Exhibit 13

Report of Independent Registered Public Accounting Firm

(BKD LOGO)The Audit Committee, Board Of Directors and Stockholders 
Princeton National Bancorp, Inc.

We have audited the accompanying consolidated balance
sheet of Princeton National Bancorp, Inc. and subsidiary
(the Company) as of December 31, 2006, and the related consolidated
statements of income, comprehensive income, changes in stockholders equity, and cash flows for the year then ended. These
consolidated financial
statements are the responsibility of the Corporations management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

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

In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the
financial position of Princeton National Bancorp, Inc. and subsidiary as of December 31, 2006, and the results of their
operations and their cash flows for the year then ended in conformity with U.S. generally accepted
accounting principles.

We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board
(United States), the effectiveness of the Companys internal control over financial reporting as of December 31, 2006, based on
criteria
established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 2, 2007 expressed an
unqualified opinion on managements assessment of,
and the effective operation of, internal control over financial reporting.

As discussed in Note 14 to the consolidated financial
statements, the Corporation changed its method of accounting
for its post-retirement health care plan in 2006.

-s- BKD, LLPDecatur, Illinois 
March
2, 2007

9

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Report of Independent Registered Public Accounting Firm

(KPMG LOGO)The Audit Committee, Board Of Directors and Stockholders 
Princeton National Bancorp, Inc.

We have audited the accompanying consolidated balance
sheet of Princeton National Bancorp, Inc. and subsidiary
(the Company) as of December 31, 2005, and the related consolidated statements of income, comprehensive income, changes in
stockholders equity, and cash flows for each of the years in the two-year
period ended December 31, 2005. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Princeton National Bancorp, Inc. and subsidiary as of December 31, 2005, and the results of their operations
and their cash
flows for each of the years in the two-year period ended December 31,
2005 in conformity with U.S. generally accepted accounting principles.

-s- KMPG LLPChicago, Illinois 
March
13, 2006

10

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Consolidated
Balance Sheets(dollars in thousands
except share data)

|                                                                                                                                                            |  |            |           |   |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- | --------- | - | - | ------- | -
|                                                                                                                                                            |  | December31 |          
|                                                                                                                                                            |  |            | 2006      |   |   | 2005    |  
|                                                                                                                                                            |  |            |           |   |   |         |  
|ASSETS                                                                                                                                                      |  |            |           |   |   |         |  
|Cash and due
  from banks                                                                                                                                   |  | $          | 33,882    |   | $ | 23,635  |  
|Interest-bearing
  deposits with financial institutions                                                                                                     |  |            | 103       |   |   | 110     |  
|Federal funds
  sold                                                                                                                                        |  |            | 5,200     |   |   | -0-     |  
|                                                                                                                                                            |  |            |           |   |   |         |  
|Total cash and
  cash equivalents                                                                                                                           |  |            | 39,185    |   |   | 23,745  |  
|                                                                                                                                                           
|Loans
  held-for-sale, at lower of cost or market                                                                                                           |  |            | 4,512     |   |   | 2,587   |  
|                                                                                                                                                           
|Investment
  securities:                                                                                                                                    |  |            |           |   |   |         |  
|Available-for-sale,
  at fair value                                                                                                                         |  |            | 252,467   |   |   | 235,371 |  
|Held-to-maturity,
  at amortized cost (fair value of $15,567 and $16,274)                                                                                   |  |            | 15,449    |   |   | 16,115  |  
|                                                                                                                                                            |  |            |           |   |   |         |  
|Total investment
  securities                                                                                                                               |  |            | 267,916   |   |   | 251,486 |  
|                                                                                                                                                           
|Loans:                                                                                                                                                      |  |            |           |   |   |         |  
|Loans, net of
  unearned interest                                                                                                                           |  |            | 629,472   |   |   | 581,724 |  
|Allowance for
  loan losses                                                                                                                                 |  |            | (3,053    | ) |   | (3,109  | )
|                                                                                                                                                            |  |            |           |   |   |         |  
|Net loans                                                                                                                                                   |  |            | 626,419   |   |   | 578,615 |  
|                                                                                                                                                           
|Premises and
  equipment, net of accumulated depreciation                                                                                                   |  |            | 28,670    |   |   | 26,412  |  
|Bank-owned life
  insurance                                                                                                                                 |  |            | 21,470    |   |   | 20,434  |  
|Accrued interest
  receivable                                                                                                                               |  |            | 11,139    |   |   | 8,714   |  
|Other real
  estate owned                                                                                                                                   |  |            | -0-       |   |   | 468     |  
|Goodwill                                                                                                                                                    |  |            | 23,029    |   |   | 22,665  |  
|Intangible
  assets, net of accumulated amortization                                                                                                        |  |            | 5,921     |   |   | 6,843   |  
|Other assets                                                                                                                                                |  |            | 3,698     |   |   | 3,294   |  
|                                                                                                                                                            |  |            |           |   |   |         |  
|TOTAL ASSETS                                                                                                                                                |  | $          | 1,031,959 |   | $ | 945,263 |  
|                                                                                                                                                            |  |            |           |   |   |         |  
|                                                                                                                                                           
|                                                                                                                                                            |  |            |           |   |   |         |  
|LIABILITIES                                                                                                                                                 |  |            |           |   |   |         |  
|Deposits:                                                                                                                                                   |  |            |           |   |   |         |  
|Demand                                                                                                                                                      |  | $          | 107,834   |   | $ | 103,622 |  
|Interest-bearing
  demand                                                                                                                                   |  |            | 231,953   |   |   | 222,675 |  
|Savings                                                                                                                                                     |  |            | 116,246   |   |   | 109,491 |  
|Time                                                                                                                                                        |  |            | 425,866   |   |   | 362,770 |  
|                                                                                                                                                            |  |            |           |   |   |         |  
|Total deposits                                                                                                                                              |  |            | 881,899   |   |   | 798,558 |  
|                                                                                                                                                            |  |            |           |   |   |         |  
|Borrowings:                                                                                                                                                 |  |            |           |   |   |         |  
|Customer
  repurchase agreements                                                                                                                            |  |            | 31,344    |   |   | 29,375  |  
|Federal funds
  purchased                                                                                                                                   |  |            | -0-       |   |   | 1,000   |  
|Interest-bearing
  demand notes issued to the U.S. Treasury                                                                                                 |  |            | 2,333     |   |   | 2,154   |  
|Advances from
  the Federal Home Loan Bank                                                                                                                  |  |            | 6,970     |   |   | 8,346   |  
|Trust preferred
  securities                                                                                                                                |  |            | 25,000    |   |   | 25,000  |  
|Note payable                                                                                                                                                |  |            | 8,500     |   |   | 6,700   |  
|                                                                                                                                                            |  |            |           |   |   |         |  
|Total borrowings                                                                                                                                            |  |            | 74,147    |   |   | 72,575  |  
|                                                                                                                                                            |  |            |           |   |   |         |  
|Other
  liabilities                                                                                                                                         |  |            | 10,558    |   |   | 10,986  |  
|                                                                                                                                                            |  |            |           |   |   |         |  
|TOTAL
  LIABILITIES                                                                                                                                         |  |            | 966,604   |   |   | 882,119 |  
|                                                                                                                                                            |  |            |           |   |   |         |  
|STOCKHOLDERS
  EQUITY                                                                                                                                      |  |            |           |   |   |         |  
|Common
  stock: $5 par value, 7,000,000 shares
  authorized:4,478,295 shares
  issued at December 31, 2006 and 4,478,296 shares issued at December 31, 2005 |  |            | 22,391    |   |   | 22,392  |  
|Surplus                                                                                                                                                     |  |            | 18,158    |   |   | 16,968  |  
|Retained
  earnings                                                                                                                                         |  |            | 48,109    |   |   | 45,786  |  
|Accumulated
  other comprehensive loss, net of tax                                                                                                          |  |            | (960      | ) |   | (482    | )
|Less: cost of
  1,126,885 and 1,131,853 treasury shares at December 31, 2006 and 2005,
  respectively                                                       |  |            | (22,343   | ) |   | (21,520 | )
|                                                                                                                                                            |  |            |           |   |   |         |  
|TOTAL
  STOCKHOLDERS EQUITY                                                                                                                                |  |            | 65,355    |   |   | 63,144  |  
|                                                                                                                                                            |  |            |           |   |   |         |  
|TOTAL
  LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                |  | $          | 1,031,959 |   | $ | 945,263 |  
|                                                                                                                                                            |  |            |           |   |   |         |  
|                                                                                                                                                           
|                                                                                                                                                            |  |            |           |   |   |         |  

See accompanying notes to consolidated financial statements.

