|                                                        |                                                                                         |  | 
|------------------------------------------------------- | --------------------------------------------------------------------------------------- |  | 
|UNITED STATES SECURITIES AND EXCHANGE COMMISSION       
|Washington, D.C. 20549                                 
|                                                       
|                                                        |                                                                                         | 
|                                                       
|FORM 10-Q                                              
|                                                       
|                                                        |                                                                                         | 
|                                                       
|þ                                                       | QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the Quarterly Period Ended March 31, 2010          
|                                                       
|Commission
File Number: 0-20050                        
|                                                        |                                                                                         | 
|                                                       
|PRINCETON
NATIONAL BANCORP, INC.                       
|(Exact name of Registrant as specified in its charter.)

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

Indicate by check mark whether the Registrant: (1)
has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90
days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

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

|                                              |  |  
|--------------------------------------------- |  | -
|Large
 accelerated filer                      |  | o
|Accelerated
 filer                            |  | o
|Non-accelerated
 filer                        |  | o
|Smaller
 reporting company                    |  | þ
|(Do not check if a smaller reporting company) | 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

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

|                        |                               
|----------------------- | ------------------------------
|                        |                               
|                        |                               
|Class                   | Outstanding
 at April 27, 2010
|Common, par value $5.00 | 3,309,710                     
|                        |                               
|                        |                               

| |       | 
| | ----- | 
| | Page1 | 







Part I: FINANCIAL INFORMATION

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

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

Part II: OTHER INFORMATION

Item 1A. Risk Factors

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

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

(a)  None.

Item 6.
Exhibits

| |      |                                                                                                                                                                           
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1 | Thomas D. Ogaard Employment Agreement
(incorporated by reference from the Form 8-K filed on January 29, 2010).                                                            
| |      |                                                                                                                                                                           
| | 10.2 | Agreement by and between Citizens First
National Bank and the Comptroller of the Currency (incorporated by reference from the Form 8-K filed
on March 17, 2010).          
| |      |                                                                                                                                                                           
| | 10.3 | Form of Restricted Stock Agreement
(filed herewith).                                                                                                                      
| |      |                                                                                                                                                                           
| | 31.1 | Certification of Chief Executive Officer
required by Rule 13a-14(a).                                                                                                      
| |      |                                                                                                                                                                           
| | 31.2 | Certification of Chief Financial Officer
required by Rule 13a-14(a).                                                                                                      
| |      |                                                                                                                                                                           
| | 32.1 | Certification of Chief Executive Officer
and Chief Financial Officer required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350.

| |       | 
| | ----- | 
| | Page2 | 

---



SIGNATURES

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

PRINCETON NATIONAL BANCORP, INC.

|   |                                     |  |                                                     |                    
|-- | ----------------------------------- |  | --------------------------------------------------- | -------------------
|By | /s/ Thomas D. Ogaard                |  | By                                                  | /s/ Todd D. Fanning
|   | Thomas D. Ogaard                    |  |                                                     | Todd D. Fanning    
|   | President & Chief Executive Officer |  | Executive. Vice President & Chief Financial Officer
|   | April 28, 2010                      |  | April 28, 2010                                     

| |       | 
| | ----- | 
| | Page3 | 

---



Schedule
1

Princeton National Bancorp, Inc.
Consolidated Balance Sheets(dollars in
thousands except per share data)

|                                                                                                                                        |  |                               |           |                       |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | --------- | --------------------- | - | --------- | -
|                                                                                                                                        |  | March
  31,
  2010(unaudited) |           | December
  31,
  2009 |  
|ASSETS                                                                                                                                  |  |                               |           |                       |   |           |  
|Cash and due from banks                                                                                                                 |  | $                             | 12,797    |                       | $ | 15,546    |  
|Interest-bearing deposits with financial institutions                                                                                   |  |                               | 81,387    |                       |   | 55,527    |  
|Total cash and cash equivalents                                                                                                         |  |                               | 94,184    |                       |   | 71,073    |  
|                                                                                                                                        |  |                               |           |                       |   |           |  
|Loans held-for-sale, at lower of cost or market                                                                                         |  |                               | 932       |                       |   | 3,296     |  
|                                                                                                                                        |  |                               |           |                       |   |           |  
|Investment securities:                                                                                                                  |  |                               |           |                       |   |           |  
|Available-for-sale, at fair value                                                                                                       |  |                               | 250,459   |                       |   | 288,474   |  
|Held-to-maturity, at
 amortized cost (fair value of $14,480 and $13,331)                                                                |  |                               | 13,947    |                       |   | 12,793    |  
|Total investment securities                                                                                                             |  |                               | 264,406   |                       |   | 301,267   |  
|                                                                                                                                        |  |                               |           |                       |   |           |  
|Loans:                                                                                                                                  |  |                               |           |                       |   |           |  
|Loans, net of unearned interest                                                                                                         |  |                               | 756,836   |                       |   | 798,074   |  
|Allowance for loan losses                                                                                                               |  |                               | (14,682   | )                     |   | (12,075   | )
|Net loans                                                                                                                               |  |                               | 742,154   |                       |   | 785,999   |  
|                                                                                                                                        |  |                               |           |                       |   |           |  
|Premises and equipment, net of accumulated depreciation                                                                                 |  |                               | 27,888    |                       |   | 28,269    |  
|Land held for sale, at lower of cost or market                                                                                          |  |                               | 2,354     |                       |   | 2,354     |  
|Federal Reserve and Federal Home Loan Bank stock                                                                                        |  |                               | 4,230     |                       |   | 4,230     |  
|Bank-owned life insurance                                                                                                               |  |                               | 22,781    |                       |   | 22,540    |  
|Accrued interest receivable                                                                                                             |  |                               | 7,355     |                       |   | 9,267     |  
|Other real estate owned                                                                                                                 |  |                               | 20,145    |                       |   | 17,658    |  
|Intangible assets, net of accumulated amortization                                                                                      |  |                               | 3,143     |                       |   | 3,347     |  
|Other assets                                                                                                                            |  |                               | 10,902    |                       |   | 11,430    |  
|                                                                                                                                        |  |                               |           |                       |   |           |  
|TOTAL ASSETS                                                                                                                            |  | $                             | 1,200,474 |                       | $ | 1,260,730 |  
|                                                                                                                                        |  |                               |           |                       |  
|LIABILITIES                                                                                                                             |  |                               |           |                       |   |           |  
|Deposits:                                                                                                                               |  |                               |           |                       |   |           |  
|Demand                                                                                                                                  |  | $                             | 121,863   |                       | $ | 136,026   |  
|Interest-bearing demand                                                                                                                 |  |                               | 377,453   |                       |   | 374,624   |  
|Savings                                                                                                                                 |  |                               | 72,984    |                       |   | 68,292    |  
|Time                                                                                                                                    |  |                               | 459,154   |                       |   | 496,597   |  
|                                                                                                                                        |  |                               |           |                       |   |           |  
|Total deposits                                                                                                                          |  |                               | 1,031,454 |                       |   | 1,075,539 |  
|                                                                                                                                        |  |                               |           |                       |   |           |  
|Borrowings:                                                                                                                             |  |                               |           |                       |   |           |  
|Customer repurchase agreements                                                                                                          |  |                               | 39,082    |                       |   | 47,327    |  
|Interest-bearing demand notes issued to the U.S. Treasury                                                                               |  |                               | 1,514     |                       |   | 1,021     |  
|Advances from the Federal Home Loan Bank                                                                                                |  |                               | 22,500    |                       |   | 31,500    |  
|Trust preferred securities                                                                                                              |  |                               | 25,000    |                       |   | 25,000    |  
|                                                                                                                                        |  |                               |           |                       |   |           |  
|Total borrowings                                                                                                                        |  |                               | 88,096    |                       |   | 104,848   |  
|                                                                                                                                        |  |                               |           |                       |   |           |  
|Other liabilities                                                                                                                       |  |                               | 4,989     |                       |   | 5,683     |  
|                                                                                                                                        |  |                               |           |                       |   |           |  
|TOTAL LIABILITIES                                                                                                                       |  |                               | 1,124,539 |                       |   | 1,186,070 |  
|                                                                                                                                        |  |                               |           |                       |   |           |  
|STOCKHOLDERS EQUITY                                                                                                                    |  |                               |           |                       |   |           |  
|Preferred stock: no par value, 100,000 shares authorized: 25,083
 shares issued and outstanding at March 31, 2010 and December 31, 2009 |  |                               | 24,958    |                       |   | 24,958    |  
|Common stock: $5 par value, 7,000,000 shares authorized: 4,478,295
 shares issued at March 31, 2010 and December 31, 2009               |  |                               | 22,391    |                       |   | 22,391    |  
|Common stock warrants                                                                                                                   |  |                               | 150       |                       |   | 150       |  
|Additional paid-in capital                                                                                                              |  |                               | 18,419    |                       |   | 18,423    |  
|Retained earnings                                                                                                                       |  |                               | 29,796    |                       |   | 29,851    |  
|Accumulated other comprehensive income, net of taxes                                                                                    |  |                               | 4,093     |                       |   | 2,816     |  
|Less: cost of 1,168,585
 and 1,171,296 treasury shares at March 31, 2010 and December 31, 2009, respectively                            |  |                               | (23,872   | )                     |   | (23,929   | )
|                                                                                                                                        |  |                               |           |                       |   |           |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                              |  |                               | 75,935    |                       |   | 74,660    |  
|                                                                                                                                        |  |                               |           |                       |   |           |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                              |  | $                             | 1,200,474 |                       | $ | 1,260,730 |  
|                                                                                                                                        |  |                               |           |                       |   |           |  
|                                                                                                                                        |  |                               |           |                       |  

See accompanying notes to
consolidated financial statements.

