accrual status. Non-accrual real estate loans that are not resolved by
borrowers move through foreclosure or other processes and become other real
estate owned. At that point the Corporation actively markets the properties for
sale. Total other real estate owned as of December 31, 2009 was $17,658. The
Corporation had $2,487 in other real estate owned as of December 31, 2008. Over
60% of the December 31, 2009 total is one industrial development property. This
is located in the Corporations northern region. The Corporation is actively
marketing the property by parcel or as a bulk sale. Most all improvements are
complete on the property. Two distribution centers are presently located in the
industrial park. Additional roadways may be built depending on how end users
choose parcel configuration. The Corporations carrying value of the property
is well supported by a current appraisal. As with non-performing loans, the
Corporation is proactive in obtaining appraisals to support the carrying value
of Other Real Estate Owned property on the balance sheet. The allowance for
possible loan losses was 20.6% and 15.3% of non-performing loans at year-end
2009 and 2008, respectively. The following table provides information on the
Corporations non-performing loans since 2005:

|                                                               |  |             |        |      |   |        |   |      |       |      |   |       |   |   |       |  
|-------------------------------------------------------------- |  | ----------- | ------ | ---- | - | ------ | - | ---- | ----- | ---- | - | ----- | - | - | ----- | -
|                                                               |  | December 31 |       
|                                                               |  |             |       
|                                                               |  | 2009        |        | 2008 |   | 2007   |   | 2006 |       | 2005 |  
|                                                               |  |             |        |      |   |        |   |      |       |      |  
|Non-accrual                                                    |  | $           | 42,593 |      | $ | 30,383 |   | $    | 7,361 |      | $ | 3,893 |   | $ | 3,822 |  
|90 days past due and accruing                                  |  |             | 2,087  |      |   | 2,655  |   |      | 73    |      |   | 33    |   |   | 3     |  
|Restructured                                                   |  |             | 13,941 |      |   | -0-    |   |      | -0-   |      |   | -0-   |   |   | -0-   |  
|                                                               |  |             |        |      |   |        |   |      |       |      |   |       |   |   |       |  
|Total non-performing loans                                     |  | $           | 58,621 |      | $ | 33,038 |   | $    | 7,434 |      | $ | 3,926 |   | $ | 3,825 |  
|                                                               |  |             |        |      |   |        |   |      |       |      |   |       |   |   |       |  
|Other real estate owned                                        |  |             | 17,658 |      |   | 2,487  |   |      | 833   |      |   | -0-   |   |   | 468   |  
|Total non-performing assets                                    |  | $           | 76,279 |      | $ | 35,525 |   | $    | 8,267 |      | $ | 3,926 |   | $ | 4,293 |  
|                                                               |  |             |        |      |   |        |   |      |       |      |   |       |   |   |       |  
|                                                               |  |             |        |      |   |        |   |      |       |      |  
|Non-performing loans to total loans (net of unearned interest) |  |             | 7.35   | %    |   | 4.18   | % |      | 1.03  | %    |   | 0.62  | % |   | 0.66  | %
|Non-performing assets to total assets                          |  |             | 6.05   | %    |   | 3.05   | % |      | 0.76  | %    |   | 0.38  | % |   | 0.45  | %

As
of December 31, 2009 and 2008, loans which the Corporations management had
serious doubts as to the ability of borrowers to comply with loan repayment
terms not carried as non-performing loans totaled approximately $416 (or .05%
of the total loan portfolio), and $551 (or .07% of the total loan portfolio),
respectively.

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

|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|----------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                    |  | For the Years Ended December 31 |        
|                                                                                    |  |                                 |        
|                                                                                    |  | 2009                            |         | 2008 |   | 2007    |   | 2006 |         | 2005 |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |  
|Amount of loans outstanding at end of year (net of unearned interest)               |  | $                               | 798,074 |      | $ | 790,837 |   | $    | 722,647 |      | $ | 629,472 |   | $ | 581,812 |  
|Average amount of loans outstanding for the year (net of unearned
 interest)        |  | $                               | 743,887 |      | $ | 734,672 |   | $    | 666,853 |      | $ | 585,382 |   | $ | 482,448 |  
|Allowance for loan losses at beginning of year                                      |  | $                               | 5,064   |      | $ | 3,248   |   | $    | 3,053   |      | $ | 3,109   |   | $ | 2,524   |  
|Allowance of bank acquired                                                          |  |                                 | -0-     |      |   | -0-     |   |      | -0-     |      |   | -0-     |   |   | 752     |  
|Charge-offs:                                                                        |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Agricultural                                                                        |  |                                 | 21      |      |   | -0-     |   |      | -0-     |      |   | 162     |   |   | -0-     |  
|Commercial                                                                          |  |                                 | 2,516   |      |   | 797     |   |      | 373     |      |   | 227     |   |   | 85      |  
|Real estate-mortgage                                                                |  |                                 | 511     |      |   | 91      |   |      | 22      |      |   | 21      |   |   | 10      |  
|Installment                                                                         |  |                                 | 1,208   |      |   | 446     |   |      | 269     |      |   | 194     |   |   | 252     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total charge-offs                                                                   |  |                                 | 4,256   |      |   | 1,334   |   |      | 664     |      |   | 604     |   |   | 347     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Recoveries:                                                                         |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |  
|Agricultural                                                                        |  |                                 | -0-     |      |   | -0-     |   |      | 1       |      |   | -0-     |   |   | -0-     |  
|Commercial                                                                          |  |                                 | 42      |      |   | 37      |   |      | 29      |      |   | 90      |   |   | 2       |  
|Real estate-mortgage                                                                |  |                                 | -0-     |      |   | -0-     |   |      | 17      |      |   | 5       |   |   | -0-     |  
|Installment                                                                         |  |                                 | 163     |      |   | 145     |   |      | 172     |      |   | 168     |   |   | 178     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total recoveries                                                                    |  |                                 | 205     |      |   | 182     |   |      | 219     |      |   | 263     |   |   | 180     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Net loans charged off                                                               |  |                                 | 4,051   |      |   | 1,152   |   |      | 445     |      |   | 341     |   |   | 167     |  
|Provision for loan losses                                                           |  |                                 | 11,062  |      |   | 2,968   |   |      | 640     |      |   | 285     |   |   | -0-     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Allowance for loan losses at end of year                                            |  | $                               | 12,075  |      | $ | 5,064   |   | $    | 3,248   |      | $ | 3,053   |   | $ | 3,109   |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Net loans charged off to average loans                                              |  |                                 | 0.54    | %    |   | 0.16    | % |      | 0.07    | %    |   | 0.06    | % |   | 0.03    | %
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |  
|Allowance for loan losses to non-performing loans                                   |  |                                 | 20.60   | %    |   | 15.33   | % |      | 43.69   | %    |   | 77.76   | % |   | 81.28   | %
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |  
|Allowance for loan losses to total loans at end of year (net of
 unearned interest) |  |                                 | 1.51    | %    |   | 0.64    | % |      | 0.45    | %    |   | 0.49    | % |   | 0.53    | %

42

---



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

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

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

Net
charge-offs were 0.54% of average (total loans) in 2009. The allowance for loan
losses at year-end 2009 was $12,100, or 1.51% of total loans, net of unearned
interest, and 20.60% of non-performing loans. The year-end 2009 allowance of
1.51% of total loans is an increase of .87% from the year-end 2008 number of
..64%, reflecting managements assessment of the present economic environment.
Although non-performing loans have increased, the balance is comprised of
credits that management believes will not result in significant losses to the
Corporation. There are $4,472 in specific loan loss reserves for the
non-performing or impaired loans as of December 31, 2009, compared to $818 one
year ago. Management considers the allowance for loan losses adequate to meet
probable losses as of December 31, 2009.