11

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

|                                                            |  |                               |           |  |   |           |  |   |           | 
|----------------------------------------------------------- |  | ----------------------------- | --------- |  | - | --------- |  | - | --------- | 
|                                                            |  | For theYears Ended December31 |          
|                                                            |  |                               | 2006      |  |   | 2005      |  |   | 2004      | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|Interest
  and dividend income:                             |  |                               |           |  |   |           |  |   |           | 
|                                                           
|Interest and
  fees on loans                                |  | $                             | 41,923    |  | $ | 31,339    |  | $ | 23,518    | 
|Interest and
  dividends on investment securities:          |  |                               |           |  |   |           |  |   |           | 
|Taxable                                                     |  |                               | 6,370     |  |   | 4,621     |  |   | 3,259     | 
|Tax-exempt                                                  |  |                               | 4,620     |  |   | 3,824     |  |   | 2,888     | 
|Interest on
  federal funds sold                            |  |                               | 499       |  |   | 120       |  |   | 30        | 
|Interest on
  interest-bearing time deposits in other banks |  |                               | 114       |  |   | 67        |  |   | 24        | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|Total interest
  income                                     |  |                               | 53,526    |  |   | 39,971    |  |   | 29,719    | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|Interest
  expense:                                         |  |                               |           |  |   |           |  |   |           | 
|Interest on
  deposits                                      |  |                               | 23,843    |  |   | 13,787    |  |   | 8,596     | 
|Interest on
  borrowings                                    |  |                               | 3,787     |  |   | 1,939     |  |   | 474       | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|Total interest
  expense                                    |  |                               | 27,630    |  |   | 15,726    |  |   | 9,070     | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|                                                           
|Net
  interest income                                       |  |                               | 25,896    |  |   | 24,245    |  |   | 20,649    | 
|Provision for loan
  losses                                 |  |                               | 285       |  |   | 0         |  |   | 375       | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|Net
  interest income after provision for loan losses       |  |                               | 25,611    |  |   | 24,245    |  |   | 20,274    | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|Non-interest
  income:                                      |  |                               |           |  |   |           |  |   |           | 
|Trust & farm
  management fees                              |  |                               | 1,467     |  |   | 1,601     |  |   | 1,451     | 
|Service charges
  on deposit accounts                       |  |                               | 4,235     |  |   | 3,448     |  |   | 3,149     | 
|Other service
  charges                                     |  |                               | 1,782     |  |   | 1,407     |  |   | 1,165     | 
|Gain on sales of
  securities available-for-sale            |  |                               | 250       |  |   | 89        |  |   | 216       | 
|Gain on sale of
  loans                                     |  |                               | 90        |  |   | 63        |  |   | 465       | 
|Brokerage fee
  income                                      |  |                               | 736       |  |   | 697       |  |   | 607       | 
|Mortgage banking
  income                                   |  |                               | 755       |  |   | 780       |  |   | 561       | 
|Bank-owned life
  insurance income                          |  |                               | 770       |  |   | 604       |  |   | 555       | 
|Other operating
  income                                    |  |                               | 160       |  |   | 151       |  |   | 146       | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|Total
  non-interest income                                 |  |                               | 10,245    |  |   | 8,840     |  |   | 8,315     | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|Non-interest
  expense:                                     |  |                               |           |  |   |           |  |   |           | 
|Salaries and
  employee benefits                            |  |                               | 15,884    |  |   | 13,400    |  |   | 11,129    | 
|Occupancy                                                   |  |                               | 1,985     |  |   | 1,558     |  |   | 1,368     | 
|Equipment
  expense                                         |  |                               | 2,933     |  |   | 2,124     |  |   | 1,653     | 
|Federal
  insurance assessments                             |  |                               | 313       |  |   | 244       |  |   | 229       | 
|Intangible
  assets amortization                            |  |                               | 651       |  |   | 324       |  |   | 208       | 
|Data processing                                             |  |                               | 1,032     |  |   | 870       |  |   | 747       | 
|Advertising                                                 |  |                               | 841       |  |   | 770       |  |   | 743       | 
|Other operating
  expense                                   |  |                               | 4,696     |  |   | 3,963     |  |   | 3,426     | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|Total
  non-interest expense                                |  |                               | 28,335    |  |   | 23,253    |  |   | 19,503    | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|                                                           
|Income
  before income taxes                                |  |                               | 7,521     |  |   | 9,832     |  |   | 9,086     | 
|Income tax
  expense                                        |  |                               | 1,033     |  |   | 2,258     |  |   | 2,214     | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|Net
  income                                                |  | $                             | 6,488     |  | $ | 7,574     |  | $ | 6,872     | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|                                                           
|Earnings
  per share:                                       |  |                               |           |  |   |           |  |   |           | 
|Basic                                                       |  | $                             | 1.93      |  | $ | 2.39      |  | $ | 2.22      | 
|Diluted                                                     |  | $                             | 1.91      |  | $ | 2.37      |  | $ | 2.21      | 
|                                                            |  |                               |           |  |   |           |  |   |           | 
|Basic weighted
  average shares outstanding                 |  |                               | 3,369,567 |  |   | 3,174,321 |  |   | 3,088,881 | 
|Diluted weighted
  average shares outstanding               |  |                               | 3,389,765 |  |   | 3,201,154 |  |   | 3,116,078 | 
|                                                           
|                                                            |  |                               |           |  |   |           |  |   |           | 

See accompanying notes to
consolidated financial statements.


12

---



Consolidated
Statements of Comprehensive Income(dollars in thousands)

|                                                                                                                                            |  |                                 |       |      |   |        |   |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | ---- | - | ------ | - | - | ----- | -
|                                                                                                                                            |  | For the Years Ended December 31 |      
|                                                                                                                                            |  | 2006                            |       | 2005 |   | 2004   |  
|                                                                                                                                            |  |                                 |       |      |   |        |  
|Net income                                                                                                                                  |  | $                               | 6,488 |      | $ | 7,574  |   | $ | 6,872 |  
|Other
  comprehensive income, net of tax                                                                                                    |  |                                 |       |      |   |        |   |   |       |  
|                                                                                                                                           
|Unrealized
  holding gains (losses) arising during the year                                                                                 |  |                                 | 302   |      |   | (1,378 | ) |   | (192  | )
|Less:
  Reclassification adjustment for net realized gains 
       included in net income, net of tax expense of
  $92, 
       $34 and $84 |  |                                 | (158  | )    |   | (55    | ) |   | (132  | )
|                                                                                                                                            |  |                                 |       |      |   |        |   |   |       |  
|Other
  comprehensive income (loss)                                                                                                         |  |                                 | 144   |      |   | (1,433 | ) |   | (324  | )
|                                                                                                                                            |  |                                 |       |      |   |        |   |   |       |  
|Comprehensive income                                                                                                                        |  | $                               | 6,632 |      | $ | 6,141  |   | $ | 6,548 |  
|                                                                                                                                            |  |                                 |       |      |   |        |   |   |       |  
|                                                                                                                                            |  |                                 |       |      |   |        |   |   |       |  
|                                                                                                                                            |  |                                 |       |      |   |        |   |   |       |  
|See accompanying notes to consolidated financial
  statements.                                                                              |  |                                 |       |      |   |        |   |   |       |  

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

|                                                                              |  |                |        |         |   |                      |  |                                                                            |        |                   |   |        |   |   |         |   |   |        |  
|----------------------------------------------------------------------------- |  | -------------- | ------ | ------- | - | -------------------- |  | -------------------------------------------------------------------------- | ------ | ----------------- | - | ------ | - | - | ------- | - | - | ------ | -
|                                                                              |  |                |        |         |   |                      |  |                                                                            |        |                   |   |        |   |   |         |   |   |        |  
|                                                                              |  | Common
  Stock |        | Surplus |   | Retained 
  Earnings |  | Accumulated
  Other 
  Comprehensive 
  Income (Loss) 
  net of tax effect |        | Treasury 
  Stock |   | Total  |  
|                                                                              |  |                |        |         |   |                      |  |                                                                            |        |                   |   |        |  
|Balance,
  January 1, 2004                                                    |  | $              | 20,699 |         | $ | 7,020                |  | $                                                                          | 38,726 |                   | $ | 1,275  |   | $ | (16,845 | ) | $ | 50,875 |  
|Net
  income                                                                  |  |                |        |         |   |                      |  |                                                                            | 6,872  |                   |   |        |   |   |         |   |   | 6,872  |  
|Sale
  of 4,176 shares of treasury stock                                      |  |                |        |         |   | 61                   |  |                                                                            |        |                   |   |        |   |   | 59      |   |   | 120    |  
|Purchase
  of 100, 000 shares of treasury stock                               |  |                |        |         |   |                      |  |                                                                            |        |                   |   |        |   |   | (2,884  | ) |   | (2,884 | )
|Exercise
  of stock options and re-issuance of treasury stock (22,936 shares) |  |                |        |         |   | 729                  |  |                                                                            | (476   | )                 |   |        |   |   | 423     |   |   | 676    |  
|Cash
  dividends ($.96 per share)                                             |  |                |        |         |   |                      |  |                                                                            | (2,966 | )                 |   |        |   |   |         |   |   | (2,966 | )
|Other
  comprehensive loss, net of $205 tax effect                            |  |                |        |         |   |                      |  |                                                                            |        |                   |   | (324   | ) |   |         |   |   | (324   | )
|                                                                              |  |                |        |         |   |                      |  |                                                                            |        |                   |   |        |   |   |         |   |   |        |  
|Balance,
  December 31, 2004                                                  |  | $              | 20,699 |         | $ | 7,810                |  | $                                                                          | 42,156 |                   | $ | 951    |   | $ | (19,247 | ) | $ | 52,369 |  
|Net
  income                                                                  |  |                |        |         |   |                      |  |                                                                            | 7,574  |                   |   |        |   |   |         |   |   | 7,574  |  
|Sale
  of 6,098 shares of treasury stock                                      |  |                |        |         |   | 75                   |  |                                                                            |        |                   |   |        |   |   | 115     |   |   | 190    |  
|Purchase
  of 100,000 shares of treasury stock                                |  |                |        |         |   |                      |  |                                                                            |        |                   |   |        |   |   | (3,150  | ) |   | (3,150 | )
|Exercise
  of stock options and re-issuance of treasury stock (43,891 shares) |  |                |        |         |   | 776                  |  |                                                                            | (611   | )                 |   |        |   |   | 762     |   |   | 927    |  
|Cash
  dividends ($1.03 per share)                                            |  |                |        |         |   |                      |  |                                                                            | (3,333 | )                 |   |        |   |   |         |   |   | (3,333 | )
|Issuance
  of 338,600 shares of common stock                                  |  |                | 1,693  |         |   | 8,307                |  |                                                                            |        |                   |   |        |   |   |         |   |   | 10,000 |  
|Other
  comprehensive loss, net of $906 tax effect                            |  |                |        |         |   |                      |  |                                                                            |        |                   |   | (1,433 | ) |   |         |   |   | (1,433 | )
|                                                                              |  |                |        |         |   |                      |  |                                                                            |        |                   |   |        |   |   |         |   |   |        |  
|Balance,
  December 31, 2005                                                  |  | $              | 22,392 |         | $ | 16,968               |  | $                                                                          | 45,786 |                   | $ | (482   | ) | $ | (21,520 | ) | $ | 63,144 |  
|Net
  income                                                                  |  |                |        |         |   |                      |  |                                                                            | 6,488  |                   |   |        |   |   |         |   |   | 6,488  |  
|Sale
  of 2,202 shares of treasury stock                                      |  |                |        |         |   | 32                   |  |                                                                            |        |                   |   |        |   |   | 38      |   |   | 70     |  
|Purchase
  of 60,000 shares of treasury stock                                 |  |                |        |         |   |                      |  |                                                                            |        |                   |   |        |   |   | (2,024  | ) |   | (2,024 | )
|Exercise
  of stock options and re-issuance of treasury stock (62,766 shares) |  |                |        |         |   | 1,157                |  |                                                                            | (623   | )                 |   |        |   |   | 1,163   |   |   | 1,697  |  
|Adjustment
  for fractional shares                                            |  |                | (1     | )       |   | 1                    |  |                                                                            |        |                   |   |        |   |   |         |   |   |        |  
|Cash
  dividends ($1.05 per share)                                            |  |                |        |         |   |                      |  |                                                                            | (3,542 | )                 |   |        |   |   |         |   |   | (3,542 | )
|Other
  comprehensive income, net of $91 tax effect                           |  |                |        |         |   |                      |  |                                                                            |        |                   |   | 144    |   |   |         |   |   | 144    |  
|Adjustment
  to initially apply FAS 158, net of $393 tax effect               |  |                |        |         |   |                      |  |                                                                            |        |                   |   | (622   | ) |   |         |   |   | (622   | )
|                                                                              |  |                |        |         |   |                      |  |                                                                            |        |                   |   |        |   |   |         |   |   |        |  
|Balance, December 31, 2006                                                    |  | $              | 22,391 |         | $ | 18,158               |  | $                                                                          | 48,109 |                   | $ | (960   | ) | $ | (22,343 | ) | $ | 65,355 |  
|                                                                              |  |                |        |         |   |                      |  |                                                                            |        |                   |   |        |   |   |         |   |   |        |  