| |       | 
| | ----- | 
| | Page4 | 

---



Schedule 2

Princeton National Bancorp, Inc.
Consolidated Statements of Income (unaudited)(dollars in
thousands except share data)

|                                                                             |  |                                     |           |      |   |           |  
|---------------------------------------------------------------------------- |  | ----------------------------------- | --------- | ---- | - | --------- | -
|                                                                             |  | For the three monts ended March 31, |          
|                                                                             |  | 2010                                |           | 2009 |  
|                                                                             |  |                                     |           |      |  
|Interest income:                                                             |  |                                     |           |      |   |           |  
|Interest and fees on loans                                                   |  | $                                   | 10,585    |      | $ | 11,059    |  
|Interest on investment securities:                                           |  |                                     |           |      |   |           |  
|Taxable                                                                      |  |                                     | 1,491     |      |   | 1,803     |  
|Tax-exempt                                                                   |  |                                     | 1,352     |      |   | 1,128     |  
|                                                                             |  |                                     |           |      |   |           |  
|Interest on
 interest-bearing deposits in other banks                        |  |                                     | 32        |      |   | 16        |  
|                                                                             |  |                                     |           |      |   |           |  
|Total interest income                                                        |  |                                     | 13,460    |      |   | 14,006    |  
|                                                                             |  |                                     |           |      |   |           |  
|Interest expense:                                                            |  |                                     |           |      |   |           |  
|Interest on deposits                                                         |  |                                     | 3,372     |      |   | 5,147     |  
|Interest on borrowings                                                       |  |                                     | 605       |      |   | 780       |  
|                                                                             |  |                                     |           |      |   |           |  
|Total interest expense                                                       |  |                                     | 3,977     |      |   | 5,927     |  
|                                                                             |  |                                     |           |      |   |           |  
|Net interest income                                                          |  |                                     | 9,483     |      |   | 8,079     |  
|Provision for loan losses                                                    |  |                                     | 3,925     |      |   | 1,170     |  
|                                                                             |  |                                     |           |      |   |           |  
|Net
 interest income after provision for loan losses                         |  |                                     | 5,558     |      |   | 6,909     |  
|                                                                             |  |                                     |           |      |   |           |  
|Non-interest income:                                                         |  |                                     |           |      |   |           |  
|Trust & farm management fees                                                 |  |                                     | 264       |      |   | 314       |  
|Service charges on deposit accounts                                          |  |                                     | 891       |      |   | 976       |  
|Other service charges                                                        |  |                                     | 495       |      |   | 446       |  
|Gain on sales of securities available-for-sale                               |  |                                     | 642       |      |   | 187       |  
|Brokerage fee income                                                         |  |                                     | 189       |      |   | 198       |  
|Mortgage banking income, net                                                 |  |                                     | 460       |      |   | 1         |  
|Bank-owned life insurance income                                             |  |                                     | 229       |      |   | 243       |  
|Other operating income                                                       |  |                                     | 22        |      |   | 430       |  
|                                                                            
|Total non-interest income                                                    |  |                                     | 3,192     |      |   | 2,795     |  
|                                                                             |  |                                     |           |      |   |           |  
|Non-interest expense:                                                        |  |                                     |           |      |   |           |  
|Salaries and employee benefits                                               |  |                                     | 4,412     |      |   | 4,471     |  
|Occupancy                                                                    |  |                                     | 700       |      |   | 709       |  
|Equipment expense                                                            |  |                                     | 767       |      |   | 773       |  
|Federal insurance assessments                                                |  |                                     | 698       |      |   | 697       |  
|Intangible assets amortization                                               |  |                                     | 204       |      |   | 208       |  
|Data processing                                                              |  |                                     | 312       |      |   | 316       |  
|Advertising                                                                  |  |                                     | 176       |      |   | 197       |  
|Other real estate owned expenses, net                                        |  |                                     | 735       |      |   | 113       |  
|Other operating expense                                                      |  |                                     | 1,282     |      |   | 1,168     |  
|                                                                             |  |                                     |           |      |   |           |  
|Total non-interest expense                                                   |  |                                     | 9,286     |      |   | 8,652     |  
|                                                                             |  |                                     |           |      |   |           |  
|Income before income taxes                                                   |  |                                     | (536      | )    |   | 1,052     |  
|Income tax benefit                                                           |  |                                     | (795      | )    |   | (104      | )
|                                                                             |  |                                     |           |      |   |           |  
|                                                                             |  |                                     |           |      |   |           |  
|Net income                                                                   |  |                                     | 259       |      |   | 1,156     |  
|                                                                             |  |                                     |           |      |   |           |  
|Dividends on preferred shares                                                |  |                                     | 314       |      |   | 237       |  
|Accretion of preferred stock discount                                        |  |                                     | 7         |      |   | 4         |  
|                                                                             |  |                                     |           |      |   |           |  
|Net (loss) income available to common stockholders                           |  | $                                   | (62       | )    | $ | 915       |  
|                                                                             |  |                                     |           |      |   |           |  
|Earnings (loss) per share:                                                   |  |                                     |           |      |   |           |  
|Basic net (loss) income per common share available to common
 stockholders   |  | $                                   | (0.02     | )    | $ | 0.28      |  
|Diluted net (loss) income per common share available to common
 stockholders |  | $                                   | (0.02     | )    | $ | 0.28      |  
|                                                                             |  |                                     |           |      |   |           |  
|Basic weighted average shares outstanding                                    |  |                                     | 3,306,762 |      |   | 3,298,064 |  
|Diluted weighted average shares outstanding                                  |  |                                     | 3,306,762 |      |   | 3,298,725 |  
|                                                                             |  |                                     |           |      |   |           |  

See accompanying notes to
consolidated financial statements.

| |       | 
| | ----- | 
| | Page5 | 

---



Schedule
3

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (unaudited)(dollars
in thousands except per share data)

|                                                                                                 |  |                |        |             |   |                     |  |                          |     |                  |   |                                                       |   |               |        |       |   |       |  |    |        |   |   |        |  
|------------------------------------------------------------------------------------------------ |  | -------------- | ------ | ----------- | - | ------------------- |  | ------------------------ | --- | ---------------- | - | ----------------------------------------------------- | - | ------------- | ------ | ----- | - | ----- |  | -- | ------ | - | - | ------ | -
|For the Three Months Ended
 March 31, 2010                                                       |  | PreferredStock |        | CommonStock |   | CommonStockWarrants |  | AdditionalPaid-inCapital |     | RetainedEarnings |   | AccumulatedOtherComprehensiveIncome,net of tax effect |   | TreasuryStock |        | Total |  
|                                                                                                 |  |                |        |             |   |                     |  |                          |     |                  |   |                                                       |   |               |        |       |   |       |  |    |        |   |   |        |  
|Balance, January 1, 2010                                                                         |  | $              | 24,958 |             | $ | 22,391              |  | $                        | 150 |                  | $ | 18,423                                                |   | $             | 29,851 |       | $ | 2,816 |  | ($ | 23,929 | ) | $ | 74,660 |  
|                                                                                                 |  |                |        |             |   |                     |  |                          |     |                  |   |                                                       |   |               |        |       |   |       |  |    |        |   |   |        |  
|Net income                                                                                       |  |                |        |             |   |                     |  |                          |     |                  |   |                                                       |   |               | 259    |       |   |       |  |    |        |   |   | 259    |  
|Dividends on preferred stock                                                                     |  |                |        |             |   |                     |  |                          |     |                  |   |                                                       |   |               | (314   | )     |   |       |  |    |        |   |   | (314   | )
|Accretion on preferred stock discount                                                            |  |                |       |             |   |                     |  |                          |     |                  |   |                                                       |   |               |       |       |   |       |  |    |        |   |   |       |  
|Sale of 1,341 shares of treasury common stock                                                    |  |                |        |             |   |                     |  |                          |     |                  |   | (12                                                   | ) |               |        |       |   |       |  |    | 23     |   |   | 11     |  
|Award of 2,000 shares of restricted common stock                                                 |  |                |        |             |   |                     |  |                          |     |                  |   | (14                                                   | ) |               |       |       |   |       |  |    | 34     |   |   | 20     |  
|Stock option compensation expense                                                                |  |                |        |             |   |                     |  |                          |     |                  |   | 22                                                    |   |               |        |       |   |       |  |    |        |   |   | 22     |  
|Other comprehensive income, net of $807 tax effect                                               |  |                |        |             |   |                     |  |                          |     |                  |   |                                                       |   |               |        |       |   | 1,277 |  |    |        |   |   | 1,277  |  
|                                                                                                 |  |                |        |             |   |                     |  |                          |     |                  |   |                                                       |   |               |        |       |   |       |  |    |        |   |   |        |  
|Balance, March 31, 2010                                                                          |  | $              | 24,958 |             | $ | 22,391              |  | $                        | 150 |                  | $ | 18,419                                                |   | $             | 29,796 |       | $ | 4,093 |  | ($ | 23,872 | ) | $ | 75,935 |  
|                                                                                                 |  |                |        |             |   |                     |  |                          |     |                  |   |                                                       |   |               |        |       |   |       |  |    |        |   |   |        |  
|For the Three Months Ended March 31, 2009                                                        |  |                |        |             |   |                     |  |                          |     |                  |   |                                                       |   |               |        |       |   |       |  |    |        |   |   |        |  
|                                                                                                 |  |                |        |             |   |                     |  |                          |     |                  |   |                                                       |   |               |        |       |   |       |  |    |        |   |   |        |  
|Balance, January 1, 2009                                                                         |  | $              |       |             | $ | 22,391              |  | $                        |    |                  | $ | 18,420                                                |   | $             | 54,329 |       | $ | 1,402 |  | ($ | 24,071 | ) | $ | 72,471 |  
|                                                                                                 |  |                |        |             |   |                     |  |                          |     |                  |   |                                                       |   |               |        |       |   |       |  |    |        |   |   |        |  
|Net income                                                                                       |  |                |        |             |   |                     |  |                          |     |                  |   |                                                       |   |               | 1,156  |       |   |       |  |    |        |   |   | 1,156  |  
|Issuance of 25,083 shares of preferred stock and 155,025 common stock
 warrants, net of expenses |  |                | 24,933 |             |   |                     |  |                          | 150 |                  |   | (63                                                   | ) |               |        |       |   |       |  |    |        |   |   | 25,020 |  
|Dividends on preferred stock                                                                     |  |                |        |             |   |                     |  |                          |     |                  |   |                                                       |   |               | (78    | )     |   |       |  |    |        |   |   | (78    | )
|Accretion on preferred stock discount                                                            |  |                | 5      |             |   |                     |  |                          |     |                  |   |                                                       |   |               | (5     | )     |   |       |  |    |        |   |   |       |  
|Sale of 2,098 shares of treasury common stock                                                    |  |                |        |             |   |                     |  |                          |     |                  |   | (4                                                    | ) |               |        |       |   |       |  |    | 36     |   |   | 32     |  
|Dividends on common stock ($.28 per share)                                                       |  |                |        |             |   |                     |  |                          |     |                  |   |                                                       |   |               | (923   | )     |   |       |  |    |        |   |   | (923   | )
|Stock option compensation expense                                                                |  |                |        |             |   |                     |  |                          |     |                  |   | 24                                                    |   |               |        |       |   |       |  |    |        |   |   | 24     |  
|Other comprehensive income, net of $160 tax effect                                               |  |                |        |             |   |                     |  |                          |     |                  |   |                                                       |   |               |        |       |   | 253   |  |    |        |   |   | 253    |  
|                                                                                                 |  |                |        |             |   |                     |  |                          |     |                  |   |                                                       |   |               |        |       |   |       |  |    |        |   |   |        |  
|Balance, March 31, 2009                                                                          |  | $              | 24,938 |             | $ | 22,391              |  | $                        | 150 |                  | $ | 18,377                                                |   | $             | 54,479 |       | $ | 1,655 |  | ($ | 24,035 | ) | $ | 97,955 |  