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

|                                                                                              |  |             |         |      |   |         | 
|--------------------------------------------------------------------------------------------- |  | ----------- | ------- | ---- | - | ------- | 
|                                                                                              |  | December 31 |        
|                                                                                              |  |             |        
|                                                                                              |  | 2009        |         | 2008 |  
|                                                                                              |  |             |         |      |  
|United States Government and federal agency and U.S. Government
 sponsored enterprises (GSEs) |  | $           | 96,313  |      | $ | 92,198  | 
|State and Municipal                                                                           |  |             | 132,871 |      |   | 103,960 | 
|Collateralized mortgage obligations:                                                          |  |             |         |      |   |         | 
|GSE Residential                                                                               |  |             | 72,083  |      |   | 54,957  | 
|                                                                                              |  |             |         |      |   |         | 
|Total                                                                                         |  | $           | 301,267 |      | $ | 251,115 | 
|                                                                                              |  |             |         |      |   |         | 

Investment
securities totaled $301,300 on December 31, 2009, an increase of $50,200 (or
20.0%) from the December 31, 2008 total of $251,100. The increase was due to
securities purchases to meet pledging requirements for new deposits, as well as
the investment of excess liquidity from deposit growth and a lack of loan
demand. Every category of securities increased, but the investment mix changed
only slightly. U.S. Government Agencies and mortgage-backed securities decreased
to 55.9% of the total portfolio, down from 58.6% a year ago. Municipal bond
holdings increased from 41.4% to 44.1%. This change occurred due to the
tightening of yield spreads in the agency market, the value created in the
tax-free market and increased purchases of taxable municipal bonds arising out
of the new issuance of Build America Bonds.

Several
interest rate strategies executed during the year to improve the overall
performance of the portfolio resulted in the repositioning of cash flows and
the capture of $1,800 of gains on short-term securities. It should also be
noted that the investment portfolio has never contained any sub-prime mortgage
securities nor any Fannie Mae or Freddie Mac preferred stock.

Investment
securities totaled $251,100 on December 31, 2008, an increase of $22,500 (or
9.9%) from the December 31, 2007 total of $228,600. The increase was primarily
due to securities purchased to meet increased pledging requirements for new
deposits and a comparison to a lower than average total from 2007. Some changes
occurred in the investment mix during 2008. Collateralized Mortgage Obligations
(CMOs) decreased by 21.1%, or $14,700, and now represent 21.9% of the
portfolio, down from 30.5%. Municipal bond holdings increased by $8,800 or
9.3%. U.S. Government agencies and Mortgage-backed securities (MBS) increased
$28,500 or 44.6%, and now represent 36.7% of the portfolio, up from 27.9%. This
can be attributed to the value created in that sector due to market pricing
opportunities. The overall yield on the total portfolio rose by 21 basis points
from 2007 to 5.51%. This occurred largely from the increase in allocation in
mortgage backs and several swap strategies, where gains were captured and yield
increases on reinvestment.

Deposits. Total deposits increased in 2009
by approximately $113,400, to $1,076,000 at December 31 (an 11.8% increase over
2008). Time deposits decreased by $47,200 (or 8.7%) from the prior year largely
due to customers investing in liquid accounts rather than term accounts because
the time deposit rates were so low. Interest-bearing demand accounts increased
$127,900 (or 51.8%) over 2008, a result of the investment in liquid accounts
rather than time deposits. Non-interest bearing demand accounts showed an
increase of $25,500, an increase of 23.0% over 2008. Regular savings accounts
increased approximately $7,200 (or 11.8%) due to customers moving to fixed rate
investments. The average interest rate paid for overall deposits decreased
0.91% in 2009 as a result of certificates of deposit maturing and re-pricing,
as well as liquid account pricing lowering. The concentration in the High Yield
Money Market portfolio of $220,000 and the Freedom IRA portfolio of $32,900
were due to these products being offered at slightly higher rates than the
other liquid products. This shift in deposits continues the trend of customers
moving away from the market and into FDIC insured investments over the last
several years. Additionally, the increase in late 2008 of FDIC coverage to
$250,000 and a strong marketing campaign emphasizing the soundness, strength
and history of the subsidiary bank brought deposits to the bank. We have
experienced growth in many of the markets served by the subsidiary bank and, it
is worth noting again this year, the subsidiary banks deposits are core
deposits and contain no brokered CDs (other than CDARS relationships).

Over
the last three years, the subsidiary bank has seen overall deposits increase
22.0%. The increase in consumer deposits reflects our continued focus on
investing in offices in high growth areas, and continued focus of officers
calling on customers and potential customers through our officer call program
to develop deposit relationships. This growth also reflects the well trained
staff that looks to assist customers by identifying needs and providing sound
solutions. There continues to be considerable interest in the alternative
delivery mechanisms, such as electronic methods which include ATMs, Internet
Banking with Bill Payment and Telebanker as a convenient means for customers to
better manage their money, maximize return, and have peace of mind by dealing
safely and securely with only one financial institution. Due to the diversity
within our various market areas, such delivery mechanisms will continue to
position us well for the future.