|                                                               |   
|-------------------------------------------------------------- | --
|                                                              
|See accompanying notes to consolidated financial
  statements. | 13

---



Consolidated
Statements of Cash Flows(dollars in thousands)

|                                                                                    |  |                                 |         |      |   |         |   |   |         |  
|----------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                    |  | For the Years Ended December 31 |        
|                                                                                    |  | 2006                            |         | 2005 |   | 2004    |  
|                                                                                    |  |                                 |         |      |   |         |  
|Operating activities:                                                               |  |                                 |         |      |   |         |   |   |         |  
|Net
  income                                                                        |  | $                               | 6,488   |      | $ | 7,574   |   | $ | 6,872   |  
|Adjustments
  to reconcile net income to net cash provided by operating activities: |  |                                 |         |      |   |         |   |   |         |  
|Depreciation                                                                        |  |                                 | 2,304   |      |   | 1,589   |   |   | 1,312   |  
|Provision
  for loan losses                                                         |  |                                 | 285     |      |   | -0-     |   |   | 375     |  
|Deferred
  income tax (benefit) expense                                             |  |                                 | (916    | )    |   | 258     |   |   | (258    | )
|Amortization
  of intangible assets and other purchase accounting adjustments, net  |  |                                 | 651     |      |   | 324     |   |   | 208     |  
|Amortization
  of premiums on investment securities, net of accretion               |  |                                 | 107     |      |   | 1,355   |   |   | 1,675   |  
|Gain
  on sales of securities available-for-sale, net                               |  |                                 | (250    | )    |   | (89     | ) |   | (216    | )
|Gain
  on sale of loans                                                             |  |                                 | (90     | )    |   | (63     | ) |   | (465    | )
|Loss
  (gain) on sales of other real estate owned, net                              |  |                                 | 122     |      |   | (29     | ) |   | (293    | )
|FHLB
  Stock dividends                                                              |  |                                 | (24     | )    |   | (78     | ) |   | (115    | )
|Loans
  originated for sale                                                         |  |                                 | (56,864 | )    |   | (40,227 | ) |   | (36,781 | )
|Proceeds
  from sales of loans originated for sale                                  |  |                                 | 54,939  |      |   | 38,941  |   |   | 37,803  |  
|Increase
  in accrued interest payable                                              |  |                                 | 1,513   |      |   | 1,610   |   |   | 149     |  
|Increase
  in accrued interest receivable                                           |  |                                 | (2,425  | )    |   | (1,458  | ) |   | (366    | )
|Increase
  in other assets                                                          |  |                                 | (1,804  | )    |   | (4,939  | ) |   | (426    | )
|(Decrease)
  increase in other liabilities                                          |  |                                 | (1,737  | )    |   | 1,748   |   |   | (545    | )
|                                                                                    |  |                                 |         |      |   |         |   |   |         |  
|                                                                                    |  |                                 |        
|Net cash
  provided by operating activities                                         |  |                                 | 2,299   |      |   | 6,516   |   |   | 8,929   |  
|                                                                                    |  |                                 |         |      |   |         |   |   |         |  
|                                                                                    |  |                                 |         |      |   |         |   |   |         |  
|Investing activities:                                                               |  |                                 |         |      |   |         |   |   |         |  
|Proceeds
  from sales of investment securities available-for-sale                   |  |                                 | 8,904   |      |   | 28,446  |   |   | 10,910  |  
|Proceeds
  from maturities of investment securities available-for-sale              |  |                                 | 40,247  |      |   | 39,366  |   |   | 28,039  |  
|Purchase
  of investment securities available-for-sale                              |  |                                 | (65,567 | )    |   | (51,831 | ) |   | (60,184 | )
|Proceeds
  from maturities of investment securities held-to-maturity                |  |                                 | 2,370   |      |   | 2,658   |   |   | 1,855   |  
|Purchase
  of investment securities held-to-maturity                                |  |                                 | (2,025  | )    |   | (1,960  | ) |   | (1,410  | )
|Proceeds
  from sales of other real estate owned                                    |  |                                 | 377     |      |   | 97      |   |   | 682     |  
|Proceeds
  from sales of loan portfolios                                            |  |                                 | 19,579  |      |   | 546     |   |   | 2,585   |  
|Net
  increase in loans                                                             |  |                                 | (67,241 | )    |   | (57,122 | ) |   | (29,212 | )
|Purchase
  of premises and equipment                                                |  |                                 | (4,562  | )    |   | (3,815  | ) |   | (4,572  | )
|Payment
  related to acquisition, net of cash and cash equivalents acquired         |  |                                 | -0-     |      |   | (43,559 | ) |   | -0-     |  
|                                                                                    |  |                                 |         |      |   |         |   |   |         |  
|                                                                                    |  |                                 |         |      |   |         |   |   |         |  
|Net cash
  used in investing activities                                             |  |                                 | (67,918 | )    |   | (87,174 | ) |   | (51,307 | )
|                                                                                    |  |                                 |         |      |   |         |   |   |         |  
|Financing activities:                                                               |  |                                 |         |      |   |         |   |   |         |  
|Net
  increase in deposits                                                          |  |                                 | 83,310  |      |   | 43,119  |   |   | 35,734  |  
|Issuance
  of trust preferred securities                                            |  |                                 | -0-     |      |   | 25,000  |   |   | -0-     |  
|Issuance
  of common stock                                                          |  |                                 | -0-     |      |   | 10,000  |   |   | -0-     |  
|Net
  increase in borrowings                                                        |  |                                 | 1,548   |      |   | 17,560  |   |   | 9,374   |  
|Dividends
  paid                                                                    |  |                                 | (3,542  | )    |   | (3,333  | ) |   | (2,966  | )
|Purchase
  of treasury stock                                                        |  |                                 | (2,024  | )    |   | (3,150  | ) |   | (2,884  | )
|Exercise
  of stock options and issuance of treasury stock                          |  |                                 | 1,697   |      |   | 927     |   |   | 676     |  
|Sales
  of treasury stock                                                           |  |                                 | 70      |      |   | 190     |   |   | 120     |  
|                                                                                    |  |                                 |         |      |   |         |   |   |         |  
|                                                                                    |  |                                 |         |      |   |         |   |   |         |  
|Net cash
  provided by financing activities                                         |  |                                 | 81,059  |      |   | 90,313  |   |   | 40,054  |  
|                                                                                    |  |                                 |         |      |   |         |   |   |         |  
|                                                                                    |  |                                 |         |      |   |         |   |   |         |  
|Increase
  (decrease) in cash and cash equivalents                                  |  |                                 | 15,440  |      |   | 9,655   |   |   | (2,324  | )
|Cash
  and cash equivalents at beginning of year                                    |  |                                 | 23,745  |      |   | 14,090  |   |   | 16,414  |  
|                                                                                    |  |                                 |         |      |   |         |   |   |         |  
|                                                                                    |  |                                 |         |      |   |         |   |   |         |  
|Cash
  and cash equivalents at end of year                                          |  | $                               | 39,185  |      | $ | 23,745  |   | $ | 14,090  |  
|                                                                                    |  |                                 |         |      |   |         |   |   |         |  
|                                                                                    |  |                                 |         |      |   |         |   |   |         |  
|Cash
  paid during the year for:                                                    |  |                                 |         |      |   |         |   |   |         |  
|Interest                                                                            |  | $                               | 26,117  |      | $ | 14,116  |   | $ | 8,921   |  
|Income
  taxes                                                                      |  | $                               | 1,267   |      | $ | 1,861   |   | $ | 2,462   |  
|Supplemental
  disclosure of noncash investing activities:                          |  |                                 |         |      |   |         |   |   |         |  
|Loans
  transferred to other real estate owned                                      |  | $                               | 31      |      | $ | 78      |   | $ | 32      |  

|   |                                                               
|-- | --------------------------------------------------------------
|  
|14 | See accompanying notes to consolidated financial
  statements.

---



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

1.       Summary of Significant Accounting
Policies

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

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

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

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

Material
estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses. In connection with the determination
of the allowance for loan losses, management obtains independent appraisals for
significant properties.

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

Loans - Loans are stated at the principal
amount outstanding, net of unearned interest and allowance for loan losses.
Interest on commercial, real estate and certain installment loans is credited
to operations as earned, based upon the principal amount outstanding. Interest
on other installment loans is credited to operations using a method which
approximates the interest method. Loan origination fees are recognized to
income, and loan origination costs are charged to expense, as incurred. The
impact of the cash basis of accounting for loan fees and costs is not
materially different from the deferral basis.

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

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

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

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

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

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

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

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

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

15

---



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

Income Taxes - Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using currently enacted tax rates. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Deferred tax assets are
recognized subject to managements judgment that realization is more likely
than not.