See accompanying notes to unaudited consolidated financial
statements

| |       | 
| | ----- | 
| | Page6 | 

---



Schedule
4

PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
(dollars in thousands)

|                                                                                      |  |                                      |         |      |   |         |  
|------------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | ---- | - | ------- | -
|                                                                                      |  | For the Three Months Ended
 March 31 |        
|                                                                                      |  | 2010                                 |         | 2009 |  
|Operating activities:                                                                 |  |                                      |         |      |   |         |  
|Net income                                                                            |  | $                                    | 259     |      | $ | 1,156   |  
|Adjustments to reconcile net income to net
 cash provided by operating activities:    |  |                                      |         |      |   |         |  
|Depreciation                                                                          |  |                                      | 531     |      |   | 564     |  
|Provision for loan losses                                                             |  |                                      | 3,925   |      |   | 1,170   |  
|Amortization of intangible assets and other
 purchase accounting adjustments, net     |  |                                      | 204     |      |   | 208     |  
|Amortization of premiums and discounts on
 investment securities, net                 |  |                                      | 404     |      |   | 185     |  
|Gain on sales of securities
 available-for-sale, net                                  |  |                                      | (642    | )    |   | (187    | )
|Impairment of mortgage servicing rights                                               |  |                                      | 0       |      |   | 556     |  
|Compensation expense for vested stock options                                         |  |                                      | 22      |      |   | 24      |  
|Loss on sales and writedowns of other real estate owned,
 net                         |  |                                      | (14     | )    |   | 0       |  
|Loans originated for sale                                                             |  |                                      | (15,808 | )    |   | (30,651 | )
|Proceeds from sales of loans originated for
 sale                                     |  |                                      | 18,172  |      |   | 31,722  |  
|(Increase) decrease in accrued interest payable                                       |  |                                      | (599    | )    |   | 153     |  
|Decrease in accrued interest receivable                                               |  |                                      | 1,912   |      |   | 1,392   |  
|Increase in other assets                                                              |  |                                      | 287     |      |   | (779    | )
|Decrease in other liabilities                                                         |  |                                      | (903    | )    |   | (1,325  | )
|                                                                                      |  |                                      |         |      |   |         |  
|Net cash provided by operating activities                                             |  |                                      | 7,750   |      |   | 4,188   |  
|                                                                                      |  |                                      |         |      |   |         |  
|Investing activities:                                                                 |  |                                      |         |      |   |         |  
|Proceeds from sales of investment
 securities available-for-sale                      |  |                                      | 24,418  |      |   | 18,197  |  
|Proceeds from maturities of investment
 securities available-for-sale                 |  |                                      | 17,952  |      |   | 21,263  |  
|Purchase of investment securities
 available-for-sale                                 |  |                                      | (1,949  | )    |   | (61,554 | )
|Proceeds from maturities of investment
 securities held-to-maturity                   |  |                                      | 0       |      |   | 1,005   |  
|Purchase of investment securities
 held-to-maturity                                   |  |                                      | (1,240  | )    |   | (1,915  | )
|Proceeds from sales of other real estate
 owned                                       |  |                                      | 1,044   |      |   | 0       |  
|Net decrease in loans                                                                 |  |                                      | 36,406  |      |   | 15,002  |  
|Purchases of premises and equipment                                                   |  |                                      | (150    | )    |   | (510    | )
|                                                                                      |  |                                      |         |      |   |         |  
|Net cash provided (used) in investing
 activities                                     |  |                                      | 76,481  |      |   | (8,512  | )
|                                                                                      |  |                                      |         |      |   |         |  
|Financing activities:                                                                 |  |                                      |         |      |   |         |  
|Net (decrease) increase in deposits                                                   |  |                                      | (44,085 | )    |   | 48,832  |  
|Net decrease in borrowings                                                            |  |                                      | (16,752 | )    |   | (20,952 | )
|Dividends on common stock                                                             |  |                                      | 0       |      |   | (923    | )
|Dividends on preferred stock                                                          |  |                                      | (314    | )    |   | (78     | )
|Sales of treasury common stock                                                        |  |                                      | 31      |      |   | 32      |  
|Award of restricted stock                                                             |  |                                      | 20      |      |   | 0       |  
|Proceeds from issuance of preferred stock
 and common stock warrants, net of expenses |  |                                      | 0       |      |   | 25,020  |  
|                                                                                      |  |                                      |         |      |   |         |  
|Net cash (used) provided by financing
 activities                                     |  |                                      | (61,120 | )    |   | 51,931  |  
|                                                                                      |  |                                      |         |      |   |         |  
|Increase in cash and cash equivalents                                                 |  |                                      | 23,111  |      |   | 47,607  |  
|Cash and cash equivalents at beginning of period                                      |  |                                      | 71,073  |      |   | 20,261  |  
|                                                                                      |  |                                      |         |      |   |         |  
|Cash and cash equivalents at March 31                                                 |  | $                                    | 94,184  |      | $ | 67,868  |  
|                                                                                      |  |                                      |         |      |   |         |  
|                                                                                      |  |                                      |         |      |   |         |  
|                                                                                      |  |                                      |         |      |   |         |  
|Supplemental
 disclosures of cash flow information:                                   |  |                                      |         |      |   |         |  
|Cash paid during the period for:                                                      |  |                                      |         |      |   |         |  
|Interest                                                                              |  | $                                    | 4,585   |      | $ | 5,774   |  
|Income taxes                                                                          |  | $                                    | 150     |      | $ | 4       |  
|                                                                                      |  |                                      |         |      |   |         |  
|Supplemental
 disclosures of non-cash flow activities:                                |  |                                      |         |      |   |         |  
|Loans transferred to other real estate owned                                          |  | $                                    | 3,194   |      | $ | 683     |  

See accompanying notes to unaudited
consolidated financial statements

| |       | 
| | ----- | 
| | Page7 | 

---



Schedule
5

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

The
accompanying unaudited condensed consolidated financial statements reflect all
adjustments, which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods ended March 31, 2010 and
2009, and all such adjustments are of a normal recurring nature. The 2009
year-end consolidated balance sheet data was derived from audited financial
statements, but do not include all disclosures required by generally accepted
accounting principles.

The
unaudited consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the information
required by accounting principles generally accepted in the United States of
America for complete financial statements and related footnote disclosures. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) considered for a fair presentation of the results for the interim
period have been included. For further information, refer to the consolidated
financial statements and notes included in the Registrants 2009 Annual Report
on Form 10-K. Results of operations for interim periods are not necessarily
indicative of the results that may be expected for the year. Certain amounts in
the 2009 consolidated financial statements have been reclassified to conform to
the 2010 presentation.

NOTE 1  CAPITAL PURCHASE PROGRAM

On
January 23, 2009, the Corporation received $25,083,000 of equity capital by
issuing to the United States Department of Treasury 25,083 shares of the
Corporations 5.00% Series B Fixed Rate Cumulative Perpetual Preferred Stock,
no par value, 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 common stock warrants 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 Preferred shares dividends, resulting in
additional dilution to the Corporations earnings per common share. The
warrants are 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. Any redemption requires Federal Reserve approval. The Series B
Perpetual Preferred stock ranks senior to the Corporations existing authorized
Series A Junior Participating Preferred stock.

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

NOTE 2  EARNINGS PER SHARE CALCULATION

The
following table sets forth the computation of basic and diluted earnings per
share for the periods indicated (in thousands, except share data):

|                                                                   |  |                               |           |      |   |           | 
|------------------------------------------------------------------ |  | ----------------------------- | --------- | ---- | - | --------- | 
|                                                                   |  | Three Months Ended
 March 31, |          
|                                                                   |  | 2010                          |           | 2009 |  
|Numerator:                                                         |  |                               |           |      |   |           | 
|Net income available to common stockholders                        |  | $                             | (62       | )    | $ | 914       | 
|                                                                   |  |                               |           |      |   |           | 
|Denominator:                                                       |  |                               |           |      |   |           | 
|Basic earnings per share-weighted average common shares            |  |                               | 3,306,762 |      |   | 3,298,064 | 
|                                                                   |  |                               |           |      |   |           | 
|Effect of dilutive securities-stock options                        |  |                               | 0         |      |   | 661       | 
|                                                                   |  |                               |           |      |   |           | 
|Diluted earnings per share-adjusted weighted average common shares |  |                               | 3,306,762 |      |   | 3,298,725 | 
|                                                                   |  |                               |           |      |   |           | 
|Net income per share
 available to common stockholders:            |  |                               |           |      |   |           | 
|                                                                   |  |                               |           |      |   |           | 
|Basic                                                              |  | $                             | (0.02     | )    | $ | 0.28      | 
|Diluted                                                            |  | $                             | (0.02     | )    | $ | 0.28      | 

| |       | 
| | ----- | 
| | Page8 | 

---



The
following shares were not considered in computing diluted earnings per share
for the three-month periods ended March 31, 2010 and 2009 because they were
anti-dilutive:

|                                                                                |  |                               |         |      |  |         | 
|------------------------------------------------------------------------------- |  | ----------------------------- | ------- | ---- |  | ------- | 
|                                                                                |  | Three Months Ended
 March 31, |        
|                                                                                |  | 2010                          |         | 2009 | 
|Stock options to purchase shares of common stock                                |  |                               | 522,511 |      |  | 448,061 | 
|                                                                                |  |                               |         |      |  |         | 
|Average dilutive potential common shares associated with common stock
 warrants |  |                               | 155,025 |      |  | 155,025 | 

NOTE 3  GOODWILL AND INTANGIBLE ASSETS

The
balance of intangible assets, net of accumulated amortization, totaled
$3,143,000 and $3,347,000 at March 31, 2010 and December 31, 2009,
respectively.

The
Corporation had a goodwill impairment study performed as of December 31, 2009.
If the implied fair value of goodwill is lower than its carrying amount,
goodwill impairment is indicated and goodwill is written down to its implied
fair value. Subsequent increases in goodwill value are not recognized in the
financial statements. The goodwill was deemed impaired as of December 31, 2009
and written off in its entirety.

The
following table summarizes the Corporations intangible assets, which are
subject to amortization, as of March 31, 2010 and December 31, 2009:

|                        |  |                        |       |                           |   |                        |   |                           |       |  |   |        |  
|----------------------- |  | ---------------------- | ----- | ------------------------- | - | ---------------------- | - | ------------------------- | ----- |  | - | ------ | -
|(in thousands)          |  |                        |       |                           |   |                        |   |                           |       |  |   |        |  
|                        |  | March 31, 2010         |       | December 31, 2009         |  
|                        |  | Gross Carrying
 Amount |       | Accumulated
 Amortization |   | Gross Carrying
 Amount |   | Accumulated
 Amortization |      
|Core deposit intangible |  | $                      | 9,004 |                           | $ | (5,914                 | ) | $                         | 9,004 |  | $ | (5,715 | )
|Other intangible assets |  |                        | 234   |                           |   | (181                   | ) |                           | 234   |  |   | (176   | )
|Total                   |  | $                      | 9,238 |                           | $ | (6,095                 | ) | $                         | 9,238 |  | $ | (5,891 | )

Amortization
expense of all intangible assets totaled $204,000 and $208,000 for of the three
months ended March 31, 2010 and 2009, respectively. The amortization expense of
these intangible assets will be approximately $615,000 for the remaining three
quarters of 2010.

NOTE 4  ORIGINATED MORTGAGE SERVICING RIGHTS

The
Corporation has originated mortgage servicing rights which are included in
other assets on the consolidated balance sheets. Mortgage servicing rights are
amortized in proportion to, and over the period of, estimated net servicing
income on a basis similar to the interest method using an accelerated
amortization method and are subject to periodic impairment testing. Changes in
the carrying value of capitalized mortgage servicing rights are summarized as
follows:

|                                 |  |   |       |  
|-------------------------------- |  | - | ----- | -
|(in thousands)                   |  |   |       |  
|                                 |  |   |       |  
|Balance, January 1, 2010         |  | $ | 3,285 |  
|Servicing rights capitalized     |  |   | 142   |  
|Amortization of servicing rights |  |   | (88   | )
|Balance, March 31, 2010          |  | $ | 3,339 |  

| |       | 
| | ----- | 
| | Page9 | 

---



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

(in thousands)

|                         |  |   |     | 
|------------------------ |  | - | --- | 
|Balance, January 1, 2010 |  | $ | 185 | 
|Additions                |  |   |    | 
|Reductions               |  |   |    | 
|Direct write-downs       |  |   |    | 
|Balance, March 31, 2010  |  | $ | 185 | 

The
Corporation services loans for others with unpaid principal balances at March
31, 2010 and December 31, 2009 of approximately $368,464,000, and $363,862,000,
respectively.