43

---



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

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

|                            |  |                                 |           |      |      |         |  |      |         |         |      |      |  |   |         |  |      |   | 
|--------------------------- |  | ------------------------------- | --------- | ---- | ---- | ------- |  | ---- | ------- | ------- | ---- | ---- |  | - | ------- |  | ---- | - | 
|                            |  | For the Years Ended December 31 |          
|                            |  |                                 |          
|                            |  | 2009                            |           | 2008 |      | 2007    | 
|                            |  | Balance                         |           | Rate |      | Balance |  | Rate |         | Balance |      | Rate | 
|                            |  |                                 |           |      |      |         |  |      |         |         |      |      | 
|Non-interest bearing demand |  | $                               | 136,026   |      | n/a  |         |  | $    | 110,559 |         | n/a  |      |  | $ | 102,452 |  | n/a  |   | 
|Interest-bearing demand     |  |                                 | 374,624   |      | 1.24 | %       |  |      | 246,714 |         | 1.44 | %    |  |   | 241,749 |  | 2.75 | % | 
|Savings                     |  |                                 | 68,292    |      | 0.08 |         |  |      | 61,089  |         | 0.11 |      |  |   | 58,401  |  | 0.39 |   | 
|Time deposits               |  |                                 | 496,597   |      | 2.74 |         |  |      | 543,770 |         | 3.96 |      |  |   | 488,805 |  | 4.88 |   | 
|                            |  |                                 |           |      |      |         |  |      |         |         |      |      |  |   |         |  |      |   | 
|Total                       |  | $                               | 1,075,539 |      | 1.70 | %       |  | $    | 962,132 |         | 2.61 | %    |  | $ | 891,407 |  | 3.45 | % | 
|                            |  |                                 |           |      |      |         |  |      |         |         |      |      |  |   |         |  |      |   | 

The
following table summarizes time deposits in amounts of $100 or more by time
remaining until maturity as of December 31, 2009. These time deposits are made
by individuals, corporations and public entities.

|                                      |  |   |         | 
|------------------------------------- |  | - | ------- | 
|Three months or less                  |  | $ | 53,240  | 
|Over three months through
 six months |  |   | 43,282  | 
|Over six months through one
 year     |  |   | 79,216  | 
|Over one year                         |  |   | 17,711  | 
|                                      |  |   |         | 
|Total                                 |  | $ | 193,449 | 
|                                      |  |   |         | 

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

The
ratio of temporary investments and other short-term available funds (those
investments maturing within one year plus twelve months projected payments on
mortgage-backed securities and collateralized mortgage obligations, and cash
and due from banks balances) to volatile liabilities (50% of non-public entity
certificates of deposit over $100, repurchase agreements issued to public
entities, treasury tax and loan deposits, short-term borrowings from banks, and
deposits of public entities) was 41.5% at December 31, 2009 and 32.2% at
December 31, 2008, respectively. Core deposits (demand deposits,
interest-bearing checking accounts, total savings, and certificates of deposit
less than $100) were 83.2% of total deposits at December 31, 2009 and 82.7% at
December 31, 2008. Money market accounts of approximately $240,000 at December
31, 2009 are classified by the Corporation as core deposits.

In
2009, with the struggling economy, an effort was made to increase liquidity.
Accordingly, the Corporation experienced a net increase of $50,800 in cash and
cash equivalents. Financing activities, consisting mostly of an increase of
deposits of $113,400, provided the Corporation with $122,000. Additionally,
operating activities provided the Corporation with $4,900. Offsetting these
provisions, the Corporation used $76,100 in investing activities, consisting of
an increase in the investment portfolio of $47,600 and an increase of $27,900
in net loans. Cash and cash equivalents of $71,100 at December 31, 2009, along
with established lines of credit, are deemed more than adequate to meet
short-term liquidity needs.

In
2008, the Corporation experienced a net decrease of $7,300 in cash and cash
equivalents. The Corporation used $93,100 for investing activities, which
primarily consisted of a $71,700 increase in net loans and a $22,600 increase
in investments. Offsetting this usage, financing activities provided the
Corporation with $75,600, consisting of an increase in deposits of $70,700 and an
increase of $8,900 in borrowings, less $3,700 in dividends paid to
shareholders, and operating activities which provided the Corporation with
$10,200.

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

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

The
Corporations strategy with respect to asset-liability management is to
maximize net interest income while limiting the Corporations exposure to risks
associated with volatile interest rates. The subsidiary banks Funds Management
Committee is responsible for monitoring the GAP position. As a general rule, the
subsidiary banks policy is to maintain GAP as a percent of total assets within
a range from +20% to -20% in any given time period. Based on the simulation of
various rising or falling interest rate scenarios in comparison to one
considered to be the most likely interest rate scenario, management seeks to
operate with net interest income within a range of +/-15% and with net income
within a range of +/- 25% during any twelve-month period. The Corporation also
performs an interest rate risk analysis, on a monthly basis, on the assets and
liabilities of the subsidiary bank. This analysis applies an immediate shift in
interest rates of up to +300 basis points and -300 basis points to the assets
and liabilities to determine the impact on the net interest income and net
income of the subsidiary bank, when compared to a flat rate scenario. This
analysis does not take into account any other balance sheet management plans
that may be implemented should such rapid interest rate movement occur.

The
following table shows the estimated changes to net interest income from the
base scenario as of December 31, 2009 and 2008 (note the 200 and 300 basis
point decline scenarios were not calculated in 2009 due to many deposit
products being unable to decline that many points):

44

---



|                        |  |   |                               |  |             |   |      |   |             |  |        |   |  | 
|----------------------- |  | - | ----------------------------- |  | ----------- | - | ---- | - | ----------- |  | ------ | - |  | 
|Change in               |  |   | Estimated Net Interest Income | 
|Interest
 Rate          |  |   | 2009                          |  | % of change |   | 2008 |   | % of change | 
|                        |  |   |                               |  |             |   |      |   |             | 
|300 basis point rise    |  | $ | 34,663                        |  | -14.56      | % |      | $ | 32,774      |  | -11.56 | % | 
|200 basis point rise    |  |   | 36,226                        |  | -10.71      |   |      |   | 33,974      |  | -8.32  |   | 
|100 basis point rise    |  |   | 38,258                        |  | -5.70       |   |      |   | 35,439      |  | -4.37  |   | 
|Base scenario           |  |   | 40,570                        |  |            |   |      |   | 37,058      |  |       |   | 
|100 basis point decline |  |   | 39,864                        |  | -1.74       |   |      |   | 35,528      |  | -4.13  |   | 
|200 basis point decline |  |   |                              |  |            |   |      |   | 32,706      |  | -11.74 |   | 
|300 basis point decline |  |   |                              |  |            |   |      |   | 30,019      |  | -18.99 |   | 