Trust Assets - Assets held in fiduciary or
agency capabilities are not included in the consolidated balance sheets since
such items are not assets of the Corporation. Fees from trust activities are
recorded on an accrual basis over the period in which the service is provided.
Fees are a function of the market value of assets managed and administered, the
volume of transactions, and fees for other services rendered, as set forth in
the underlying client agreement with fiduciary services. This revenue
recognition involves the use of estimates and assumptions, including components
that are calculated based on estimated asset valuations and transaction
volumes. Generally, the actual trust fee is charged to each account on a
monthly prorated basis. Any out of pocket expenses or services not typically
covered by the fee schedule for trust activities are charged directly to the
trust account on a gross basis as trust revenue is incurred. The Corporation
manages or administers 1,126 trust accounts with assets totaling approximately
$254,148 at December 31, 2006 and had 1,014 trust accounts with assets totaling
approximately $206,850 at December 31, 2005.

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

Earnings Per Share - Earnings per share
have been computed based upon the weighted average common shares outstanding
during each year.

Intangible Assets - Intangible assets are
being amortized on either a straight-line or accelerated basis over periods
ranging from four to fifteen years. Such assets are periodically evaluated as
to the recoverability of their carrying value.

Cash Flows - For purposes of reporting cash
flows, cash and cash equivalents include cash and due from banks,
interest-bearing deposits in financial institutions and federal funds sold.
Generally, federal funds are sold or purchased for one-day periods.

Reclassification - Certain amounts in the
2005 and 2004 consolidated financial statements have been reclassified to
conform to the 2006 presentation. These reclassifications had no effect on net
income.

Stock Options - Prior to January 1, 2006,
the Corporation accounted for its stock option plans under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), and related interpretations as permitted by the Financial
Accounting Standards Board (FASB) Statement No. 123, Accounting for
Stock-Based Compensation (FAS 123). No stock-based employee compensation cost
was recognized in the Statements of Income as all options granted had an
exercise price equal to market value of the underlying stock on the grant date.

In
December, 2004, the FASB issued Statement 123 (revised 2004), Share-Based
Payment (FAS 123R), which requires the cost resulting from stock options be
measured at fair value and recognized earnings. This statement replaces FAS 123
and supersedes APB 25, which permitted the recognition of compensation expense
using the intrinsic value method.

Prior,
to the adoption of FAS 123R, on December 20, 2005, the Corporation announced that
the Personnel Policy and Salary Committee of the Board of Directors approved
the accelerated vesting of all outstanding unvested stock options to purchase
shares of common stock of PNBC granted through the Corporations non-qualified
stock option plans. The unvested options related to awards granted in 2003 and
2004 to directors and officers of the Corporation. All of the unvested options
were in the money at the date vesting was accelerated, in a range from $4.42 to
$22.06 per share. There was no compensation cost recognized in the financial
statements from the vesting decision. By accelerating the vesting of these
options, the Corporation estimated approximately $925 of future compensation
expense was eliminated. Options to purchase 142,133 shares of PNBC common
stock, which otherwise would have vested from time to time over the following
two years, became immediately exercisable as a result of this decision. The
remaining terms for each of the options granted remained the same. This
acceleration became effective as of December 31, 2005. Additionally, the
Corporation announced the stock option award for 2005 of 80,700 shares was
granted with full vesting. This decision was made to eliminate additional
future compensation expense of approximately $163 for each of the three years,
beginning in 2006.

The
number of shares of common stock authorized under the stock option plans is
502,500. The option exercise price must be at least 100% of the fair market
value of the common stock on the date of the grant, and the option term cannot
exceed ten years.

Effective,
January 1, 2006, the Corporation adopted the fair value recognition provisions
of FAS 123R, using the modified prospective application method. Under this
method, the Statement applies to new awards and to awards modified, repurchased
or cancelled after the effective date. Additionally, compensation cost for a
portion of the awards for which requisite services have not been rendered that
are outstanding as of the effective date shall be recognized as the requisite
service is rendered or after the effective date. The following table
illustrates the effect on net income and earnings per share if the Corporation
had applied the fair value recognition provisions of FAS 123R on stock-based employee
compensation for the years ended December 31, 2005 and 2004:

|                                                                                                           |  |                                 |       |      |   |       |  
|---------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ----- | ---- | - | ----- | -
|                                                                                                           |  | For the Years Ended December 31 |      
|                                                                                                           |  |                                 |      
|                                                                                                           |  | 2005                            |       | 2004 |  
|                                                                                                           |  |                                 |       |      |  
|Net income, as reported                                                                                    |  | $                               | 7,574 |      | $ | 6,872 |  
|Stock-based compensation expense determined under the fair value
based
  method, net of related tax effect |  |                                 | (867  | )    |   | (399  | )
|                                                                                                           |  |                                 |       |      |   |       |  
|Pro forma net income                                                                                       |  | $                               | 6,707 |      | $ | 6,473 |  
|                                                                                                           |  |                                 |       |      |   |       |  
|Basic earnings per share, as reported                                                                      |  | $                               | 2.39  |      | $ | 2.22  |  
|Pro forma basic earnings per share                                                                         |  | $                               | 2.11  |      | $ | 2.10  |  
|Diluted earnings per share, as reported                                                                    |  | $                               | 2.37  |      | $ | 2.21  |  
|Pro forma diluted earnings per share                                                                       |  | $                               | 2.10  |      | $ | 2.08  |  

Impact of New Accounting Standards - In
February 2006, the FASB issued SFAS No. 155 (FAS 155), Accounting for Certain
Hybrid Financial Instruments: an amendment of FASB Statements No. 133 and 140.
FAS 155 permits fair value re-measurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation,
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of Statement 133, establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation, clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives, and
amends Statement 140 to eliminate the prohibition on a qualifying special
purpose entity from

16

---



holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. FAS 155 is
effective for all financial instruments
acquired or issued after the beginning of an entitys first fiscal year that
begins after September 15, 2006. The Corporation does not expect the adoption of
FAS 155 will have a material impact on its results of operations, financial
position or liquidity.

In
March 2006, the FASB issued SFAS No. 156 (FAS 156), Accounting for Servicing of
Financial Assets  an amendment of FAS 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, with respect to the
accounting for separately recognized servicing assets and liabilities. FAS 156
requires an entity to recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into
a servicing contract in any of the following situations: a transfer of the
servicers financial assets that meets the requirements for sale accounting, a
transfer of the servicers financial assets to a qualifying special-purpose
entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities
and classifies them as either available-for-sale securities or trading
securities in accordance with FAS 115, Accounting
for Certain investments in Debt and Equity Securities, or an acquisition or
assumption of an obligation to service a financial asset that does not relate
to financial assets of the servicer or its consolidated affiliates. FAS 156
maintains the requirement set forth under FAS 140 that all separately recognized
servicing assets and servicing liabilities are to be initially measured at fair
value, if practicable. In regard to subsequent measurement methods for each
class of separately recognized servicing assets and servicing liabilities, FAS
156 amends FAS 140 to allow for either an amortization method or a fair value
measurement method. FAS 156 is effective as of the beginning of the fiscal year
that begins after September 15, 2006. The Company does not expect the adoption of FAS 156 will have a
material impact on its results of operations, financial position or liquidity.

In
July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes  an Interpretation of FASB Statement 109, which provides guidance
on the measurement, recognition and disclosure of tax positions taken or
expected to be taken in a tax return. The Interpretation also provides guidance on derecognition, classification,
interest and penalties, and disclosure. FIN 48 prescribes that a tax position
should only be recognized if it is more-likely-than-not that the position will
be sustained upon examination by the appropriate taxing authority. A tax
position that meets this threshold is
measured as the largest amount of benefit that is greater than 50 percent
likely of being realized upon ultimate settlement. The cumulative effect of applying
the provisions of FIN 48 is to be reported as an adjustment to the beginning
balance of retained earnings in the period of adoption. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company does
not expect the adoption of this Interpretation will have a material impact on
its results of operations, financial position or liquidity.

In
September 2006, FASB issued SFAS No. 157 (FAS 157), Fair Value Measurements,
which provides enhanced guidance for using fair value to measure assets and liabilities. FAS 157
establishes a common definition of fair value, provides a framework for
measuring fair value under U.S. GAAP and expands disclosure requirements about fair value measurements. FAS 157
is effective for financial statements issued in fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The Corporation
is currently evaluating the impact, if any, the adoption of FAS 157 will have
on its financial reporting and disclosures.

In
September 2006, the FASB issued SFAS No. 158 (FAS 158), Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans  an amendment of FASB Statements
87, 88, 106, and 132 (R), which requires recognition of a net liability or asset
to report the funded status of defined benefit pension and other postretirement plans on the balance sheet and
recognition (as a component of other comprehensive income) of changes in the
funded status in the year in which the changes occur. Additionally, FAS 158
requires measurement of a plans assets and obligations as of the balance sheet
date and additional annual disclosures in the notes to the financial
statements. The recognition and disclosure provision of FAS 158 is effective
for fiscal years ending after December 15, 2006, and was adopted during 2006.
The requirement to measure a plans assets and obligations as of the balance
sheet date is effective for fiscal years
ending after December 15, 2008. The Corporation does not expect the adoption of
the measurement provisions to have a material impact on its results of
operations, financial position or liquidity.

In
September 2006, the FASB ratified Emerging Issues Task Force No. 06-4,
Postretirement Benefits Associated with Split-Dollar Life Insurance (EITF 06-4). EITF 06-4 requires deferred-compensation
or
postretirement benefit aspects of an endorsement-type split-dollar life
insurance arrangement to be recognized as a liability by the employer and the
obligation is not effectively settled by the purchase of a life insurance
policy. The liability for future benefits should be recognized based on the
substantive agreement with the employee, which may be either to provide a
future death benefit or to pay for the future cost of the life insurance. EITF
06-4 is effective for fiscal years beginning after December 15, 2007. The
Corporation is currently evaluating the impact,
if any, the adoption of EITF 06-4 will have on its financial reporting and
disclosures.