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

Estimated
 Amortization Expense:

|                                             |  |                       |       | 
|-------------------------------------------- |  | --------------------- | ----- | 
|                                             |  | Amount (in thousands) |      
|For the nine months ended
 December 31, 2010 |  | $                     | 238   | 
|For the year ended
 December 31, 2011        |  |                       | 306   | 
|For the year ended
 December 31, 2012        |  |                       | 287   | 
|For the year ended
 December 31, 2013        |  |                       | 269   | 
|For the year ended
 December 31, 2014        |  |                       | 252   | 
|For the year ended
 December 31, 2015        |  |                       | 237   | 
|Thereafter                                   |  |                       | 1,608 | 

NOTE 5  OTHER COMPREHENSIVE INCOME

Other
comprehensive income components and related taxes for the three months ended
March 31, 2010 and 2009 were as follows:

(in thousands)

|                                                                         |  |      |       |      |   |      |  
|------------------------------------------------------------------------ |  | ---- | ----- | ---- | - | ---- | -
|                                                                         |  | 2010 |       | 2009 |  
|                                                                         |  |      |       |      |   |      |  
|Net unrealized gains on
 securities available-for-sale                   |  | $    | 2,726 |      | $ | 600  |  
|Less: Reclassification
 adjustment for realized gains included in income |  |      | (642  | )    |   | (187 | )
|                                                                         |  |      | 2,084 |      |   | 413  |  
|                                                                         |  |      |       |      |   |      |  
|Amortization of transition
 obligation of post retirement health care    |  |      | 0     |      |   | 0    |  
|                                                                         |  |      |       |      |   |      |  
|Other comprehensive
 income, before tax effect                           |  |      | 2,084 |      |   | 413  |  
|                                                                         |  |      |       |      |   |      |  
|Less: Tax expense                                                        |  |      | 807   |      |   | 160  |  
|                                                                         |  |      |       |      |   |      |  
|Other comprehensive income                                               |  | $    | 1,277 |      | $ | 253  |  

| |        | 
| | ------ | 
| | Page10 | 

---



The
components of accumulated other comprehensive income, included in stockholders
equity at March 31, 2010 and 2009 are as follows:

|                                                      |  |      |       |      |   |       |  
|----------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|                                                      |  | 2010 |       | 2009 |  
|Net
 unrealized gain on securities available-for-sale |  | $    | 7,210 |      | $ | 3,232 |  
|Net
 unrealized benefit obligations                   |  |      | (530  | )    |   | (530  | )
|                                                      |  |      | 6,680 |      |   | 2,702 |  
|                                                      |  |      |       |      |   |       |  
|Less: Tax
 effect                                     |  |      | 2,587 |      |   | 1,047 |  
|                                                      |  |      |       |      |   |       |  
|Net of-tax
 amount                                   |  | $    | 4,093 |      | $ | 1,655 |  

NOTE 6  FEDERAL HOME LOAN BANK STOCK

The
subsidiary bank held Federal Home Loan Bank stock totaling $2,373,000 at March
31, 2010 and December 31, 2009. The Federal Home Loan Bank of Chicago is operating
under a Cease and Desist Order from their regulator, the Federal Housing
Finance Board. The Federal Home Loan Bank will continue to provide liquidity
and funding through advances, however, the order prohibits capital stock
repurchases until a time to be determined by the Federal Housing Finance Board
and requires their approval for dividends. With regard to dividends, the
Federal Home Loan Bank 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 the first three months of 2010
or during 2009. Management performed an analysis and deemed the cost method
investment in Federal Home Loan Bank stock was ultimately recoverable as of
March 31, 2010 and December 31, 2009.

NOTE 7  INVESTMENT SECURITIES

The
amortized cost and fair value of securities available-for-sale and
held-to-maturity are as follows:

|                                                                |  |                 |         |                          |   |                           |  |             |      |   |   |         | 
|--------------------------------------------------------------- |  | --------------- | ------- | ------------------------ | - | ------------------------- |  | ----------- | ---- | - | - | ------- | 
|                                                                |  | March
 31, 2010 |        
|                                                                |  | Amortized
 Cost |         | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Fair
 Value |     
|                                                                |  | (In
 thousands) |        
|Securities available-for-sale                                   |  |                 |         |                          |   |                           |  |             |      |   |   |         | 
|Obligations of U.S. government agencies and
 sponsored entities |  | $               | 28,523  |                          | $ | 536                       |  | $           | (41  | ) | $ | 29,100  | 
|Obligations of states and political subdivisions                |  |                 | 110,441 |                          |   | 4,252                     |  |             | (168 | ) |   | 114,525 | 
|Mortgage-backed securities:                                     |  |                 |         |                          |   |                           |  |             |      |   |   |         | 
|Other mortgage-backed securities, includes
 CMOs (3)            |  |                 | 104,285 |                          |   | 2,550                     |  |             | (161 | ) |   | 106,674 | 
|Total securities available-for-sale                             |  | $               | 243,249 |                          | $ | 7,580                     |  | $           | (370 | ) | $ | 250,459 | 
|Securities held-to-maturity                                     |  |                 |         |                          |   |                           |  |             |      |   |   |         | 
|Obligations of states and political
 subdivisions               |  | $               | 13,947  |                          | $ | 540                       |  | $           | (7   | ) | $ | 14,480  | 
|Total securities                                                |  | $               | 257,196 |                          | $ | 8,121                     |  | $           | (377 | ) | $ | 264,939 | 

| | 
| | 
|

|    |                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------
|(1) | Includes
 obligations of the Government National Mortgage Association (GNMA).                                             
|    |                                                                                                                             
|(2) | Includes
 obligations of the Federal Home Loan Mortgage Corporation (FHLMC) and
 Fannie Mae Mortgage Association (FNMA).
|    |                                                                                                                             
|(3) | Includes
 obligations issued or guaranteed by FNMA, FHLMC or GNMA.                                                          

|                                                                                              |  |                    |         |                          |   |                           |  |             |        |   |   |         | 
|--------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ------------------------ | - | ------------------------- |  | ----------- | ------ | - | - | ------- | 
|                                                                                              |  | December
 31, 2009 |        
|                                                                                              |  | Amortized
 Cost    |         | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Fair
 Value |       
|                                                                                              |  | (In
 thousands)    |        
|Securities available-for-sale                                                                 |  |                    |         |                          |   |                           |  |             |        |   |   |         | 
|Obligations of U.S. government agencies and
 government-sponsored entities (GSEs) (1)(2)(3) |  | $                  | 95,498  |                          | $ | 1,560                     |  | $           | (745   | ) | $ | 96,313  | 
|Obligations of states and political
 subdivisions                                             |  |                    | 116,864 |                          |   | 3,580                     |  |             | (366   | ) |   | 120,078 | 
|Other mortgage-backed securities, includes
 CMOs (3)                                          |  |                    | 70,985  |                          |   | 1,156                     |  |             | (58    | ) |   | 72,083  | 
|Total securities available-for-sale                                                           |  | $                  | 283,347 |                          | $ | 6,296                     |  | $           | (1,169 | ) | $ | 288,474 | 
|Securities held-to-maturity                                                                   |  |                    |         |                          |   |                           |  |             |        |   |   |         | 
|Obligations of states and political
 subdivisions                                             |  | $                  | 12,793  |                          | $ | 547                       |  | $           | (9     | ) | $ | 13,331  | 
|Total securities                                                                              |  | $                  | 296,140 |                          | $ | 6,843                     |  | $           | (1,178 | ) | $ | 301,805 | 

| | 
| | 
|

|    |                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------
|(1) | Includes
 obligations of the FHLMC and FNMA.                                                                                
|    |                                                                                                                             
|(2) | Includes
 obligations of the Federal Home Loan Mortgage Corporation (FHLMC) and
 Fannie Mae Mortgage Association (FNMA).
|    |                                                                                                                             
|(3) | Includes
 obligations issued or guaranteed by FNMA, FHLMC or GNMA.                                                          

| |        | 
| | ------ | 
| | Page11 | 

---



The
following is a summary of the fair value of securities held-to-maturity and
available-for-sale with unrealized losses and an aging of those unrealized
losses:

|                                                                                                                            |  |                      |        |                    |   |             |   |                    |       |             |   |                    |   |   |        |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------ | ------------------ | - | ----------- | - | ------------------ | ----- | ----------- | - | ------------------ | - | - | ------ |  | - | ------ | -
|                                                                                                                            |  | March
 31, 2010      |       
|                                                                                                                            |  | Less
 Than 12 Months |        | 12
 Months or More |   | Total       |  
|                                                                                                                            |  | Fair
 Value          |        | Unrealized
 Losses |   | Fair
 Value |   | Unrealized
 Losses |       | Fair
 Value |   | Unrealized
 Losses |  
|                                                                                                                            |  | (In
 thousands)      |       
|Securities available-for-sale:                                                                                              |  |                      |        |                    |   |             |   |                    |       |             |   |                    |   |   |        |  |   |        |  
|Obligations of U.S. Treasury and obligations of U.S. government
 agencies and government-sponsored entities (GSEs) (1)(2) |  | $                    | 19,635 |                    |   | (210        | ) |                    |      |             |   |                   |   |   | 19,635 |  |   | (210   | )
|Obligations of states and political subdivisions                                                                            |  |                      | 9,875  |                    |   | (123        | ) |                    | 4,333 |             |   | (52                | ) |   | 14,208 |  |   | (175   | )
|Collaterlized mortgage obligations                                                                                          |  |                      | 821    |                    |   | (1          | ) |                    |      |             |   |                   |   |   | 821    |  |   | (1     | )
|Total securities available-for-sale                                                                                         |  |                      | 30,331 |                    |   | (334        | ) |                    | 4,333 |             |   | (52                | ) |   | 34,664 |  |   | (4,817 | )
|Total temporarily impaired securities                                                                                       |  | $                    | 30,331 |                    | $ | (334        | ) | $                  | 4,333 |             | $ | (52                | ) | $ | 34,664 |  | $ | (4,817 | )

| | 
| | 
|

|    |                                      
|--- | -------------------------------------
|(1) | Includes
 obligations of GNMA.       
|    |                                      
|(2) | Includes
 issues from FNMA and FHLMC.

|                                                                                           |  |                      |        |                    |   |             |   |                    |       |             |   |                    |   |   |        |  |   |        |  
|------------------------------------------------------------------------------------------ |  | -------------------- | ------ | ------------------ | - | ----------- | - | ------------------ | ----- | ----------- | - | ------------------ | - | - | ------ |  | - | ------ | -
|                                                                                           |  |                      |        | December
 31, 2009 |   |             |  
|                                                                                           |  | Less
 Than 12 Months |        | 12
 Months or More |   | Total       |  
|                                                                                           |  | Fair
 Value          |        | Unrealized
 Losses |   | Fair
 Value |   | Unrealized
 Losses |       | Fair
 Value |   | Unrealized
 Losses |  
|                                                                                           |  | (In
 thousands)      |       
|Securities available-for-sale:                                                             |  |                      |        |                    |   |             |   |                    |       |             |   |                    |   |   |        |  |   |        |  
|Obligations of U.S. government agencies and
 government-sponsored entities (GSEs) (1)(2) |  | $                    | 39,012 |                    | $ | (745        | ) | $                  | 7     |             | $ |                   |   | $ | 39,019 |  | $ | (745   | )
|Obligations of states and political subdivisions                                           |  |                      | 17,114 |                    |   | (255        | ) |                    | 5,344 |             |   | (120               | ) |   | 22,458 |  |   | (375   | )
|Collateralized mortgage obligations                                                        |  |                      | 8,006  |                    |   | (58         | ) |                    | 0     |             |   | 0                  |   |   | 8,006  |  |   | (58    | )
|Total temporarily impaired securities                                                      |  | $                    | 64,132 |                    | $ | (1,058      | ) | $                  | 5,351 |             | $ | (120               | ) | $ | 69,483 |  | $ | (1,178 | )

| | 
| | 
|

|    |                                      
|--- | -------------------------------------
|(1) | Includes
 obligations of GNMA.       
|    |                                      
|(2) | Includes
 issues from FNMA and FHLMC.