Contractual Obligations, Commercial Commitments and
Off-Balance Sheet Arrangements. As disclosed in the Notes to
Consolidated Financial Statements, the Corporation has certain obligations and
commitments to make future payments under contracts. At December 31, 2009, the
aggregate contracted obligations excluding bank deposits) and commercial
commitments are as follows:

|                                                          |  |       |         |                   |   |           |  |           |        |              |   |       |  |   |     |    
|--------------------------------------------------------- |  | ----- | ------- | ----------------- | - | --------- |  | --------- | ------ | ------------ | - | ----- |  | - | --- | ---
|                                                          |  | Total |         | Less Than
 1 Year |   | 1-3 Years |  | 3-5 Years |        | Over 5 Years |  
|                                                          |  |       |         |                   |   |           |  |           |        |              |  
|Contractual Obligations:                                  |  |       |         |                   |   |           |  |           |        |              |   |       |  |   |     |    
|Time Deposits                                             |  | $     | 496,597 |                   | $ | 433,049   |  | $         | 60,564 |              | $ | 2,952 |  | $ | 32  |    
|Customer repurchase agreements                            |  |       | 47,327  |                   |   | 47,327    |  |           | -0-    |              |   | -0-   |  |   | -0- |    
|Interest-bearing demand notes
issued to the U.S. Treasury |  |       | 1,021   |                   |   | 1,021     |  |           | -0-    |              |   | -0-   |  |   | -0- |    
|Advances from the Federal Home Loan Bank                  |  |       | 31,500  |                   |   | 22,500    |  |           | 9,000  |              |   | -0-   |  |   | -0- |    
|Federal funds purchased                                   |  |       | -0-     |                   |   | -0-       |  |           | -0-    |              |   | -0-   |  |   | -0- |    
|Trust preferred securities                                |  |       | 25,000  |                   |   | 25,000    |  |           | -0-    |              |   | -0-   |  |   | -0- |    
|Post-retirement health insurance                          |  |       | 769     |                   |   | 51        |  |           | 107    |              |   | 126   |  |   | 485 | (1)
|                                                          |  |       |         |                   |   |           |  |           |        |              |   |       |  |   |     |    
|Total                                                     |  | $     | 602,214 |                   | $ | 528,948   |  | $         | 69,671 |              | $ | 3,078 |  | $ | 517 |    
|                                                          |  |       |         |                   |   |           |  |           |        |              |   |       |  |   |     |    
|                                                          |  |       |         |                   |   |           |  |           |        |              |   |       |  |   |     |    
|Off-Balance Sheet Arrangements:                           |  |       |         |                   |   |           |  |           |        |              |   |       |  |   |     |    
|Commitments to lend                                       |  | $     | 129,142 |                   | $ | 129,142   |  | $         | -0-    |              | $ | -0-   |  | $ | -0- |    
|Standby letters of credit                                 |  |       | 3,970   |                   |   | 3,970     |  |           | -0-    |              |   | -0-   |  |   | -0- |    
|                                                          |  |       |         |                   |   |           |  |           |        |              |   |       |  |   |     |    
|Total                                                     |  | $     | 133,112 |                   | $ | 133,112   |  | $         | -0-    |              | $ | -0-   |  | $ | -0- |    
|                                                          |  |       |         |                   |   |           |  |           |        |              |   |       |  |   |     |    

(1) For the years 2015
through 2019

See
Note 19 of the Consolidated Financial Statements for additional discussion on
contractual obligations, commercial commitments and off-balance sheet
arrangements.

The
following table sets forth the Corporations interest rate repricing gaps for
selected maturity periods at December 31, 2009:

|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |            |   |   |           |  |   |           | 
|--------------------------------------------------------- |  | --------------------- | -------- | -------- | - | -------- | - | -------- | -------- | ---------- | - | -------- | - | ---------- | ---------- | - | - | --------- |  | - | --------- | 
|                                                          |  | Rate Sensitive Within |         
|                                                          |  |                       |         
|                                                          |  | 1 year                |          | 1-2 yrs. |   | 2-3 yrs. |   | 3-5 yrs. |          | Thereafter |   | Total    |   | Fair Value |           
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |           
|Interest-earning assets:                                  |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |            |   |   |           |  |   |           | 
|Interest-bearing deposits                                 |  | $                     | 55,527   |          | $ | -0-      |   | $        | -0-      |            | $ | -0-      |   | $          | -0-        |   | $ | 55,527    |  | $ | 55,527    | 
|Taxable investment securities                             |  |                       | 16,549   |          |   | 10,776   |   |          | 20,563   |            |   | 16,612   |   |            | 103,897    |   |   | 168,397   |  |   | 168,397   | 
|Tax-exempt investment securities                          |  |                       | 7,718    |          |   | 12,750   |   |          | 14,581   |            |   | 22,431   |   |            | 75,390     |   |   | 132,870   |  |   | 133,408   | 
|Loans                                                     |  |                       | 402,583  |          |   | 94,544   |   |          | 98,934   |            |   | 112,846  |   |            | 79,001     |   |   | 789,295   |  |   | 793,674   | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |            |   |   |           |  |   |           | 
|Total rate sensitive assets (RSA)                       |  | $                     | 482,377  |          | $ | 118,070  |   | $        | 134,078  |            | $ | 151,889  |   | $          | 258,288    |   | $ | 1,146,089 |  | $ | 1,151,006 | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |            |   |   |           |  |   |           | 
|Interest-bearing liabilities:                             |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |            |   |   |           |  |   |           | 
|Interest-bearing demand deposits                          |  | $                     | 374,624  |          | $ | -0-      |   | $        | -0-      |            | $ | -0-      |   | $          | -0-        |   | $ | 374,624   |  | $ | 374,624   | 
|Savings deposits                                          |  |                       | 68,292   |          |   | -0-      |   |          | -0-      |            |   | -0-      |   |            | -0-        |   |   | 68,292    |  |   | 68,292    | 
|Time deposits                                             |  |                       | 433,049  |          |   | 48,006   |   |          | 12,558   |            |   | 2,952    |   |            | 32         |   |   | 496,597   |  |   | 502,721   | 
|Customer repurchase agreements                            |  |                       | 47,327   |          |   | -0-      |   |          | -0-      |            |   | -0-      |   |            | -0-        |   |   | 47,327    |  |   | 47,327    | 
|Advances from Federal Home Loan Bank                      |  |                       | 22,500   |          |   | 9,000    |   |          | -0-      |            |   | -0-      |   |            | -0-        |   |   | 31,500    |  |   | 32,995    | 
|Federal funds purchased                                   |  |                       | -0-      |          |   | -0-      |   |          | -0-      |            |   | -0-      |   |            | -0-        |   |   | -0-       |  |   | -0-       | 
|Interest-bearing demand notes issued to the U.S. Treasury |  |                       | 1,021    |          |   | -0-      |   |          | -0-      |            |   | -0-      |   |            | -0-        |   |   | 1,021     |  |   | 1,021     | 
|Trust preferred securities                                |  |                       | 25,000   |          |   | -0-      |   |          | -0-      |            |   | -0-      |   |            | -0-        |   |   | 25,000    |  |   | 37,958    | 
|Note payable                                              |  |                       | -0-      |          |   | -0-      |   |          | -0-      |            |   | -0-      |   |            | -0-        |   |   | -0-       |  |   | -0-       | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |            |   |   |           |  |   |           | 
|Total rate sensitive liabilities (RSL)                  |  | $                     | 971,813  |          | $ | 57,006   |   | $        | 12,558   |            | $ | 2,952    |   | $          | 32         |   | $ | 1,044,361 |  | $ | 1,064,938 | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |            |   |   |           |  |   |           | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |            |   |   |           |  |   |           | 
|Interest rate sensitivity GAP (RSA less RSL)              |  | $                     | (489,436 | )        | $ | 61,064   |   | $        | 121,520  |            | $ | 148,937  |   | $          | 258,256    |   |   |           |  |   |           | 
|Cumulative GAP                                            |  | $                     | (489,436 | )        | $ | (428,372 | ) | $        | (306,852 | )          | $ | (157,915 | ) | $          | 100,341    |   |   |           |  |   |           | 
|RSA/RSL                                                   |  |                       | 49.64    | %        |   | 207.12   | % |          | 1,067.67 | %          |   | 5,145.29 | % |            | 807,150.00 | % |   |           |  |   |           | 
|Cumulative RSA/RSL                                        |  |                       | 49.64    | %        |   | 58.36    | % |          | 70.53    | %          |   | 84.88    | % |            | 109.61     | % |   |           |  |   |           | 