2.Earnings Per Share

The
following table sets forth the computation for basic and diluted earnings per
share for the years ended December 31, 2006, 2005 and 2004:

|                                                                            |  |      |           |      |   |           |  |   |           | 
|--------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | 
|                                                                            |  | 2006 |           | 2005 |   | 2004      | 
|Numerator:                                                                  |  |      |           |      |   |           |  |   |           | 
|Net income                                                                  |  | $    | 6,488     |      | $ | 7,574     |  | $ | 6,872     | 
|Denominator:                                                                |  |      |           |      |   |           |  |   |           | 
|Basic
  earnings per share - weighted average shares outstanding            |  |      | 3,369,567 |      |   | 3,174,321 |  |   | 3,088,881 | 
|Effect of
  dilutive securities - stock options                             |  |      | 20,198    |      |   | 26,833    |  |   | 27,197    | 
|                                                                            |  |      |           |      |   |           |  |   |           | 
|Diluted earnings per share -
  adjusted weighted average shares outstanding |  |      | 3,389,765 |      |   | 3,201,154 |  |   | 3,116,078 | 
|                                                                           
|Earnings per share:                                                         |  |      |           |      |   |           |  |   |           | 
|Basic                                                                       |  | $    | 1.93      |      | $ | 2.39      |  | $ | 2.22      | 
|Diluted                                                                     |  | $    | 1.91      |      | $ | 2.37      |  | $ | 2.21      | 

3.Cash and Due From Banks

The
average compensating balances held at correspondent banks during 2006 and 2005
were $3,207 and $3,469, respectively. The subsidiary bank maintains such
compensating balances with correspondent banks to offset charges for services
rendered by those banks. In addition, the Federal Reserve Bank required the subsidiary bank to maintain
average balances of approximately $1,845 and $929, for 2006 and 2005,
respectively, as reserve requirements.

17

---



4. Investment Securities

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

|                                    |  |               |         |                      |   |                               |  |                        |        |   |   |         | 
|----------------------------------- |  | ------------- | ------- | -------------------- | - | ----------------------------- |  | ---------------------- | ------ | - | - | ------- | 
|                                    |  | 2006          |        
|                                    |  | AmortizedCost |         | GrossUnrealizedGains |   | Gross 
  Unrealized 
  Losses |  | EstimatedFair 
  Value |       
|                                    |  |               |         |                      |   |                               |  |                        |       
|Available-for-sale:                 |  |               |         |                      |   |                               |  |                        |        |   |   |         | 
|United States
  Treasuries          |  | $             | 1,003   |                      | $ | -0-                           |  | $                      | (2     | ) | $ | 1,001   | 
|United States Government Agencies   |  |               | 64,495  |                      |   | 14                            |  |                        | (761   | ) |   | 63,748  | 
|State and
Municipal                 |  |               | 89,984  |                      |   | 1,273                         |  |                        | (778   | ) |   | 90,479  | 
|Collateralized
mortgage obligations |  |               | 93,581  |                      |   | 185                           |  |                        | (484   | ) |   | 93,282  | 
|Other
securities                    |  |               | 3,957   |                      |   | -0-                           |  |                        | -0-    |   |   | 3,957   | 
|                                    |  |               |         |                      |   |                               |  |                        |        |   |   |         | 
|Total                               |  |               | 253,020 |                      |   | 1,472                         |  |                        | (2,025 | ) |   | 252,467 | 
|                                    |  |               |         |                      |   |                               |  |                        |        |   |   |         | 
|Held-to-maturity:                   |  |               |         |                      |   |                               |  |                        |        |   |   |         | 
|State and Municipal                 |  |               | 15,449  |                      |   | 216                           |  |                        | (98    | ) |   | 15,567  | 
|                                    |  |               |         |                      |   |                               |  |                        |        |   |   |         | 
|Total                               |  | $             | 268,469 |                      | $ | 1,688                         |  | $                      | (2,123 | ) | $ | 268,034 | 
|                                    |  |               |         |                      |   |                               |  |                        |        |   |   |         | 

|                                    |  |               |         |                      |   |                       |  |                    |        |   |   |         | 
|----------------------------------- |  | ------------- | ------- | -------------------- | - | --------------------- |  | ------------------ | ------ | - | - | ------- | 
|                                    |  | 2005          |        
|                                    |  | AmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedFairValue |       
|                                    |  |               |         |                      |   |                       |  |                    |       
|Available-for-sale:                 |  |               |         |                      |   |                       |  |                    |        |   |   |         | 
|United States Treasuries            |  | $             | 1,521   |                      | $ | -0-                   |  | $                  | (8     | ) | $ | 1,513   | 
|United States Government Agencies   |  |               | 62,848  |                      |   | 21                    |  |                    | (1,026 | ) |   | 61,843  | 
|State and Municipal                 |  |               | 91,278  |                      |   | 1,794                 |  |                    | (877   | ) |   | 92,195  | 
|Collateralized mortgage obligations |  |               | 77,167  |                      |   | 30                    |  |                    | (721   | ) |   | 76,476  | 
|Other securities                    |  |               | 3,344   |                      |   | -0-                   |  |                    | -0-    |   |   | 3,344   | 
|                                    |  |               |         |                      |   |                       |  |                    |        |   |   |         | 
|Total                               |  |               | 236,158 |                      |   | 1,845                 |  |                    | (2,632 | ) |   | 235,371 | 
|                                    |  |               |         |                      |   |                       |  |                    |        |   |   |         | 
|Held-to-maturity:                   |  |               |         |                      |   |                       |  |                    |        |   |   |         | 
|State and Municipal                 |  |               | 16,115  |                      |   | 259                   |  |                    | (100   | ) |   | 16,274  | 
|                                    |  |               |         |                      |   |                       |  |                    |        |   |   |         | 
|Total                               |  | $             | 252,273 |                      | $ | 2,104                 |  | $                  | (2,732 | ) | $ | 251,645 | 
|                                    |  |               |         |                      |   |                       |  |                    |        |   |   |         | 

Maturities
of investment securities classified as available-for-sale and held-to-maturity
were as follows at December 31, 2006:

|                                         |  |               |         |                    |   |         | 
|---------------------------------------- |  | ------------- | ------- | ------------------ | - | ------- | 
|                                         |  | AmortizedCost |         | EstimatedFairValue |  
|                                         |  |               |         |                    |  
|Available-for-sale:                      |  |               |         |                    |  
|Due in one
  year or less                |  | $             | 29,366  |                    | $ | 29,213  | 
|Due
  after one year through five years  |  |               | 33,349  |                    |   | 32,744  | 
|Due after
  five years through ten years |  |               | 27,505  |                    |   | 27,788  | 
|Due after
  ten years                    |  |               | 57,730  |                    |   | 58,010  | 
|                                         |  |               |         |                    |   |         | 
|                                         |  |               | 147,950 |                    |   | 147,755 | 
|                                         |  |               |         |                    |   |         | 
|Mortgage-backed securities               |  |               | 7,532   |                    |   | 7,473   | 
|Collateralized
  mortgage obligations    |  |               | 93,581  |                    |   | 93,282  | 
|Other
  securities                       |  |               | 3,957   |                    |   | 3,957   | 
|                                         |  |               |         |                    |   |         | 
|                                         |  | $             | 253,020 |                    | $ | 252,467 | 
|                                         |  |               |         |                    |   |         | 
|Held-to-maturity:                        |  |               |         |                    |   |         | 
|Due in one
  year or less                |  | $             | 3,067   |                    | $ | 3,045   | 
|Due after
  one year through five years  |  |               | 5,271   |                    |   | 5,242   | 
|Due after
  five years through ten years |  |               | 6,274   |                    |   | 6,446   | 
|Due after
  ten years                    |  |               | 837     |                    |   | 834     | 
|                                         |  |               |         |                    |   |         | 
|                                         |  | $             | 15,449  |                    | $ | 15,567  | 
|                                         |  |               |         |                    |   |         | 

Other
securities consist of Federal Home Loan Bank and Federal Reserve Bank stock
held totaling $2,373 and $1,584 at December 31, 2006, and $2,649 and $695 at December 31, 2005, respectively.

18

---



Proceeds
from sales of investment securities available-for-sale during 2006, 2005 and
2004 were $8,904, $28,446 and $10,910, respectively. Gross gains of $250 in
2006, $89 in 2005 and $216 in 2004 (resulting in tax expense of $97, $34 and
$84, respectively) were realized on those sales. There were no gross losses
from these sales in 2006, 2005 or 2004. There were no sales of investment
securities classified as held-to-maturity during 2006, 2005 and 2004.

Securities
with unrealized losses at December 31, 2006 and 2005 not recognized in income
are as follows:

|                                    |  |                     |        |                           |   |              |  |                           |         |              |   |                           |  |   |         |  |   |       | 
|----------------------------------- |  | ------------------- | ------ | ------------------------- | - | ------------ |  | ------------------------- | ------- | ------------ | - | ------------------------- |  | - | ------- |  | - | ----- | 
|                                    |  | 2006                |       
|                                    |  | Less than 12 Months |        | 12 months or More         |   | Total        | 
|                                    |  | Fair
  Value        |        | Gross
  Unrealized
  Loss |   | Fair
  Value |  | Gross
  Unrealized
  Loss |         | Fair
  Value |   | Gross
  Unrealized
  Loss | 
|                                    |  |                     |        |                           |   |              |  |                           |         |              |   |                           | 
|United States Treasuries            |  | $                   | -0-    |                           | $ | -0-          |  | $                         | 1,001   |              | $ | 2                         |  | $ | 1,001   |  | $ | 2     | 
|United States Government Agencies   |  |                     | 9,109  |                           |   | 11           |  |                           | 49,539  |              |   | 750                       |  |   | 58,648  |  |   | 761   | 
|State and Municipal                 |  |                     | 5,892  |                           |   | 45           |  |                           | 43,059  |              |   | 734                       |  |   | 48,951  |  |   | 876   | 
|Collateralized mortgage obligations |  |                     | 14,158 |                           |   | 46           |  |                           | 45,518  |              |   | 438                       |  |   | 59,676  |  |   | 484   | 
|Other securities                    |  |                     | -0-    |                           |   | -0-          |  |                           | -0-     |              |   | -0-                       |  |   | -0-     |  |   | -0-   | 
|                                    |  |                     |        |                           |   |              |  |                           |         |              |   |                           |  |   |         |  |   |       | 
|Total
  temporarily impaired        |  | $                   | 29,159 |                           | $ | 102          |  | $                         | 139,117 |              | $ | 1,924                     |  | $ | 168,276 |  | $ | 2,123 | 
|                                    |  |                     |        |                           |   |              |  |                           |         |              |   |                           |  |   |         |  |   |       | 