The
unrealized loss on available-for-sale securities is included in other
comprehensive loss on the consolidated balance sheets. Management has concluded
that no individual unrealized loss as of March 31, 2010, identified in the
preceding table, represents other-than-temporary impairment. The Corporation
does not intend to sell nor would it be required to sell the securities shown
in the table with unrealized losses before recovering their amortized cost.

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

|                                       |  |                           |         |             |   |         | 
|-------------------------------------- |  | ------------------------- | ------- | ----------- | - | ------- | 
|                                       |  | Adjusted
 Carrying
 Value |         | Fair
 Value |  
|Available-for-sale:                    |  |                           |         |             |   |         | 
|Due in one year or less                |  | $                         | 100     |             | $ | 100     | 
|Due after one year through five years  |  |                           | 11,418  |             |   | 11,957  | 
|Due after five years through ten years |  |                           | 63,659  |             |   | 66,182  | 
|Due after ten years                    |  |                           | 78,394  |             |   | 80,042  | 
|                                       |  |                           | 153,572 |             |   | 158,281 | 
|Mortgage-backed securities             |  |                           | 53,744  |             |   | 54,742  | 
|Collateral mortgage obligations        |  |                           | 35,933  |             |   | 37,436  | 
|                                       |  | $                         | 243,249 |             | $ | 250,459 | 
|                                       |  |                           |         |             |   |         | 
|Held-to-maturity:                      |  |                           |         |             |   |         | 
|Due in one year or less                |  | $                         | 3,338   |             | $ | 3,389   | 
|Due after one year through five years  |  |                           | 7,113   |             |   | 7,471   | 
|Due after five years through ten years |  |                           | 3,188   |             |   | 3,316   | 
|Due after ten years                    |  |                           | 308     |             |   | 304     | 
|                                       |  | $                         | 13,947  |             | $ | 14,480  | 

| |        | 
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---



Proceeds
from sales of investment securities available-for sale was $24,418 for the first three
months of 2010 compared to $18,197 for the first three months of 2009. Gross gains
were realized of $2,054 in 2010 for those sales. Gross losses were realized of
$1,412 for those sales. The carrying value of securities pledged as collateral,
to secure public deposits and for other purposes was $233,428 at March 31, 2010
and $283,011 at December 31, 2009.

NOTE 8  FAIR VALUE OF ASSETS AND
LIABILITIES

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. 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.                                     

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

Available-for-Sale Securities

The
fair 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. For these investments, the inputs used by the
pricing service to determine fair value may include one, or a combination or,
observable inputs such as benchmark yields, reported trades, broker/dealer
quotes, issurer spreads, two-sided markets, benchmark securities, bids, offers
and reference data market research publications and are classified within Level
2 of the valuation hierarchy. Level 2 securities include Obligations of U.S.
Treasury securities, Obligations of U.S. government corporations and agencies,
obligations of states and political subdivisions, mortgage-backed securities,
collateralized mortgage obligations and corporate bonds. 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.

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---



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

|                                                                                               |  |            |         |                                                                   |                               |                                                 |  |                                              |         |  |   |   | 
|---------------------------------------------------------------------------------------------- |  | ---------- | ------- | ----------------------------------------------------------------- | ----------------------------- | ----------------------------------------------- |  | -------------------------------------------- | ------- |  | - | - | 
|March 31, 2010                                                                                 |  |            |         |                                                                   | Fair Value Measurements Using |                                                
|                                                                                               |  | Fair Value |         | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                               | Significant Other
 Observable Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |        
|Available-for-sale securities                                                                  |  |            |         |                                                                   |                               |                                                 |  |                                              |         |  |   |   | 
|United States Government and Federal agency and U.S. Government
 sponsored Enterprises (GSEs)  |  | $          | 83,018  |                                                                   | $                             | 0                                               |  | $                                            | 83,018  |  | $ | 0 | 
|State and Municipal                                                                            |  |            | 114,525 |                                                                   |                               | 0                                               |  |                                              | 114,525 |  |   | 0 | 
|Collateral mortgage obligations:                                                               |  |            |         |                                                                   |                               |                                                 |  |                                              |         |  |   |   | 
|GSE Residential                                                                                |  |            | 52,916  |                                                                   |                               | 0                                               |  |                                              | 52,916  |  |   | 0 | 
|Total                                                                                          |  | $          | 250,459 |                                                                   | $                             | 0                                               |  | $                                            | 250,459 |  | $ | 0 | 
|                                                                                               |  |            |         |                                                                   |                               |                                                 |  |                                              |         |  |   |   | 
|                                                                                               |  |            |         |                                                                   |                               |                                                 |  |                                              |         |  |   |   | 
|                                                                                               |  |            |         |                                                                   |                               |                                                 |  |                                              |         |  |   |   | 
|December 31, 2009                                                                              |  |            |         |                                                                   | Fair Value Measurements Using |                                                
|                                                                                               |  | Fair Value |         | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |                               | Significant Other
 Observable Inputs
 (Level 2) |  | Significant
 Unobservable
 Inputs
 (Level 3) |        
|Available-for-sale securities                                                                  |  |            |         |                                                                   |                               |                                                 |  |                                              |         |  |   |   | 
|United States
 Government and Federal agency and U.S. Government sponsored Enterprises
 (GSEs) |  | $          | 96,113  |                                                                   | $                             | 0                                               |  | $                                            | 96,113  |  | $ | 0 | 
|State and Municipal                                                                            |  |            | 120,078 |                                                                   |                               | 0                                               |  |                                              | 120,078 |  |   | 0 | 
|Collateral mortgage obligations:                                                               |  |            |         |                                                                   |                               |                                                 |  |                                              |         |  |   |   | 
|GSE Residential                                                                                |  |            | 72,083  |                                                                   |                               | 0                                               |  |                                              | 72,083  |  |   | 0 | 
|Total                                                                                          |  | $          | 288,724 |                                                                   | $                             | 0                                               |  | $                                            | 288,724 |  | $ | 0 | 

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

Impaired Loans

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 in
accordance with the provisions of ASC 310-10-35, authoritative guidance for
impairments. Allowable methods for estimating fair value include using the fair
value of the collateral for collateral dependent loans or, where a loan is
determined not to be collateral dependent, using the discounted cash flow
method.

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. If the impaired loan is determined not to be
collateral dependent, then the discounted cash flow method is used. This method
requires the impaired loan to be recorded at the present value of expected
future cash flows discounted at the loans effective interest rate. The
effective interest rate of a loan is the contractual interest rate adjusted for
any net deferred loan fees or costs, premiums or discount existing at
origination or acquisition of the loan. Impaired loans are classified within
Level 3 of the fair value hierarchy.

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.

| |        | 
| | ------ | 
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---



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
310-10-35-16 fair value hierarchy in which the fair value measurements fall at
March 31, 2010 and December 31, 2009.

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
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. Other real estate owned measured at
fair value on a non-recurring basis at March 31, 2010 amounted to $20.1
million.

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 March 31,
2010 and December 31, 2009 (in thousands):

|                                       |  |            |        |                                                                    |  |                                                  |  |                                              |   |  |   |        | 
|-------------------------------------- |  | ---------- | ------ | ------------------------------------------------------------------ |  | ------------------------------------------------ |  | -------------------------------------------- | - |  | - | ------ | 
|March 31, 2010                         |  |            |        | Fair Value
 Measurements Using                                     | 
|                                       |  | 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) |  | $          | 11,456 |                                                                    |  | 0                                                |  |                                              | 0 |  | $ | 11,456 | 
|Mortgage
 servicing rights             |  |            | 142    |                                                                    |  | 0                                                |  |                                              | 0 |  |   | 142    | 
|Other
 real estate owned               |  |            | 3,194  |                                                                    |  | 0                                                |  |                                              | 0 |  |   | 3,194  | 

|                                       |  |            |        |                                                                    |  |                                                   |  |                                              |   |  |   |        | 
|-------------------------------------- |  | ---------- | ------ | ------------------------------------------------------------------ |  | ------------------------------------------------- |  | -------------------------------------------- | - |  | - | ------ | 
|December 31, 2009                      |  |            |        | Fair Value
 Measurements Using                                     | 
|                                       |  | 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 | 

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.

| |        | 
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---



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

(in
thousands)

|                                                             |  |                   |           |                   |   |                 |  |             |           |  |   |           | 
|------------------------------------------------------------ |  | ----------------- | --------- | ----------------- | - | --------------- |  | ----------- | --------- |  | - | --------- | 
|                                                             |  | December
 31,2009 |           | December 31, 2009 |  
|                                                             |  | Carrying
 Value   |           | Fair
 Value       |   | Carrying
 Value |  | Fair
 Value |          
|Financial Assets:                                            |  |                   |           |                   |   |                 |  |             |           |  |   |           | 
|                                                             |  |                   |           |                   |   |                 |  |             |           |  |   |           | 
|Cash and due
 from banks                                     |  | $                 | 12,797    |                   | $ | 12,797          |  | $           | 15,546    |  | $ | 15,546    | 
|Interest-bearing
 deposits in financial institutions         |  |                   | 81,387    |                   |   | 81,387          |  |             | 55,527    |  |   | 55,527    | 
|Investment
 securities                                       |  |                   | 264,406   |                   |   | 264,939         |  |             | 301,267   |  |   | 301,805   | 
|Loans, net,
 including loans held for sale                   |  |                   | 743,086   |                   |   | 747,776         |  |             | 787,908   |  |   | 792,287   | 
|Accrued
 interest receivable                                 |  |                   | 7,355     |                   |   | 7,355           |  |             | 9,267     |  |   | 9,267     | 
|Total Financial Assets                                       |  | $                 | 1,109,031 |                   | $ | 1,114,254       |  | $           | 1,172,802 |  | $ | 1,177,719 | 
|Financial Liabilities:                                       |  |                   |           |                   |   |                 |  |             |           |  |   |           | 
|                                                             |  |                   |           |                   |   |                 |  |             |           |  |   |           | 
|Non-interest
 bearing demand deposits                        |  | $                 | 121,863   |                   | $ | 121,863         |  | $           | 136,026   |  | $ | 136,026   | 
|Interest-bearing
 deposits                                   |  |                   | 909,591   |                   |   | 907,992         |  |             | 939,513   |  |   | 945,637   | 
|Borrowings                                                   |  |                   | 88,096    |                   |   | 102,148         |  |             | 104,848   |  |   | 119,301   | 
|Accrued
 interest payable                                    |  |                   | 2,393     |                   |   | 2,393           |  |             | 2,999     |  |   | 2,999     | 
|Total
 Financial Liabilities                                 |  | $                 | 1,121,943 |                   | $ | 1,132,003       |  | $           | 1,183,386 |  | $ | 1,203,963 | 
|                                                             |  |                   |           |                   |   |                 |  |             |           |  |   |           | 
|Unrecognized
 financial instruments (net of contract amount) |  |                   |           |                   |   |                 |  |             |           |  |   |           | 
|                                                             |  |                   |           |                   |   |                 |  |             |           |  |   |           | 
|Commitments
 to originate loans                              |  | $                 | -0-       |                   | $ | -0-             |  | $           | -0-       |  | $ | -0-       | 
|Lines of
 credit                                             |  |                   | -0-       |                   |   | -0-             |  |             | -0-       |  |   | -0-       | 
|Letters 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
instrument liabilities with no stated maturities have an estimated fair value
equal to both the amount payable on demand and the recorded book balance.