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

Management
of the Corporation considers $67,300 (one-half) of the interest-bearing
checking account balances and $120,000 (one-half) of the money market account
balances (both being the components of interest-bearing demand deposits) and
all savings deposits as core, or non-rate sensitive deposits, primarily

45

---



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

since
interest-bearing demand and savings deposits historically have not been rate
sensitive. As a general rule, the subsidiary banks policy is to maintain RSA
as a percent of RSL within a range of +70% to +120% within a six-month time
period.

At
December 31, 2009, savings deposits totaled approximately $68,300. If the
$68,300 in savings deposits, the $67,300 of interest-bearing checking account
balances and the $120,000 in money market account balances reflected in the
less than one year time frame are excluded from the rate sensitivity above
(consistent with the consideration mentioned in the paragraph above), then rate
sensitive liabilities would be approximately $716,200 decreasing the negative
gap to approximately $233,800. RSA as a percent of RSL would be 67.4%.

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

Investment Maturities and Yields. The
following table sets forth the contractual maturities of the amortized cost of
investment securities at December 31, 2009, and the taxable equivalent yields
of such securities:

|                                                                                              |  |                       |        |                                       |  |                        |   |                             |         |        |  |       |   |        |         |       |  |      |   |   |     |  |  |   | 
|--------------------------------------------------------------------------------------------- |  | --------------------- | ------ | ------------------------------------- |  | ---------------------- | - | --------------------------- | ------- | ------ |  | ----- | - | ------ | ------- | ----- |  | ---- | - | - | --- |  |  | - | 
|                                                                                              |  | Due
 within
 one year |        | Due
 after one but
 within five years |  | Due
 after
 five years |   | Other
 (no stated maturity) |        
|                                                                                              |  |                       |        |                                       |  |                        |   |                             |        
|                                                                                              |  | Amount                |        | Yield                                 |  | Amount                 |   | Yield                       |         | Amount |  | Yield |   | Amount |         | Yield | 
|United States Government and federal agency and U.S. Government
 sponsored enterprises (GSEs) |  | $                     | 795    |                                       |  | 1.81                   | % | $                           | 56,705  |        |  | 4.20  | % | $      | 37,997  |       |  | 3.92 | % | $ | -0- |  |  |  | 
|State and Municipal                                                                           |  |                       | 3,333  |                                       |  | 5.19                   |   |                             | 13,515  |        |  | 5.48  |   |        | 112,810 |       |  | 5.88 |   |   | -0- |  |  |  | 
|Collateralized mortgage obligations:                                                          |  |                       |        |                                       |  |                        |   |                             |         |        |  |       |   |        |         |       |  |      |   |   |     |  |  |   | 
|GSE residential                                                                               |  |                       | 6,685  |                                       |  | 4.28                   |   |                             | 57,073  |        |  | 4.08  |   |        | 7,227   |       |  | 4.07 |   |   | -0- |  |  |  | 
|                                                                                              |  |                       |        |                                       |  |                        |   |                             |         |        |  |       |   |        |         |       |  |      |   |   |     |  |  |   | 
|Total                                                                                         |  | $                     | 10,813 |                                       |  | 4.38                   | % | $                           | 127,293 |        |  | 4.28  | % | $      | 158,034 |       |  | 5.33 | % | $ | -0- |  |  |  | 
|                                                                                              |  |                       |        |                                       |  |                        |   |                             |         |        |  |       |   |        |         |       |  |      |   |   |     |  |  |   | 

Loan
Maturities. The following table sets forth scheduled loan repayments on
agricultural, commercial and real estate construction loans at December 31,
2009:

|                         |  |                      |         |                                      |   |                       |  |             |       |       |   |        |  |   |         | 
|------------------------ |  | -------------------- | ------- | ------------------------------------ | - | --------------------- |  | ----------- | ----- | ----- | - | ------ |  | - | ------- | 
|                         |  | Due within
 one year |         | Due after one but
 within five years |   | Due after
 five years |  | Non-accrual |       | Total |  
|                         |  |                      |         |                                      |   |                       |  |             |       |       |  
|Agricultural             |  | $                    | 69,926  |                                      | $ | 6,934                 |  | $           | 58    |       | $ | -0-    |  | $ | 76,918  | 
|Commercial               |  |                      | 174,365 |                                      |   | 35,385                |  |             | 7,070 |       |   | 27,229 |  |   | 244,049 | 
|Real Estate-Construction |  |                      | 21,812  |                                      |   | 6                     |  |             | -0-   |       |   | -0-    |  |   | 21,818  | 
|                         |  |                      |         |                                      |   |                       |  |             |       |       |   |        |  |   |         | 
|Total                    |  | $                    | 266,103 |                                      | $ | 42,325                |  | $           | 7,128 |       | $ | 27,229 |  | $ | 342,785 | 
|                         |  |                      |         |                                      |   |                       |  |             |       |       |   |        |  |   |         | 

Of
the loans shown above, the following table sets forth loans due after one year
which have predetermined (fixed) interest rates or adjustable (variable)
interest rates at December 31, 2009:

|                   |  |            |        |               |   |        |  |   |        | 
|------------------ |  | ---------- | ------ | ------------- | - | ------ |  | - | ------ | 
|                   |  | Fixed
rate |        | Variable
rate |   | Total  | 
|                   |  |            |        |               |   |        | 
|Due after one year |  | $          | 38,034 |               | $ | 11,419 |  | $ | 49,453 | 