|                                    |  |                     |         |                           |   |              |  |                           |        |              |   |                           |  |   |         |  |   |       | 
|----------------------------------- |  | ------------------- | ------- | ------------------------- | - | ------------ |  | ------------------------- | ------ | ------------ | - | ------------------------- |  | - | ------- |  | - | ----- | 
|                                    |  | 2005                |        
|                                    |  | Less than 12 Months |         | 12 months or More         |   | Total        | 
|                                    |  | Fair
  Value        |         | Gross
  Unrealized
  Loss |   | Fair
  Value |  | Gross
  Unrealized
  Loss |        | Fair
  Value |   | Gross
  Unrealized
  Loss | 
|                                    |  |                     |         |                           |   |              |  |                           |        |              |   |                           | 
|United States Treasuries            |  | $                   | 1,513   |                           | $ | 8            |  | $                         | -0-    |              | $ | -0-                       |  | $ | 1,513   |  | $ | 8     | 
|United States Government Agencies   |  |                     | 35,278  |                           |   | 381          |  |                           | 25,597 |              |   | 645                       |  |   | 60,875  |  |   | 1,026 | 
|State and Municipal                 |  |                     | 45,547  |                           |   | 413          |  |                           | 17,361 |              |   | 564                       |  |   | 62,908  |  |   | 977   | 
|Collateralized mortgage obligations |  |                     | 42,051  |                           |   | 356          |  |                           | 26,378 |              |   | 365                       |  |   | 68,429  |  |   | 721   | 
|Other securities                    |  |                     | -0-     |                           |   | -0-          |  |                           | -0-    |              |   | -0-                       |  |   | -0-     |  |   | -0-   | 
|                                    |  |                     |         |                           |   |              |  |                           |        |              |   |                           |  |   |         |  |   |       | 
|Total
  temporarily impaired        |  | $                   | 124,389 |                           | $ | 1,158        |  | $                         | 69,336 |              | $ | 1,574                     |  | $ | 193,725 |  | $ | 2,732 | 
|                                    |  |                     |         |                           |   |              |  |                           |        |              |   |                           |  |   |         |  |   |       | 

There
are 1,024 securities in an unrealized loss position in the investment portfolio
at December 31, 2006, all due to interest rate changes and not credit events.
These unrealized losses are not considered other-than-temporary and, therefore,
have not been recognized into income, because the issuer(s) are of high credit
quality (99.5% of the securities in the portfolio are rated AA or higher) and
management has the ability and intent to hold for the foreseeable future. The
fair value is expected to recover as the investments approach their maturity
date or there is a downward shift in interest rates.

The
carrying value of securities pledged as collateral, to secure public deposits
and for other purposes, was $242,888 at December 31, 2006 and $220,167 at
December 31, 2005.

5. Loans

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

|                             |  |      |         |      |   |         | 
|---------------------------- |  | ---- | ------- | ---- | - | ------- | 
|                             |  | 2006 |         | 2005 |  
|Loans                        |  |      |         |      |   |         | 
|Commercial                   |  | $    | 134,402 |      | $ | 114,342 | 
|Agricultural                 |  |      | 83,610  |      |   | 73,884  | 
|Real estate 
  construction |  |      | 42,991  |      |   | 37,286  | 
|Real estate 
  mortgage     |  |      | 312,398 |      |   | 308,138 | 
|Installment                  |  |      | 56,071  |      |   | 48,074  | 
|                             |  |      |         |      |   |         | 
|Total                        |  | $    | 629,472 |      | $ | 581,724 | 
|                             |  |      |         |      |   |         | 

Changes in the allowance for loan losses for the years ended December 31 were as follows:

|                                             |  |      |       |      |   |       |   |   |       |  
|-------------------------------------------- |  | ---- | ----- | ---- | - | ----- | - | - | ----- | -
|                                             |  | 2006 |       | 2005 |   | 2004  |  
|                                             |  |      |       |      |   |       |   |   |       |  
|Balance, January 1                           |  | $    | 3,109 |      | $ | 2,524 |   | $ | 2,250 |  
|Provision for
  loan losses                  |  |      | 285   |      |   | -0-   |   |   | 375   |  
|Allowance of
  bank acquired                 |  |      | -0-   |      |   | 752   |   |   | -0-   |  
|Loans charged
  off                          |  |      | (604  | )    |   | (347  | ) |   | (358  | )
|Recoveries of
  loans previously charged off |  |      | 263   |      |   | 180   |   |   | 257   |  
|                                             |  |      |       |      |   |       |   |   |       |  
|Balance, December 31                         |  | $    | 3,053 |      | $ | 3,109 |   | $ | 2,524 |  
|                                             |  |      |       |      |   |       |   |   |       |  

Non-accrual
loans at December 31, 2006, 2005 and 2004 were $3,893, $3,822 and $328,
respectively. Interest income that would have been recorded on these loans, had
they remained current, was approximately $397, $281 and $30, respectively. At
December 31, 2006 and 2005, accruing loans delinquent 90 days or more totaled
$33 and $3, respectively.

Impaired
loans at December 31, 2006, 2005 and 2004 totaled $2,123, $2,204 and $175,
respectively. Of these totals, $522, $378 and $60 of loans had valuation
reserves totaling $150, $111 and $3 at December 31, 2006, 2005 and 2004,
respectively. For the years ended December 31, 2006, 2005 and 2004,

19

---



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

the average recorded investment in impaired loans was
approximately $2,296, $1,581 and $194, respectively. Interest recognized on
impaired loans during the portion of the year that they were impaired was not
material.

The
Corporations subsidiary bank had loans outstanding to directors, executive
officers and to their related interests (related parties) of the Corporation
and its subsidiary of approximately, $5,530, $4,633 and $3,853, at December 31,
2006, 2005 and 2004, respectively. These loans were made in the ordinary course
of business on substantially the same terms and conditions, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other customers and did not involve more than the normal risk
of collectibility. As a practice, the subsidiary bank does not make loans to
its executive officers. A summary of the activity in 2006 for loans made to
directors, executive officers or principal holders of common stock or to any
associate of such persons for which the aggregate to any such person exceeds
$60 at December 31, 2006 is as follows:

|                          |  |           |  |          |  |                            
|------------------------- |  | --------- |  | -------- |  | ---------------------------
|Balance
  January 1, 2006 |  | Additions |  | Payments |  | Balance
  December 31, 2006
|                          |  |           |  |          |  |                            
|$4,633                    |  | $12,817   |  | $11,920  |  | $5,530                     

6.
Premises and Equipment

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

|                               |  |      |        |      |   |        | 
|------------------------------ |  | ---- | ------ | ---- | - | ------ | 
|                               |  | 2006 |        | 2005 |  
|                              
|Land                           |  | $    | 7,756  |      | $ | 7,745  | 
|Buildings                      |  |      | 25,518 |      |   | 21,643 | 
|Furniture and Equipment        |  |      | 20,035 |      |   | 19,444 | 
|                               |  |      |        |      |   |        | 
|                              
|                               |  |      | 53,309 |      |   | 48,832 | 
|Less: accumulated depreciation |  |      | 24,639 |      |   | 22,420 | 
|                               |  |      |        |      |   |        | 
|                              
|Total                          |  | $    | 28,670 |      | $ | 26,412 | 
|                               |  |      |        |      |   |        | 

Depreciation expense charged to operating expense for
2006, 2005 and 2004 was $2,304, $1,589 and $1,312, respectively.

7.
Acquisition

On
July 31, 2005, the Corporation acquired 100% of the outstanding stock of
Somonauk FSB Bancorp, Inc. (Somonauk), a $211.6 million bank holding company
with offices in Somonauk, Newark, Sandwich, Plano and Millbrook, Illinois. The
Corporation completed this acquisition in order to expand its market presence
in this area. Somonauk was acquired for a purchase price of $49.6 million;
$39.6 million paid in cash and the remaining $10 million paid in common stock,
resulting in the issuance of 338,600 shares. In conjunction with the
acquisition, the Corporation issued $25.0 million in trust preferred securities
and borrowed $15.0 million in secured notes. Of the $15.0 million in nates
payable, $9.0 million was immediately repaid after the closing of the
transaction.

The
following table represents the unaudited balance sheet for Somonauk as of June
30, 2005, which approximates the balance sheet at the date of acquisition:

|                                           |  |   |         |  
|------------------------------------------ |  | - | ------- | -
|Assets                                     |  |   |         |  
|Cash and due from banks                    |  | $ | 6,856   |  
|Investment securities                      |  |   | 84,135  |  
|Loans, net of unearned interest            |  |   | 113,706 |  
|Allowance for loan losses                  |  |   | (911    | )
|Premises and equipment, net                |  |   | 3,119   |  
|Other assets                               |  |   | 3,473   |  
|                                           |  |   |         |  
|                                          
|Total Assets                               |  | $ | 210,378 |  
|                                           |  |   |         |  
|Liabilities & Stockholders Equity         |  |   |         |  
|Deposits                                   |  | $ | 179,533 |  
|Borrowings                                 |  |   | 4,408   |  
|Other liabilities                          |  |   | 2,055   |  
|Stockholders equity                       |  |   | 24,382  |  
|                                           |  |   |         |  
|                                          
|Total
  Liabilities & Stockholders Equity |  | $ | 210,378 |  
|                                           |  |   |         |  