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

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

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

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

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

| |        | 
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---



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

NOTE 9  INCOME TAXES

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

|                                                    |  |      |      |      |   |      |  
|--------------------------------------------------- |  | ---- | ---- | ---- | - | ---- | -
|                                                    |  | 2010 |      | 2009 |  
|Computed expected tax (benefit) expense           |  | $    | (182 | )    | $ | 358  |  
|                                                    |  |      |      |      |   |      |  
|Increase (decrease) in income taxes resulting from: |  |      |      |      |   |      |  
|Tax-exempt income                                   |  |      | (463 | )    |   | (379 | )
|State income taxes, net of
 federal tax benefit     |  |      | (62  | )    |   | 41   |  
|Bank-owned life insurance
 income                   |  |      | (82  | )    |   | (86  | )
|Other, net                                          |  |      | (6   | )    |   | (38  | )
|                                                    |  | $    | (795 | )    | $ | (104 | )

NOTE  10 IMPACT OF NEW ACCOUNTING STANDARDS

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 with the transferred financial asset. This accounting standard is
effective for financial asset transfers occurring after December 31, 2009.
Management has determined the impact adoption of this accounting standard will
have no impacton 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.

| |        | 
| | ------ | 
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---



NOTE 11  REGULATORY MATTERS

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

Pursuant
to the Agreement, the Banks board is required to review the adequacy of the
Banks allowance for loan and lease losses and to establish a program for the
maintenance of an adequate allowance. A copy of the boards program is required
to be submitted to the Comptroller for review. The Bank is also required to
take immediate action to protect its interest in criticized assets identified
in the Banks most recent Report of Examination with the Comptroller and to
adopt individual written workout plans with respect to such assets. A copy of the
workout plans is required to be submitted to the Comptroller with respect to
any criticized asset equal to or exceeding $100,000. The Bank is prohibited
from extending any additional credit to any borrower whose loan is criticized,
unless a majority of the Banks board (or appropriate committee) has determined
that the extension is necessary to promote the best interests of the Bank and
such determination is properly recorded. Under the Agreement, the board must
ensure that the Banks internal ratings of credit relationships are timely,
accurate, and consistent with the regulatory credit classification criteria set
forth in the Comptrollers Handbook and related authority. The board must also
ensure that any loan relationship with a high probability of payment default or
other well-defined weakness is rated no better than substandard, regardless
of the existence of certain mitigants that reduce credit risk.

The
Banks board and management has taken relevant actions to comply with the terms
of this agreement, including the implementation of remediation steps to protect
its interest in criticized assets, enhanced workout plans among other steps.

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Schedule
6

PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three months ended March 31, 2010 and 2009

The
following discussion provides information about Princeton National Bancorp,
Inc.s (PNBC or the Corporation) financial condition and results of
operations for the three month periods ended March 31, 2010 and 2009. This
discussion should be read in conjunction with the attached consolidated
financial statements and notes thereto. This report contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended (the Exchange Act), such as discussions of the Corporations
pricing and fee trends, credit quality and outlook, liquidity, new business
results, expansion plans, anticipated expenses and planned schedules. The
Corporation intends such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and is including this statement for
purposes of these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Corporation, are identified by use of the words believe,
expect, intend, anticipate, estimate, project, or similar
expressions. Actual results could differ materially from the results indicated
by these statements because the realization of those results is subject to many
risks and uncertainties including: the effect of the current severe disruption
in financial markets and the United States government programs introduced to restore
stability and liquidity, changes in interest rates, general economic conditions
and the weakening state of the United States economy, legislative/regulatory
changes, monetary and fiscal policies of the U.S. government, including
policies of the U.S. Treasury and the Federal Reserve Board, the quality or
composition of the loan or investment portfolios, demand for loan products,
deposit flows, competition, demand for financial services in the Corporations
market area and accounting principles, policies and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements. Further information
concerning the Corporation and its business, including a discussion of these
and additional factors that could materially affect the Corporations financial
results, is included in the Corporations 2009 Annual Report on Form 10-K under
the headings Item 1. Business and Item 1A. Risk Factors.

CRITICAL ACCOUNTING POLICIES AND USE OF
SIGNIFICANT ESTIMATES

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

Allowance for Loan Losses

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

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

| |         | 
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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 740-10`.
An uncertain tax position is recognized as a benefit only if it is more likely
than not that the tax position would be sustained in a tax examination, with a
tax examination being presumed to occur. The amount actually recognized is the largest
amount of tax benefit that is greater than 50% likely to be recognized on
examination. For tax positions not meeting the more likely than not test, no
tax benefit is recorded. A significant amount of judgment is applied to
determine both whether the tax position meets the more likely than not test
as well as to determine the largest amount of tax benefit that is greater than
50% likely to be recognized. Differences between the position taken by
management and that of taxing authorities could result in a reduction of a tax
benefit or increase to tax liability, which could adversely affect future
income tax expense.

Impairment of Intangible Assets

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

Mortgaging Service Rights (MSRs)

MSR
fair values are very sensitive to movements in interest rates as expected
future net servicing income depends on the projected outstanding principal
balances of the underlying loans, which can be greatly reduced by prepayments.
Prepayments usually increase when mortgage interest rates decline and decrease
when mortgage interest rates rise. For discussion regarding the impairment of
MSRs, see Note 4  Originated Mortgage Servicing Rights in the Notes to
Consolidated Financial Statements.

Fair Value Measurements

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. 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.                                     

| |         | 
| | ------- | 
| | Page 20 | 

---



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
8  Fair Value of Assets and Liabilities in the Notes to Consolidated
Financial Statements.

RECENT DEVELOPMENTS

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

Pursuant
to the Agreement, the Banks board is required to review the adequacy of the
Banks allowance for loan and lease losses and to establish a program for the
maintenance of an adequate allowance. A copy of the boards program is required
to be submitted to the Comptroller for review. The Bank is also required to
take immediate action to protect its interest in criticized assets identified
in the Banks most recent Report of Examination with the Comptroller and to adopt
individual written workout plans with respect to such assets. A copy of the
workout plans is required to be submitted to the Comptroller with respect to
any criticized asset equal to or exceeding $100,000. The Bank is prohibited
from extending any additional credit to any borrower whose loan is criticized,
unless a majority of the Banks board (or appropriate committee) has determined
that the extension is necessary to promote the best interests of the Bank and
such determination is properly recorded. Under the Agreement, the board must
ensure that the Banks internal ratings of credit relationships are timely,
accurate, and consistent with the regulatory credit classification criteria set
forth in the Comptrollers Handbook and related authority. The board must also
ensure that any loan relationship with a high probability of payment default or
other well-defined weakness is rated no better than substandard, regardless
of the existence of certain mitigants that reduce credit risk.

On
November 20, 2009, the Corporation announced the appointment of Thomas D.
Ogaard to succeed Tony J. Sorcic as President and Chief Executive Officer of
the Corporation upon Mr. Sorcics retirement effective February 1,
2010. Mr. Ogaard had previously served as the Corporations Executive Vice
President and serves as a member of the boards of directors of the Corporation
and its subsidiary bank, Citizens First National Bank.

On
December 18, 2009, the Corporation entered into a consulting agreement
with Tony J. Sorcic, the Corporations current President and Chief Executive
Officer, who has previously announced his retirement to be effective
February 1, 2010. The consulting agreement is to be effective immediately
upon his retirement and will continue for the six month period ending on
July 31, 2010.

On
January 26, 2010, the Corporation announced the appointment of Todd D.
Fanning as Executive Vice President and Chief Operating Officer of the
Corporation and to the boards of directors of the Company and the Bank.
Mr. Fanning is Chief Financial Officer of the Corporation and the Bank.

RESULTS OF OPERATIONS

Net
income for the first quarter of 2010 was $259,000, as compared to net income of $1,156,000 in the
first quarter of 2009. Net
loss available to common stockholders was $62,000 for the first quarter of 2010
compared to net income available to common stockholders of $915,000 for the
first quarter of 2009. Basic and diluted loss per common share available to
common stockholders for the first quarter of 2010 was $0.02 compared to basic
and diluted earnings per share of $0.28 for the first quarter of 2009. This represents
a decrease of $976,000 (106.7%) or $0.30 per basic and diluted common share.
The lower net income figure is attributable to an increase in the provision for
loan losses and insurance assessments by the FDIC. The annualized return on
average assets and return on average equity decreased accordingly to 0.09% and
1.38%, respectively, for the first quarter of 2010, compared with 0.40% and
5.14% for the first quarter of 2009.

Net
interest income before the provision for loan losses was $9,483,000 for the
first quarter of 2010, compared to $8,079,000 for the first quarter of 2009 (an
increase of $1,404,000 or 17.4%). The net yield on interest-earning assets (on
a fully taxable equivalent basis) increased by 0.50% to 3.90% in the first
quarter of 2010 from 3.40% in the first quarter of 2009. This large increase in
the net yield on average interest-earning assets was driven primary by reduced
funding costs which decreased from 2.42% for the first quarter of 2009 to 1.61%
for the first quarter of 2010.

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| | ------- | 
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The
Corporations provision for loan loss expense recorded each quarter is
determined by managements evaluation of the risk characteristics of the loan
portfolio. As mentioned above, net charge-offs increased during the first
quarter of 2010 to $1,366,000, compared to net charge-offs of $371,000 for the
first quarter of 2009. PNBC recorded a loan loss provision of $3,925,000 in the
first quarter of 2010 compared to a provision of $1,170,000 in the first
quarter of 2009. The allowance for loan losses is discussed more fully below.