Allocation of Allowance for Loan Losses.
The subsidiary bank has allocated the allowance for loan losses to provide for
the possibility of losses being incurred within the categories of loans set
forth in the table below. The allocation of the allowance and the ratio of
loans within each category to total loans at December 31 are as follows:

|                     |  |                   |   |                                                  |  |                   |       |                                                       |  |                   |   |                                                       |  |                   |       |                                                       |  |                   |   |                                                       |  |  |       |   |  |  |   |       |  |  |       |   |  |  |   |       |  |  |       |   | 
|-------------------- |  | ----------------- | - | ------------------------------------------------ |  | ----------------- | ----- | ----------------------------------------------------- |  | ----------------- | - | ----------------------------------------------------- |  | ----------------- | ----- | ----------------------------------------------------- |  | ----------------- | - | ----------------------------------------------------- |  |  | ----- | - |  |  | - | ----- |  |  | ----- | - |  |  | - | ----- |  |  | ----- | - | 
|                     |  | December 31       |  
|                     |  |                   |  
|                     |  | 2009              |   | 2008                                             |  | 2007              |       | 2006                                                  |  | 2005              |  
|                     |  | Allowance
 amount |   | Percent
of loans
in each
category
to total
loans |  | Allowance
 amount |       | Percent
 of loans
 in each
 category
 to total
 loans |  | Allowance
 amount |   | Percent
 of loans
 in each
 category
 to total
 loans |  | Allowance
 amount |       | Percent
 of loans
 in each
 category
 to total
 loans |  | Allowance
 amount |   | Percent
 of loans
 in each
 category
 to total
 loans | 
|                     |  |                   |   |                                                  |  |                   |       |                                                       |  |                   |   |                                                       |  |                   |       |                                                       |  |                   |   |                                                       | 
|Agricultural         |  |                   | $ | 181                                              |  |                   | 9.7   | %                                                     |  |                   | $ | 235                                                   |  |                   | 10.1  | %                                                     |  |                   | $ | 580                                                   |  |  | 11.8  | % |  |  | $ | 830   |  |  | 13.3  | % |  |  | $ | 1,011 |  |  | 12.7  | % | 
|Commercial           |  |                   |   | 7,213                                            |  |                   | 30.7  |                                                       |  |                   |   | 2,469                                                 |  |                   | 28.5  |                                                       |  |                   |   | 1,188                                                 |  |  | 23.4  |   |  |  |   | 1,022 |  |  | 21.4  |   |  |  |   | 890   |  |  | 19.7  |   | 
|Real estate-mortgage |  |                   |   | 3,610                                            |  |                   | 50.8  |                                                       |  |                   |   | 1,284                                                 |  |                   | 51.9  |                                                       |  |                   |   | 743                                                   |  |  | 54.8  |   |  |  |   | 490   |  |  | 56.4  |   |  |  |   | 420   |  |  | 59.3  |   | 
|Installment          |  |                   |   | 1,060                                            |  |                   | 8.8   |                                                       |  |                   |   | 890                                                   |  |                   | 9.5   |                                                       |  |                   |   | 486                                                   |  |  | 10.0  |   |  |  |   | 540   |  |  | 8.9   |   |  |  |   | 484   |  |  | 8.3   |   | 
|Unallocated          |  |                   |   | 11                                               |  |                   | n/a   |                                                       |  |                   |   | 186                                                   |  |                   | n/a   |                                                       |  |                   |   | 251                                                   |  |  | n/a   |   |  |  |   | 171   |  |  | n/a   |   |  |  |   | 304   |  |  | n/a   |   | 
|                     |  |                   |   |                                                  |  |                   |       |                                                       |  |                   |   |                                                       |  |                   |       |                                                       |  |                   |   |                                                       |  |  |       |   |  |  |   |       |  |  |       |   |  |  |   |       |  |  |       |   | 
|Total                |  |                   | $ | 12,075                                           |  |                   | 100.0 | %                                                     |  |                   | $ | 5,064                                                 |  |                   | 100.0 | %                                                     |  |                   | $ | 3,248                                                 |  |  | 100.0 | % |  |  | $ | 3,053 |  |  | 100.0 | % |  |  | $ | 3,109 |  |  | 100.0 | % | 
|                     |  |                   |   |                                                  |  |                   |       |                                                       |  |                   |   |                                                       |  |                   |       |                                                       |  |                   |   |                                                       |  |  |       |   |  |  |   |       |  |  |       |   |  |  |   |       |  |  |       |   | 

46

---



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

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

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

|                                                                 |  |                              |        |         |   |         |  |         |        |  |   |        |  
|---------------------------------------------------------------- |  | ---------------------------- | ------ | ------- | - | ------- |  | ------- | ------ |  | - | ------ | -
|                                                                 |  | Year Ended December 31, 2008 |       
|                                                                 |  |                              |       
|                                                                 |  | 1st Qtr                      |        | 2nd Qtr |   | 3rd Qtr |  | 4th Qtr |       
|                                                                 |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Interest income                                                  |  | $                            | 15,066 |         | $ | 14,473  |  | $       | 14,812 |  | $ | 14,471 |  
|Interest expense                                                 |  |                              | 7,612  |         |   | 6,656   |  |         | 6,640  |  |   | 6,393  |  
|                                                                 |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Net interest income                                              |  |                              | 7,454  |         |   | 7,817   |  |         | 8,172  |  |   | 8,078  |  
|Provision for loan losses                                        |  |                              | 368    |         |   | 450     |  |         | 550    |  |   | 1,600  |  
|                                                                 |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Net interest income after provision for loan losses              |  |                              | 7,086  |         |   | 7,367   |  |         | 7,622  |  |   | 6,478  |  
|Non-interest income                                              |  |                              | 3,153  |         |   | 2,751   |  |         | 2,851  |  |   | 2,838  |  
|Non-interest expense                                             |  |                              | 7,560  |         |   | 7,509   |  |         | 7,628  |  |   | 8,426  |  
|                                                                 |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Income before income taxes                                       |  |                              | 2,679  |         |   | 2,609   |  |         | 2,845  |  |   | 890    |  
|Income tax expense                                               |  |                              | 589    |         |   | 589     |  |         | 658    |  |   | (139   | )
|                                                                 |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Net income                                                       |  | $                            | 2,090  |         | $ | 2,020   |  | $       | 2,187  |  | $ | 1,029  |  
|                                                                 |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Preferred stock dividends                                        |  |                              | -0-    |         |   | -0-     |  |         | -0-    |  |   | -0-    |  
|Accretion of preferred stock discount                            |  |                              | -0-    |         |   | -0-     |  |         | -0-    |  |   | -0-    |  
|                                                                 |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Net income available to common stockholders                      |  | $                            | 2,090  |         | $ | 2,020   |  | $       | 2,187  |  | $ | 1,029  |  
|                                                                 |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Earnings per share:                                              |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Basic income per common share available to common stockholders   |  | $                            | 0.63   |         | $ | 0.61    |  | $       | 0.66   |  | $ | 0.32   |  
|Diluted income per common share available to common stockholders |  | $                            | 0.63   |         | $ | 0.61    |  | $       | 0.66   |  | $ | 0.31   |  
|Cash dividends declared per share                                |  | $                            | 0.28   |         | $ | 0.28    |  | $       | 0.28   |  | $ | 0.28   |  