20

---



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

|                                              |  |  |                                        |           |  |  |                                     |   |           | 
|--------------------------------------------- |  |  | -------------------------------------- | --------- |  |  | ----------------------------------- | - | --------- | 
|                                              |  |  | For the Year Ended
  December 31, 2005 |           |  |  | For the Year EndedDecember 31, 2004 |  
|                                              |  |  |                                        |           |  |  |                                     |  
|Net interest income                           |  |  | $                                      | 27,023    |  |  |                                     | $ | 24,379    | 
|Provision for loan losses                     |  |  |                                        | 126       |  |  |                                     |   | 470       | 
|Non-interest income                           |  |  |                                        | 9,456     |  |  |                                     |   | 9,084     | 
|Non-interest expense                          |  |  |                                        | 27,225    |  |  |                                     |   | 24,242    | 
|                                              |  |  |                                        |           |  |  |                                     |   |           | 
|Income before income taxes                    |  |  |                                        | 9,128     |  |  |                                     |   | 8,751     | 
|Income tax expense                            |  |  |                                        | 2,000     |  |  |                                     |   | 1,657     | 
|                                              |  |  |                                        |           |  |  |                                     |   |           | 
|Net income                                    |  |  | $                                      | 7,128     |  |  |                                     | $ | 7,094     | 
|Earnings per share:                           |  |  |                                        |           |  |  |                                     |   |           | 
|Basic                                         |  |  | $                                      | 2.11      |  |  |                                     | $ | 2.07      | 
|Diluted                                       |  |  | $                                      | 2.10      |  |  |                                     | $ | 2.05      | 
|Basic weighted average
  shares outstanding   |  |  |                                        | 3,370,903 |  |  |                                     |   | 3,427,481 | 
|Diluted weighted average
  shares outstanding |  |  |                                        | 3,397,736 |  |  |                                     |   | 3,454,678 | 

The
unaudited pro forma condensed consolidated financial statements da not reflect
any anticipated cost savings and revenue enhancements. Additionally, the
Somonauk income statement for the first six months of 2005 includes
merger-related expenses. Accordingly, the pro forma results of operations of
PNBC as of and after the merger may not be indicative of the results that
actually would have occurred if the merger had been in effect during the
periods presented or of the results that may be attained in the future.

At
the time of the acquisition, the subsidiary bank of Somonauk (Farmers State
Bank) was immediately merged into Citizens First National Bank. The acquisition
of Somonauk was accounted for under the purchase method of accounting and,
accordingly, the assets and liabilities of Somonauk were adjusted to their fair
market values as of the acquisition date. The operating results of Somonauk
have been consolidated with those of the Corporation from August 1, 2005.
Goodwill was recorded in the amount of $21.7 million along with a core deposit
intangible of $6.0 million, which is being amortized on an accelerated basis
over a fifteen year period.

8.
Goodwill and Intangible Assets

The
balance of goodwill totaled $23,029 at December 31, 2006 and $22,665 at
December 31, 2005. The increase in the goodwill during 2006 was due to final
purchase accounting adjustments related to the Somonauk acquisition. Goodwill
is tested annually for impairment. 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 balance of intangible
assets, net of accumulated amortization, totaled $5,921 and $6,843 at December
31, 2006 and December 31, 2005, respectively.

The
following table summarizes the Corporations intangible assets, which are
subject to amortization, as of December 31, 2006 and 2005:

|                        |  |      |                        |       |  |  |                            |   |        |   |                         |  |   |       |                            |  |  |   |        |   | 
|----------------------- |  | ---- | ---------------------- | ----- |  |  | -------------------------- | - | ------ | - | ----------------------- |  | - | ----- | -------------------------- |  |  | - | ------ | - | 
|                        |  | 2006 |                        | 2005  | 
|                        |  |      | Gross
  CarryingAmount |       |  |  | Accumulated
  Amortization |   |        |   | Gross Carrying
  Amount |  |   |       | Accumulated
  Amortization |  | 
|                        |  |      |                        |       |  |  |                            |   |        |   |                         |  |   |       |                            |  | 
|Core deposit intangible |  |      | $                      | 9,004 |  |  |                            | $ | (3,112 | ) |                         |  | $ | 9,004 |                            |  |  | $ | (2,199 | ) | 
|Other acquisition costs |  |      |                        | 160   |  |  |                            |   | (131   | ) |                         |  |   | 160   |                            |  |  |   | (122   | ) | 
|                        |  |      |                        |       |  |  |                            |   |        |   |                         |  |   |       |                            |  |  |   |        |   | 
|Total                   |  |      | $                      | 9,164 |  |  |                            | $ | (3,243 | ) |                         |  | $ | 9,164 |                            |  |  | $ | (2,321 | ) | 
|                        |  |      |                        |       |  |  |                            |   |        |   |                         |  |   |       |                            |  |  |   |        |   | 

The
following table shows the future estimated amortization expense for the
Corporations intangible assets based on existing balances as of December 31,
2006:

Estimated
Amortization Expense for the year ended December 31:

|           |  |   |       | 
|---------- |  | - | ----- | 
|2007       |  | $ | 900   | 
|2008       |  |   | 876   | 
|2009       |  |   | 852   | 
|2010       |  |   | 809   | 
|2011       |  |   | 646   | 
|Thereafter |  |   | 1,838 | 

21

---



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

Mortgage
servicing rights, which are included in other assets on the consolidated
balance sheets, are accounted for on an individual loan-by-loan basis.
Accordingly, amortization is recorded in proportion to the amount of principal
payment received on loans serviced. The mortgage servicing rights are subject
to periodic impairment testing. During the years ended December 31, 2006, 2005
and 2004 no impairment had been recorded and the recorded value was determined
to approximate the fair market value. Changes in the carrying value of mortgage
servicing rights are summarized as follows:

|                                                                                                                  |  |      |       |      |   |       |   |   |       |  
|----------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | - | - | ----- | -
|                                                                                                                  |  | 2006 |       | 2005 |   | 2004  |  
|Balance, January 1                                                                                                |  | $    | 2,002 |      | $ | 1,405 |   | $ | 1,334 |  
|Servicing rights
  capitalized                                                                                    |  |      | 773   |      |   | 479   |   |   | 380   |  
|Amortization of
  servicing rights                                                                                |  |      | (345  | )    |   | (233  | ) |   | (309  | )
|Mortgage
  servicing rights resulting from acquisition                                                            |  |      | -0-   |      |   | 351   |   |   | -0-   |  
|Adjustment to
  recorded mortgage servicing rights related to the Somonauk acquisition
  reclassified to goodwill |  |      | (351  | )    |   | -0-   |   |   | -0-   |  
|Impairment of servicing rights                                                                                    |  |      | -0-   |      |   | -0-   |   |   | -0-   |  
|                                                                                                                  |  |      |       |      |   |       |   |   |       |  
|Balance, December 31                                                                                              |  | $    | 2,079 |      | $ | 2,002 |   | $ | 1,405 |  
|                                                                                                                  |  |      |       |      |   |       |   |   |       |  

The
following table shows the future estimated amortization expense for mortgage
servicing rights based on existing balances as of December 31, 2006. The
Corporations actual amortization expense in any given period may be
significantly different from the estimated amounts displayed, depending on the
amount of additional mortgage servicing rights, changes in mortgage interest
rates, estimated prepayment speeds and market conditions.

Estimated
Amortization Expense for the year ended December 31:

|           |  |   |       | 
|---------- |  | - | ----- | 
|2007       |  | $ | 241   | 
|2008       |  |   | 226   | 
|2009       |  |   | 212   | 
|2010       |  |   | 199   | 
|2011       |  |   | 187   | 
|Thereafter |  |   | 1,014 | 

The
Corporation services loans for others with unpaid principal balances at
December 31, 2006, 2005 and 2004 of approximately $236,893, $202,042 and
$147,958, respectively.

9.
Deposits

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

|                                                                                      |  |      |         |      |   |         |  |   |        | 
|------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | ------ | 
|                                                                                      |  | 2006 |         | 2005 |   | 2004    | 
|Amount                                                                                |  | $    | 140,300 |      | $ | 105,591 |  | $ | 73,114 | 
|Interest expense for the year                                                         |  |      | 4,285   |      |   | 1,919   |  |   | 992    | 
|                                                                                      |  |      |         |      |   |         |  |   |        | 
|Total interest expense on deposits for the years
ending December 31
  was as follows: |  |     
|                                                                                      |  |      |         |      |   |         | 
|                                                                                      |  | 2006 |         | 2005 |   | 2004    | 
|Interest-bearing
  demand                                                             |  | $    | 4,877   |      | $ | 3,224   |  | $ | 2,029  | 
|Savings                                                                               |  |      | 326     |      |   | 267     |  |   | 208    | 
|Time                                                                                  |  |      | 18,640  |      |   | 10,296  |  |   | 6,359  | 
|                                                                                      |  |      |         |      |   |         |  |   |        | 
|Total                                                                                 |  | $    | 23,843  |      | $ | 13,787  |  | $ | 8,596  | 
|                                                                                      |  |      |         |      |   |         |  |   |        | 

At December 31, 2006, the
scheduled maturities of time deposits are as follows:

|           |  |   |         | 
|---------- |  | - | ------- | 
|2007       |  | $ | 352,591 | 
|2008       |  |   | 51,049  | 
|2009       |  |   | 17,327  | 
|2010       |  |   | 2,586   | 
|2011       |  |   | 2,227   | 
|Thereafter |  |   | 86      | 
|           |  |   |         | 
|Total      |  | $ | 425,866 | 
|           |  |   |         | 