Non-interest
income totaled $3,192,000 for the first quarter of 2010, compared to $2,795,000
in the first quarter of 2009, an increase of $397,000 or 14.2%. $316,000 of
this increase was realized with the adoption of ASC 310 adoption of deferred
loan fees. The increase was primarily due to the increase in gains on
securities sold of $455,000 and $459,000 increase in mortgage banking income
for the first quarter of 2010. During the first quarter of 2009, a $556,000
impairment charge was recorded for mortgage servicing rights. The categories of
service charges on deposits and trust and farm management fees also experienced
decreases of $85,000 (8.7%) and $50,000 (15.9.%), respectively, due to a
decrease in overdraft fee income and lower fees from a decline in managed asset
values. Annualized non-interest income as a percentage of total average assets
increased from 0.96% for the first three months of 2009, to 1.06% for the same
period in 2010.

Total
non-interest expense for the first quarter of 2010 was $9,286,000, an increase
of $635,000 (or 7.3%) from $8,652,000 in the first quarter of 2009. The largest
difference between the first quarters of 2010 and 2009 was an increase in other
real estate expenses of $622,000, an increase of 550.4%. Other real estate
owned increased by $17.0 million to $20.1 million at March 31, 2010 compared to
$3.2 million at March 31, 2009. Additionally, the category of other operating
expense increased $118,000 (or 10.1%) due mostly to an increase in loan
administrative expenses. Annualized non-interest expense as a percentage of
total average assets increased to 3.09% for the first three months of 2010,
compared to 2.96% for the same period in 2009.

INCOME TAXES

The
Corporation recorded an income tax benefit of $795,000 for the first quarter of
2010, as compared to an income tax benefit of $104,000 for the first quarter of
2009. The effective tax rate was (148.3%) for the three-month period ended
March 31, 2010 and (9.9%) for the three-month period ended March 31, 2009. The
income tax benefit is due to a pre-tax loss coupled with the effect of
tax-exempt investment interest income. For more information on the
Corporations income taxes see Note 9  Income Taxes in the Notes to
Consolidated Financial Statements.

FDIC

On
September 29, 2009 the Board of Directors of the FDIC adopted a Notice of
Proposed Rulemaking (NPR) that would require insured institutions to prepay
their estimated quarterly risk-based assessments for the fourth quarter of 2009
and for all of 2010, 2011 and 2012. The FDIC 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 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 $6,763,000 for the fourth quarter of 2009 and
for all of 2010, 2011 and 2012.

As
of March 31, 2010, and each quarter thereafter, each institution would record
an expense (charge to earnings) for its regular quarterly assessment and an
offsetting credit to the prepaid assessment until the asset is exhausted. At
December 31, 2009, the Corporation had a remaining prepaid assessment of
$5,634,000. This amount is reflected in the category of Other Assets in the
Consolidated Balance Sheet. $698,000 of FDIC assessment expense was recorded for
the first quarter of 2010.

ANALYSIS OF FINANCIAL CONDITION

Total
assets at March 31, 2010 decreased to $1,200,474,000 from $1,260,730,000 at
December 31, 2009 (a decrease of $60.3 million or 4.8%). Total loan balances
decreased by $43.8 million during the three month period to $742.2 million due
to seasonal pay downs in the agricultural portfolio, along with the refinancing
of adjustable-rate residential real estate loans into fixed rate products which
are sold in the secondary market and loans participation sales. Investment
balances totaled $264,406,000 at March 31, 2010, compared to $301,267,000 at
December 31, 2009 (a decrease of $35.4 million, or 11.8%), as investments gains
were realized on sales of securities as part of managements overall asset
liability management plans to increase liquidity. Total deposits decreased to
$1,031,454,000 at March 31, 2010 from $1,075,539,000 at December 31, 2009 (a
decrease of $44.1 million or 4.1%). Comparing categories of deposits at March
31, 2010 to December 31, 2009, time deposits decreased $37.4 million (or 7.5%),
interest-bearing demand deposits increased $2.9 million (or 0.8%), savings
deposits increased $4.7 million (or 6.9%), and demand deposits decreased $14.2
million (or 10.4%). Borrowings, consisting of customer repurchase agreements,
federal funds purchased, notes payable, treasury, tax, and loan (TT&L)
deposits, and Federal Home Loan Bank (FHLB) advances, decreased from
$104,848,000 at December 31, 2009 to $88,096,000 at March 31, 2010 (a decrease
of $16.8 million or 16.0%). This decrease was due to the repayment of
interest-bearing demand notes issued by the U.S. Treasury and customer
repurchase agreements of ($9.0 million and $8.2 million) respectively for the
three month period compared to December 31, 2009. TT&L increased $493,000
for the first quarter of 2010.

| |         | 
| | ------- | 
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CAPITAL PURCHASE PROGRAM

On
January 23, 2009, the Corporation received $25,083,000 of equity capital by
issuing to the United States Department of Treasury 25,083 shares of the
Corporations 5.00% Series B Fixed Rate Cumulative Perpetual Preferred Stock,
no par value, 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 common stock warrants 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 Preferred shares dividends, resulting in
additional dilution to the Corporations earnings per common share. The
warrants are 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. Any redemption requires Federal Reserve approval. The Series B
Perpetual Preferred stock ranks senior to the Corporations existing authorized
Series A Junior Participating Preferred stock.

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

ASSET QUALITY

For
the three months ended March 31, 2010, the subsidiary bank charged off
$1,417,000 of loans and had recoveries of $99,000, compared to charge-offs of
$411,000 and recoveries of $42,000 during the three months ended March 31,
2009. The allowance for loan losses is based on factors that include the
overall composition of the loan portfolio, types of loans, underlying
collateral, past loss experience, loan delinquencies, substandard and doubtful
credits, and such other factors that, in managements reasonable judgment,
warrant consideration. The adequacy of the allowance is monitored monthly. At
March 31, 2010, the allowance was $14,682,000 which is 21.8% of non-performing
loans and 1.94% of total loans, compared with $12,075,000 which was 20.6% of
non-performing loans and 1.51% of total loans at December 31, 2009.

Non-performing
loans increased to $67,291,000 or 9.08% of net loans at March 31, 2010, as
compared to $58,621,000 or 7.35% of net loans at December 31, 2009.
Approximately 65% of the non-accrual loans are seven relationships totaling
$16.8 million, all of which are development loans in the Corporations northern
and eastern market areas. Specific reserves had been established for these
seven relationships as of March 31, 2010 of $3.7 million. All loans are
individually evaluated and management continues to maintain adequate reserves
in the allowance for loan losses.

At
March 31, 2010 non-accrual loans were $53,448,000 compared to $42,593,000 at
December 31, 2009. Impaired loans totaled $25,906,000 at March 31, 2010
compared to $12,196,000 at December 31, 2009. The total amount of loans ninety
days or more past due and still accruing interest at March 31, 2010 was $22,000
compared to $2,087,000 at December 31, 2009. There was a specific loan loss
reserve of $6,271,000 established for impaired loans as of March 31, 2010
compared to a specific loan loss reserve of $2,905,000 at December 31, 2009.
PNBCs management analyzes the allowance for loan losses monthly and believes
the current level of allowance is adequate to meet probable losses as of March 31, 2010.

| |         | 
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The
following table provides information about the Corporations non-performing
assets (in thousands):

|                                      |  |                |   |                   |   |                |  |   |        |   |  |  |   |        |   | 
|------------------------------------- |  | -------------- | - | ----------------- | - | -------------- |  | - | ------ | - |  |  | - | ------ | - | 
|                                      |  | March
31,
2010 |   | December
31, 2009 |   | March
31,
2009 | 
|                                      |  |                |   |                   |   |                |  |   |        |   |  |  |   |        |   | 
|Non-accrual                           |  |                | $ | 53,448            |   |                |  | $ | 42,593 |   |  |  | $ | 33,136 |   | 
|90 days past due and accruing         |  |                |   | 22                |   |                |  |   | 2,087  |   |  |  |   | 145    |   | 
|Restructured                          |  |                |   | 13,821            |   |                |  |   | 13,941 |   |  |  |   | 0      |   | 
|Total non-performing loans            |  |                | $ | 67,291            |   |                |  | $ | 58,621 |   |  |  | $ | 33,281 |   | 
|Other real estate owned               |  |                |   | 20,145            |   |                |  |   | 17,658 |   |  |  |   | 3,170  |   | 
|Total non-performing assets           |  |                | $ | 87,436            |   |                |  | $ | 76,279 |   |  |  | $ | 36,451 |   | 
|                                      |  |                |   |                   |   |                |  |   |        |   |  |  |   |        |   | 
|Non-performing loans to total loans   |  |                |   | 9.08              | % |                |  |   | 7.35   | % |  |  |   | 4.33   | % | 
|Non-performing assets to total assets |  |                |   | 7.28              | % |                |  |   | 6.05   | % |  |  |   | 2.74   | % | 

The
allowance for possible loan losses shown in this table below represents the
allowance available to absorb losses within the portfolio (in thousands):

|                                                                                               |  |                |   |                   |   |                |  |   |         |   |  |  |   |         |   | 
|---------------------------------------------------------------------------------------------- |  | -------------- | - | ----------------- | - | -------------- |  | - | ------- | - |  |  | - | ------- | - | 
|                                                                                               |  | March 31,
2010 |   | December
31, 2009 |   | March 31,
2009 | 
|                                                                                               |  |                |   |                   |   |                |  |   |         |   |  |  |   |         |   | 
|Amount of loans outstanding at end of
 period (net of unearned interest)                       |  |                | $ | 756,836           |   |                |  | $ | 798,074 |   |  |  | $ | 774,802 |   | 
|Average amount of loans outstanding for the
 period (net of unearned interest)                 |  |                | $ | 778,162           |   |                |  | $ | 743,877 |   |  |  | $ | 778,731 |   | 
|Allowance for possible loan losses at beginning
 of the period                                 |  |                | $ | 12,075            |   |                |  | $ | 5,064   |   |  |  | $ | 5,064   |   | 
|Charge-offs:                                                                                   |  |                |   |                   |   |                |  |   |         |   |  |  |   |         |   | 
|Agricultural                                                                                   |  |                |   | 0                 |   |                |  |   | 21      |   |  |  |   | 0       |   | 
|Commercial                                                                                     |  |                |   | 981               |   |                |  |   | 2,516   |   |  |  |   | 130     |   | 
|Real estate mortgage                                                                           |  |                |   | 362               |   |                |  |   | 511     |   |  |  |   | 139     |   | 
|Installment                                                                                    |  |                |   | 74                |   |                |  |   | 1,208   |   |  |  |   | 142     |   | 
|Total charge-offs                                                                              |  |                |   | 1,417             |   |                |  |   | 4,256   |   |  |  |   | 411     |   | 
|Recoveries:                                                                                    |  |                |   |                   |   |                |  |   |         |   |  |  |   |         |   | 
|Agricultural                                                                                   |  |                |   | 0                 |   |                |  |   | 0       |   |  |  |   | 0       |   | 
|Commercial                                                                                     |  |                |   | 96                |   |                |  |   | 42      |   |  |  |   | 8       |   | 
|Real estate mortgage                                                                           |  |                |   | 0                 |   |                |  |   | 0       |   |  |  |   | 0       |   | 
|Installment                                                                                    |  |                |   | 3                 |   |                |  |   | 163     |   |  |  |   | 32      |   | 
|Total recoveries                                                                               |  |                |   | 99                |   |                |  |   | 205     |   |  |  |   | 40      |   | 
|Net loans charged-off                                                                          |  |                |   | 1,318             |   |                |  |   | 4,051   |   |  |  |   | 371     |   | 
|Provision for loan losses                                                                      |  |                |   | 3,925             |   |                |  |   | 11,062  |   |  |  |   | 1,170   |   | 
|Allowance for possible loan losses at end
 of period                                           |  |                | $ | 14,682            |   |                |  | $ | 12,075  |   |  |  | $ | 5,864   |   | 
|Net loans charged-off to Average loans                                                         |  |                |   | 0.69              | % |                |  |   | 0.54    | % |  |  |   | 0.19    | % | 
|Allowance for possible loan losses To
 non-performing loans                                    |  |                |   | 21.82             | % |                |  |   | 20.60   | % |  |  |   | 17.62   | % | 
|Allowance for possible loan losses to total
 loans at end of period (net of unearned interest) |  |                |   | 1.94              | % |                |  |   | 1.51    | % |  |  |   | 0.76    | % | 
|                                                                                               |  |                |   |                   |   |                |  |   |         |   |  |  |   |         |   | 