47

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

|                                                                                    |  |                                 |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|----------------------------------------------------------------------------------- |  | ------------------------------- | --------- | ---- | - | --------- | - | ---- | --------- | ---- | - | --------- | - | - | ------- | -
|                                                                                    |  | For the Years Ended December 31 |          
|                                                                                    |  |                                 |          
|                                                                                    |  | 2009                            |           | 2008 |   | 2007      |   | 2006 |           | 2005 |  
|                                                                                    |  |                                 |           |      |   |           |   |      |           |      |  
|Summary of Income                                                                   |  |                                 |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Interest income                                                                     |  | $                               | 56,736    |      | $ | 58,822    |   | $    | 61,559    |      | $ | 53,526    |   | $ | 39,971  |  
|Interest expense                                                                    |  |                                 | 22,085    |      |   | 27,301    |   |      | 34,505    |      |   | 27,630    |   |   | 15,726  |  
|Net interest income                                                                 |  |                                 | 34,651    |      |   | 31,521    |   |      | 27,054    |      |   | 25,896    |   |   | 24,245  |  
|Provision for loan losses                                                           |  |                                 | 11,062    |      |   | 2,968     |   |      | 640       |      |   | 285       |   |   | -0-     |  
|Non-interest income                                                                 |  |                                 | 13,244    |      |   | 11,593    |   |      | 11,298    |      |   | 10,245    |   |   | 8,840   |  
|Non-interest expense                                                                |  |                                 | 59,559    |      |   | 31,123    |   |      | 29,565    |      |   | 28,335    |   |   | 23,253  |  
|(Loss) income before income taxes                                                   |  |                                 | (22,726   | )    |   | 9,023     |   |      | 8,147     |      |   | 7,521     |   |   | 9,832   |  
|Income tax expense (benefit)                                                        |  |                                 | (1,600    | )    |   | 1,697     |   |      | 1,377     |      |   | 1,033     |   |   | 2,258   |  
|Net (loss) income                                                                   |  |                                 | (21,126   | )    |   | 7,326     |   |      | 6,770     |      |   | 6,488     |   |   | 7,574   |  
|Dividends on preferred shares                                                       |  |                                 | 1,178     |      |   | -0-       |   |      | -0-       |      |   | -0-       |   |   | -0-     |  
|Accretion of preferred stock discount                                               |  |                                 | 25        |      |   | -0-       |   |      | -0-       |      |   | -0-       |   |   | -0-     |  
|Net (loss) income available to common stockholders                                  |  |                                 | (22,329   | )    |   | 7,326     |   |      | 6,770     |      |   | 6,488     |   |   | 7,574   |  
|                                                                                    |  |                                 |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Per Share Data                                                                      |  |                                 |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Basic earnings per share available to common stockholders                           |  | $                               | (6.76     | )    | $ | 2.22      |   | $    | 2.04      |      | $ | 1.93      |   | $ | 2.39    |  
|Diluted earnings per share available to common stockholders                         |  |                                 | (6.76     | )    |   | 2.21      |   |      | 2.03      |      |   | 1.91      |   |   | 2.37    |  
|Book value (at end of period)                                                       |  |                                 | 15.03     |      |   | 21.97     |   |      | 20.74     |      |   | 19.50     |   |   | 18.87   |  
|Cash dividends declared                                                             |  |                                 | 0.70      |      |   | 1.12      |   |      | 1.08      |      |   | 1.05      |   |   | 1.03    |  
|Dividend payout ratio                                                               |  |                                 | -4.6      | %    |   | 50.5      | % |      | 53.1      | %    |   | 54.6      | % |   | 44.0    | %
|                                                                                    |  |                                 |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Selected Balances (at end of year)                                                  |  |                                 |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Total assets                                                                        |  | $                               | 1,260,730 |      | $ | 1,163,130 |   | $    | 1,080,702 |      | $ | 1,031,959 |   | $ | 945,263 |  
|Earning assets                                                                      |  |                                 | 1,097,992 |      |   | 1,013,521 |   |      | 949,534   |      |   | 904,504   |   |   | 852,286 |  
|Investments                                                                         |  |                                 | 301,267   |      |   | 251,115   |   |      | 228,575   |      |   | 267,916   |   |   | 251,486 |  
|Gross loans                                                                         |  |                                 | 801,370   |      |   | 792,992   |   |      | 723,575   |      |   | 633,984   |   |   | 584,311 |  
|Allowance for loan losses                                                           |  |                                 | 12,075    |      |   | 5,064     |   |      | 3,248     |      |   | 3,053     |   |   | 3,109   |  
|Deposits                                                                            |  |                                 | 1,075,539 |      |   | 962,132   |   |      | 891,407   |      |   | 881,899   |   |   | 798,558 |  
|Borrowings                                                                          |  |                                 | 104,848   |      |   | 118,016   |   |      | 109,089   |      |   | 74,147    |   |   | 72,575  |  
|Stockholders equity                                                                |  |                                 | 74,660    |      |   | 72,471    |   |      | 68,607    |      |   | 65,355    |   |   | 63,144  |  
|                                                                                    |  |                                 |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Selected Financial Ratios                                                           |  |                                 |           |      |   |           |   |      |           |      |   |           |   |   |         |  
|Net income (loss) available to common stockholders to average
 stockholders equity |  |                                 | (22.81    | )%   |   | 10.59     | % |      | 10.32     | %    |   | 10.07     | % |   | 13.43   | %
|Net income (loss) available to common stockholders to average assets                |  |                                 | (1.79     | )    |   | 0.66      |   |      | 0.65      |      |   | 0.68      |   |   | 0.97    |  
|Average stockholders equity to average assets                                      |  |                                 | 7.84      |      |   | 6.25      |   |      | 6.33      |      |   | 6.70      |   |   | 7.21    |  
|Average earning assets to average assets                                            |  |                                 | 87.43     |      |   | 88.57     |   |      | 88.61     |      |   | 88.73     |   |   | 90.21   |  
|Non-performing loans to total loans at end of year (net of unearned
 interest)      |  |                                 | 7.35      |      |   | 4.18      |   |      | 1.03      |      |   | 0.62      |   |   | 0.66    |  
|Tier 1 capital to average adjusted assets                                           |  |                                 | 7.48      |      |   | 6.22      |   |      | 6.33      |      |   | 6.67      |   |   | 7.83    |  
|Risk-based capital to risk-adjusted assets                                          |  |                                 | 11.50     |      |   | 8.30      |   |      | 8.44      |      |   | 9.18      |   |   | 9.76    |  
|Net loans charged-off to average loans                                              |  |                                 | 0.54      |      |   | 0.16      |   |      | 0.07      |      |   | 0.06      |   |   | 0.03    |  
|Allowance for loan losses to total loans at end of year (net of
 unearned interest) |  |                                 | 1.51      |      |   | 0.64      |   |      | 0.45      |      |   | 0.49      |   |   | 0.53    |  
|Average interest-bearing deposits to average deposits                               |  |                                 | 89.36     |      |   | 89.02     |   |      | 89.01     |      |   | 88.27     |   |   | 88.29   |  
|Average non-interest-bearing deposits to average deposits                           |  |                                 | 10.64     |      |   | 10.98     |   |      | 10.99     |      |   | 11.73     |   |   | 11.71   |  
|                                                                                   

48

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Market Information

MARKET INFORMATION The
following firms are currently market-makers in Princeton National Bancorp, Inc.
stock (symbol PNBC): HOWE
 BARNES HOEFER & ARNETT
 RBC DAIN
 RAUSCHER222 South Riverside Plaza
 Citicorp Center7th Floor
 500 West Madison, Suite
 2500Chicago, IL 60606
 Chicago, IL 60661Contact: Todd Raclaw
 Contact: Brian FosterPhone: 800-800-4693
 Phone: 800-683-3246WILLIAM
 BLAIR & COMPANY
 KEEFE
 BRUYETTE & WOODS222 West Adams Street
 The Equitable BuildingChicago, IL 60606
 787 Seventh Avenue, 4th
 FloorContact: Samuel C. Gross
 New York, NY 10019Phone: 800-621-0687
 Contact: Cathy BellinaPhone: 800-966-1559 The
table below indicates the high and low prices and the dividends declared per
share for PNBC common stock during the periods indicated: 2009
 
 High
 
 Low
 
 Cash
Dividend
Declared
 
 2008
 
 High
 
 Low
 
 Cash
Dividend
DeclaredFirst Quarter
 
 $
 23.06
 
 $
 12.30
 
 $
 0.28
 
 First Quarter
 
 $
 29.73
 
 $
 23.56
 
 $
 0.28Second Quarter
 
 
 15.75
 
 
 13.49
 
 
 0.14
 
 Second Quarter
 
 
 29.75
 
 
 26.00
 
 
 0.28Third Quarter
 
 
 18.94
 
 
 13.39
 
 
 0.14
 
 Third Quarter
 
 
 28.95
 
 
 24.78
 
 
 0.28Fourth Quarter
 
 
 15.99
 
 
 9.70
 
 
 0.14
 
 Fourth Quarter
 
 
 26.00
 
 
 22.05
 
 
 0.28 On
December 31, 2009, PNB had 769 registered holders of record of its common
stock. The
holders of the Common Stock are entitled to receive such dividends as are
declared by the Board of Directors of PNBC, which considers payment of
dividends quarterly. The ability of PNBC to pay dividends is dependent upon
receipt of dividends from the Bank. In determining cash dividends, the Board of
Directors considers the earnings, capital requirements, debt servicing
requirements, financial ratio guidelines established by the Board, the
financial condition of PNBC and other relevant factors. The Banks ability to
pay dividends to PNBC is subject to regulatory restrictions. See Supervision
and Regulation. PNBC
has paid regular cash dividends on the Common Stock since it commenced
operations in 1982. There can be no assurance, however, that any such dividends
will be paid by PNBC or that such dividends will not be reduced or eliminated
in the future. The timing and amount of dividends will depend upon the
earnings, capital requirements, and financial condition of PNBC and the Bank as
well as the general economic conditions and other relevant factors affecting
PNBC and the Bank. See Managements Discussion and Analysis of Financial
Condition and Results of Operations.


Annual
 Report on Form 10-K and Investor InformationA
 copy of Princeton National Bancorp, Inc.s Annual Report on Form 10-K to be
 filed with the Securities & Exchange Commission, is available without
 charge by writing:Lou
 Ann Birkey 
 Vice President - Investor Relations & Corporate Secretary 
 Princeton National Bancorp, Inc.
 606 South Main St. 
 Princeton, IL 61356or E-MAIL us at
 pnbc@citizens1st.com


Annual
 Meeting of StockholdersThe
 annual meeting of the stockholders of Princeton National Bancorp, Inc. will
 be held at 10:00 AM, Tuesday, April 27, 2010, at the following location:The Galleria Convention
 Center 
 1659 North Main St.
 Princeton, IL 61356Stockholders are invited to
 attend.


49

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Common Stock Price Performance Graph

The
following Common Stock price performance graph compares the monthly change in
the Corporations cumulative total stockholder returns on its Common Stock,
assuming the Common Stock was purchased on December 31, 2004 and sold on
December 31, 2009, with the cumulative total return of stocks included in the
Russell 3000, the NASDAQ Bank Index and the SNL Midwest Bank Stock Index for
the same period. The amounts shown assume the reinvestment of dividends.

Total Return Performance

(LINE GRAPH)

|                                  |  |               |        |          |  |          |  |          |        |          |  |          |  |  |       |  |  |        | 
|--------------------------------- |  | ------------- | ------ | -------- |  | -------- |  | -------- | ------ | -------- |  | -------- |  |  | ----- |  |  | ------ | 
|                                  |  | Period Ending |       
|                                  |  |               |       
|Index                             |  | 12/31/04      |        | 12/31/05 |  | 12/31/06 |  | 12/31/07 |        | 12/31/08 |  | 12/31/09 | 
|                                  |  |               |        |          |  |          |  |          |        |          |  |          | 
|Princeton National Bancorp,
 Inc. |  |               | 100.00 |          |  | 119.25   |  |          | 120.48 |          |  | 93.15    |  |  | 88.78 |  |  | 45.59  | 
|Russell 3000                      |  |               | 100.00 |          |  | 106.12   |  |          | 122.80 |          |  | 129.11   |  |  | 80.94 |  |  | 103.88 | 
|SNL Midwest Bank Index            |  |               | 100.00 |          |  | 96.36    |  |          | 111.38 |          |  | 86.81    |  |  | 57.11 |  |  | 48.40  | 
|NASDAQ Bank                       |  |               | 100.00 |          |  | 95.67    |  |          | 106.20 |          |  | 82.76    |  |  | 62.96 |  |  | 51.31  | 

The
Corporations Common Stock began trading on the NASDAQ Stock Market under the
symbol PNBC on May 8, 1992. On December
31, 2009 and February 26, 2010, the Record Date, the closing bid prices for the
Common Stock as quoted on NASDAQ Online were $10.81 and $9.90, respectively.

50

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