CAPITAL RESOURCES

Federal
regulations require all financial institutions to evaluate capital adequacy by
the risk-based capital method, which makes capital requirements more sensitive
to the differences in the level of risk assets. At March 31, 2010, total
risk-based capital of PNBC was 11.96%, compared to 11.50% at December 31, 2009.
The Tier 1 capital ratio increased from 7.48% at December 31, 2009, to 7.53% at
March 31, 2010. Total stockholders equity to total assets at March 31, 2010
increased to 6.33% from 5.92% at December 31, 2009.

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LIQUIDITY

Liquidity
is measured by a financial institutions ability to raise funds through
deposits, borrowed funds, capital, or the sale of assets. Additional sources of
liquidity include cash flow from the repayment of loans and the maturity of
investment securities. Major uses of cash include the origination of loans and
purchase of investment securities. Cash flows provided by investing and
operating activities, offset by those used in financing activities, resulted in
a net increase in cash and cash equivalents of $24,053,000 from December 31,
2009 to March 31, 2010. This increase was primarily the result of the proceeds
received from the sale of investment securities and a decrease in loans, offset
by net decreases in deposits and borrowings. For more detailed information, see
PNBCs Consolidated Statements of Cash Flows.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET
RISK

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

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

The
subsidiary banks exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional amount
of those instruments. The subsidiary bank uses the same credit policies in
making commitments and conditional obligations as they do for on-balance-sheet
instruments. At March 31, 2010, commitments to extend credit and standby
letters of credit were approximately $101,753,000 and $3,924,000 respectively.

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

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

LAND HELD FOR SALE

The
Corporation owns separate lots in Elburn, Aurora and Somonauk, Illinois that
have been removed from the land balance and are now shown on the Corporations
balance sheet as land held-for-sale, at the lower of cost or market. The land
in Elburn, approximately 2 acres, was purchased in 2003 for $930,000 in
anticipation of the construction of a branch facility. The land in Aurora,
consisting of two lots remaining from the original purchase of fourteen acres
in 2004 which was used to construct a branch facility has a cost basis of
$1,344,000. The land in Somonauk, acquired in 2005 during the acquisition of
FSB Bancorp, Inc., consists of approximately two acres with a cost basis of
$80,000.

LEGAL PROCEEDINGS

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

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QUANTIATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

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

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.

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PRINCETON
NATIONAL BANCORP, INC. AND SUBSIDIARY

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

|                                                           |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|---------------------------------------------------------- |  | ---------------------------------- | --------- | ---------------------------------- | - | ------------ |  | ---------------- | ---- | -------- | - | ------------ |  | - | ------ |  |  | ---- | -
|                                                           |  | Three Months Ended, March 31, 2010 |           | Three Months Ended, March 31, 2009 |  
|                                                           |  | Average Balance                    |           | Interest                           |   | Yield/
 Cost |  | Average
 Balance |      | Interest |   | Yield/
 Cost | 
|Average
 Interest-Earning Assets                           |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|                                                           |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Interest-bearing deposits                                  |  | $                                  | 61,316    |                                    | $ | 32           |  |                  | 0.21 | %        | $ | 35,708       |  | $ | 16     |  |  | 0.18 | %
|Taxable investment
 securities                             |  |                                    | 148,478   |                                    |   | 1,491        |  |                  | 4.07 | %        |   | 148,917      |  |   | 1,803  |  |  | 4.91 | %
|Tax-exempt investment
 securities                          |  |                                    | 126,315   |                                    |   | 2,049        |  |                  | 6.58 | %        |   | 106,754      |  |   | 1,710  |  |  | 6.50 | %
|Federal funds sold                                         |  |                                    | 145       |                                    |   | 0            |  |                  | 0.00 | %        |   | 199          |  |   | 0      |  |  | 0.00 | %
|Net loans                                                  |  |                                    | 725,573   |                                    |   | 10,621       |  |                  | 5.94 | %        |   | 746,711      |  |   | 11,095 |  |  | 6.03 | %
|                                                           |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Total interest-earning assets                              |  |                                    | 1,061,828 |                                    |   | 14,193       |  |                  | 5.42 | %        |   | 1,038,289    |  |   | 14,624 |  |  | 5.71 | %
|                                                           |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Average non-interest
 earning assets                       |  |                                    | 158,716   |                                    |   |              |  |                  |      |          |   | 148,259      |  |   |        |  |  |      |  
|                                                           |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Total average assets                                       |  | $                                  | 1,220,543 |                                    |   |              |  |                  |      |          | $ | 1,186,548    |  |   |        |  |  |      |  
|                                                           |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Average
 Interest-Bearing Liabilities                      |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|                                                           |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Interest-bearing demand
 deposits                          |  | $                                  | 378,885   |                                    |   | 1,143        |  |                  | 1.22 | %        | $ | 262,338      |  |   | 736    |  |  | 1.14 | %
|Savings deposits                                           |  |                                    | 70,155    |                                    |   | 16           |  |                  | 0.09 | %        |   | 63,167       |  |   | 12     |  |  | 0.08 | %
|Time deposits                                              |  |                                    | 471,757   |                                    |   | 2,214        |  |                  | 1.90 | %        |   | 567,448      |  |   | 4,399  |  |  | 3.14 | %
|Interest-bearing demand
 notes issued to the U.S. Treasury |  |                                    | 930       |                                    |   | 0            |  |                  | 0.04 | %        |   | 1,055        |  |   | 0      |  |  | 0.00 | %
|Federal funds purchased                                    |  |                                    | 0         |                                    |   | 0            |  |                  | 0.00 | %        |   | 1,029        |  |   | 1      |  |  | 0.39 | %
|Customer repurchase
 agreements                            |  |                                    | 42,008    |                                    |   | 96           |  |                  | 0.93 | %        |   | 30,708       |  |   | 81     |  |  | 1.07 | %
|Advances from Federal Home
 Loan Bank                      |  |                                    | 27,644    |                                    |   | 153          |  |                  | 2.24 | %        |   | 32,493       |  |   | 247    |  |  | 3.08 | %
|Trust preferred securities                                 |  |                                    | 25,000    |                                    |   | 355          |  |                  | 5.76 | %        |   | 25,000       |  |   | 355    |  |  | 5.76 | %
|Note payable                                               |  |                                    | 0         |                                    |   | 0            |  |                  | 0.00 | %        |   | 9,631        |  |   | 96     |  |  | 4.04 | %
|                                                           |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Total interest-bearing liabilities                         |  |                                    | 1,016,378 |                                    |   | 3,977        |  |                  | 1.59 | %        |   | 992,869      |  |   | 5,927  |  |  | 2.42 | %
|                                                           |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Net yield on average
 interest-earning assets              |  |                                    |           |                                    | $ | 10,216       |  |                  | 3.90 | %        |   |              |  | $ | 8,697  |  |  | 3.40 | %
|                                                           |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Average
 non-interest-bearing liabilities                  |  |                                    | 127,843   |                                    |   |              |  |                  |      |          |   | 102,243      |  |   |        |  |  |      |  
|                                                           |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Average stockholders
 equity                              |  |                                    | 76,322    |                                    |   |              |  |                  |      |          |   | 91,436       |  |   |        |  |  |      |  
|                                                           |  |                                    |           |                                    |   |              |  |                  |      |          |   |              |  |   |        |  |  |      |  
|Total average liabilities and stockholders equity         |  | $                                  | 1,220,543 |                                    |   |              |  |                  |      |          | $ | 1,186,548    |  |   |        |  |  |      |  

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

|                                      |  |                                      |        |      |   |       | 
|------------------------------------- |  | ------------------------------------ | ------ | ---- | - | ----- | 
|                                      |  | For the Three Months Ended March 31, |       
|                                      |  | 2010                                 |        | 2009 |  
|Net interest income as
 stated        |  | $                                    | 9,483  |      | $ | 8,079 | 
|Tax equivalent adjustment-investments |  |                                      | 697    |      |   | 582   | 
|Tax equivalent adjustment-loans       |  |                                      | 36     |      |   | 36    | 
|                                      |  |                                      |        |      |   |       | 
|Tax equivalent net
 interest income   |  | $                                    | 10,216 |      | $ | 8,697 | 

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Schedule
7

ITEM 7  CONTROLS AND PROCEDURES

(a)Disclosure controls and procedures.  We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2010.  Our disclosure controls and procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit to the SEC.  President and Chief Executive Officer, and Executive Vice-President and Chief Financial Officer, reviewed and participated in this evaluation.  Based on this evaluation, management concluded that, as of the date of their evaluation, our disclosure controls were effective.



(b)Internal controls.  There have been significant changes in our internal accounting controls
or in other factors during the quarter ended March 31, 2010 that have strengthened those controls as described below.



During the audit of the financial statements as of December 31, 2009, BKD, LLP, the Corporations external public accounting firm identified certain control deficiencies that were material weaknesses.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Companys annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses noted were in the follow areas:  allowance for loan losses, appraisal values, collateral analysis and internal loan review. These deficiencies are inter-related and management has taken remediation actions to address these internal control matters.  Management has remediated each of these material weaknesses as of March 31, 2010. A more complete discussion of managements actions are detailed below.

In evaluating the cause of the above referenced control deficiencies, management has identified that added human resources were needed in the internal loan review area.  Internal loan review works with management in preparing the analysis of the adequacy of the allowance for loan losses.  Appraisal values and collateral analysis is a key portion of determining the adequacy of the allowance.  During 2009, a second person was added to the internal loan review staff. A third person was added in January 2010.  These two additions each possess credit analysis and lending experience.  Internal loan review had modified its loan review program to enhance its coverage of the loan portfolio on an annual basis with emphasis on the largest loans and those identified as problems.  Further, loan review coverage and sampling of the remaining loan portfolio is also a part of its 2010 program.  Noted reporting requirements discussed in the formal written agreement between Citizens First National Bank and the Office of the Comptroller of the Currency are being met.  The bulk sales value method has been added to appraisal for development loans and is also used by internal loan review in assessing loans for impairment.  Management believes that while the actions taken currently are adequate, further actions will likely be needed to enhance its internal controls.

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