22

---



10.
Borrowings

As
of December 31, borrowings consisted of the following:

|                                                          |  |        |        |                     |  |        |   |                     |        |  |  |      |  
|--------------------------------------------------------- |  | ------ | ------ | ------------------- |  | ------ | - | ------------------- | ------ |  |  | ---- | -
|                                                          |  | 2006   |        | 2005                | 
|                                                          |  | Amount |        | WeightedAverageRate |  | Amount |   | WeightedAverageRate |       
|                                                          |  |        |        |                     |  |        |   |                     |       
|Customer repurchase agreements                            |  | $      | 31,344 |                     |  | 4.66   | % | $                   | 29,375 |  |  | 3.98 | %
|Advances from the Federal Home Loan Bank of Chicago due:  |  |        |        |                     |  |        |   |                     |        |  |  |      |  
|May 3, 2006                                               |  |        | -0-    |                     |  | n/a    |   |                     | 1,000  |  |  | 2.65 |  
|November 24, 2006                                         |  |        | -0-    |                     |  | n/a    |   |                     | 400    |  |  | 2.80 |  
|February 1, 2008                                          |  |        | 1,000  |                     |  | 4.00   |   |                     | 1,000  |  |  | 4.00 |  
|February 27, 2008                                         |  |        | 2,500  |                     |  | 5.37   |   |                     | 2,500  |  |  | 5.37 |  
|June 19, 2008                                             |  |        | 2,500  |                     |  | 5.44   |   |                     | 2,500  |  |  | 5.44 |  
|November 2, 2009                                          |  |        | 970    |                     |  | 3.84   |   |                     | 946    |  |  | 3.84 |  
|Federal funds purchased                                   |  |        | -0-    |                     |  | n/a    |   |                     | 1,000  |  |  | 4.50 |  
|Interest-bearing demand notes issued to the U.S. Treasury |  |        | 2,333  |                     |  | 5.04   |   |                     | 2,154  |  |  | 3.95 |  
|Trust preferred securities                                |  |        | 25,000 |                     |  | 5.68   |   |                     | 25,000 |  |  | 5.68 |  
|Note payable                                              |  |        | 8,500  |                     |  | 7.25   |   |                     | 6,700  |  |  | 6.25 |  
|                                                          |  |        |        |                     |  |        |   |                     |        |  |  |      |  
|Total                                                     |  | $      | 74,147 |                     |  | 5.34   | % | $                   | 72,575 |  |  | 4.85 | %
|                                                          |  |        |        |                     |  |        |   |                     |        |  |  |      |  

The
subsidiary bank has adopted a collateral pledge agreement whereby they agreed
to keep on hand at all times, free of all other pledges, liens and encumbrances, first mortgages with unpaid
principal balances aggregating no less than 167% of the outstanding secured
advances from the Federal Home Loan Bank of Chicago (FHLB). The advances from
the FHLB, which have fixed interest rates ranging from 3.84% to 5.44% as of
December 31, 2006, are subject to restrictions or penalties in the event
of prepayment. The advance maturing in February, 2008 has a callable feature
which began in February, 2003 and quarterly
thereafter. All stock in the FHLB is also pledged as additional collateral for
these advances.

On
July 15, 2005, the Corporation, through its subsidiary PNBC Capital Trust I,
issued trust preferred securities in the amount of $25,000. These securities were issued to help finance the
acquisition of Somonauk FSB Bancorp, inc. (see Note 7 of the Notes to
Consolidated Financial Statements). Additionally, these securities have
a maturity of thirty years and a fixed interest rate of 5.68% for the first
five years. The interest then adjusts to a floating rate at the three-month
LIBOR plus 154 basis points. While these securities are recorded as a liability
for financial reporting purposes, they qualify as Tier 1 capital for regulatory purposes. According to the provisions of FIN
46(R), Consolidation of Variable Interest Entities, PNBC Capital Trust I is a
variable interest entity which is not
required to be consolidated by the Corporation.

The
Corporation has a note payable with a balance of $8,500 and $6,700 at December
31, 2006 and 2005, respectively. The note payable is a demand note that carries a floating interest rate equal
to the lenders prime rate less one percent (7.25% at December 31, 2006). The
note, which is secured by the capital stock certificates of the
subsidiary bank, has a maturity of July 29, 2007 and contains the covenant the
subsidiary bank will maintain risk-based capital
at a minimum of 10% of risk-weighted assets.

Customer
repurchase agreements consist of obligations of the Bank to other parties. The
obligations are secured by government agency securities and mortgage-backed
securities and such collateral is held by the Bank. The maximum amount of
outstanding agreements at any month-end during 2006 and 2005 totaled
$35,625 and $31,840, respectively, and the daily average of such agreements
totaled $34,149 and $31,035 for 2006 and 2005, respectively. The agreements at
December 31, 2006 are on-going and, as such, have no fixed maturity date.

11. Income Taxes

Income
tax expense (benefit) consisted of the following:

|                                |  |         |       |          |   |       |   |   |       | 
|------------------------------- |  | ------- | ----- | -------- | - | ----- | - | - | ----- | 
|                                |  | Current |       | Deferred |   | Total |  
|                                |  |         |       |          |   |       |  
|Year ended
  December 31, 2006: |  |         |       |          |   |       |   |   |       | 
|Federal                         |  | $       | 1,605 |          | $ | (966  | ) | $ | 639   | 
|State                           |  |         | 344   |          |   | 50    |   |   | 394   | 
|                                |  |         |       |          |   |       |   |   |       | 
|Total                           |  | $       | 1,949 |          | $ | (916  | ) | $ | 1,033 | 
|                                |  |         |       |          |   |       |   |   |       | 
|Year ended December 31, 2005:   |  |         |       |          |   |       |   |   |       | 
|Federal                         |  | $       | 1,584 |          | $ | 209   |   | $ | 1,793 | 
|State                           |  |         | 416   |          |   | 49    |   |   | 465   | 
|                                |  |         |       |          |   |       |   |   |       | 
|Total                           |  | $       | 2,000 |          | $ | 258   |   | $ | 2,258 | 
|                                |  |         |       |          |   |       |   |   |       | 
|Year ended December 31, 2004:   |  |         |       |          |   |       |   |   |       | 
|Federal                         |  | $       | 1,915 |          | $ | (200  | ) | $ | 1,715 | 
|State                           |  |         | 557   |          |   | (58   | ) |   | 499   | 
|                                |  |         |       |          |   |       |   |   |       | 
|Total                           |  | $       | 2,472 |          | $ | (258  | ) | $ | 2,214 | 
|                                |  |         |       |          |   |       |   |   |       | 

23

---



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

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

|                                                    |  |      |        |      |   |        |   |   |       |  
|--------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | - | - | ----- | -
|                                                    |  | 2006 |        | 2005 |   | 2004   |  
|                                                    |  |      |        |      |   |        |  
|Computed expected tax expense                     |  | $    | 2,557  |      | $ | 3,343  |   | $ | 3,089 |  
|Increase (decrease) in income taxes resulting from: |  |      |        |      |   |        |   |   |       |  
|Tax-exempt income                                   |  |      | (1,603 | )    |   | (1,319 | ) |   | (982  | )
|Non-deductible interest expense                     |  |      | 197    |      |   | 116    |   |   | 65    |  
|State income taxes, net of federal tax
benefit      |  |      | 170    |      |   | 298    |   |   | 222   |  
|Bank-owned life insurance income                    |  |      | (265   | )    |   | (211   | ) |   | (192  | )
|Other, net                                          |  |      | (23    | )    |   | 31     |   |   | 12    |  
|                                                    |  |      |        |      |   |        |   |   |       |  
|                                                    |  | $    | 1,033  |      | $ | 2,258  |   | $ | 2,214 |  
|                                                    |  |      |        |      |   |        |   |   |       |  

The
tax effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 2006 and
2005 are presented below:

|                                                                          |  |      |        |      |   |        |  
|------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                                                          |  | 2006 |        | 2005 |  
|Deferred tax assets:                                                      |  |      |        |      |   |        |  
|Deferred compensation                                                     |  | $    | 133    |      | $ | 115    |  
|Allowance for loan losses                                                 |  |      | 1,185  |      |   | 1,241  |  
|Unrealized loss on investment securities
available-for-sale               |  |      | 214    |      |   | 305    |  
|FAS 106 benefit accrual                                                   |  |      | 157    |      |   | 137    |  
|Other, net                                                                |  |      | 532    |      |   | 136    |  
|                                                                          |  |      |        |      |   |        |  
|Total gross deferred tax assets                                           |  |      | 2,221  |      |   | 1,934  |  
|                                                                          |  |      |        |      |   |        |  
|Deferred tax liabilities:                                                 |  |      |        |      |   |        |  
|Buildings and equipment, principally due to
differences in
  depreciation |  |      | (487   | )    |   | (676   | )
|Accretion                                                                 |  |      | (107   | )    |   | (171   | )
|Purchase accounting adjustments                                           |  |      | (2,669 | )    |   | (2,914 | )
|FHLB Stock dividends                                                      |  |      | (272   | )    |   | (308   | )
|Mortgage servicing rights                                                 |  |      | (807   | )    |   | (777   | )
|Prepaid expenses                                                          |  |      | (131   | )    |   | (100   | )
|Unfunded liability for post-retirement
benefits                           |  |      | (393   | )    |   | -0-    |  
|Other, net                                                                |  |      | (19    | )    |   | (72    | )
|                                                                          |  |      |        |      |   |        |  
|Total gross deferred tax liabilities                                      |  |      | (4,875 | )    |   | (5,018 | )
|                                                                          |  |      |        |      |   |        |  
|Net deferred tax liabilities                                              |  | $    | (2,654 | )    | $ | (3,084 | )
|                                                                          |  |      |        |      |   |        |  

Management
believes it is more likely than not that the deferred tax assets will be
realized. Therefore, no valuation allowance has been recorded at December 31,
2006 and 2005.

12. Regulatory Matters

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

Quantitative
measures established by regulation to ensure capital adequacy require the
Corporation and its subsidiary bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital to risk-weighted assets,
and of Tier 1 capital to average adjusted assets. As of December 31, 2006 and
2005, the subsidiary bank is categorized as well-capitalized for all three
ratios under the regulatory framework, while the Corporation is classified as
well-capitalized for two ratios and adequately-capitalized for one ratio at
December 31, 2006 and 2005.

The
most recent notifications, at December 31, 2006 and 2005, from the federal
banking agencies categorized the subsidiary bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Corporation and the subsidiary bank must maintain total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table that follows, at December 31, 2006. Following the Somonauk acquisition in
2005, the Corporations total risk-based ratio fell below the 10% requirement
to be well-capitalized, while the subsidiary bank remains well-capitalized.

24

---



The Corporations and the
subsidiary banks actual capital amounts and ratios as of December 31, 2006 and
2005 are as follows:

|                                             |  |        |        |                                 |       |                                                                      |  |       |        |        |      |       |  |   |        |  |       |   | 
|-------------------------------------------- |  | ------ | ------ | ------------------------------- | ----- | -------------------------------------------------------------------- |  | ----- | ------ | ------ | ---- | ----- |  | - | ------ |  | ----- | - | 
|                                             |  | Actual |        | For Capital
  Adequacy Purposes |       | To Be Well-
  Capitalized UnderPrompt Corrective
  Action Provisions | 
|                                             |  | Amount |        | Ratio                           |       | Amount                                                               |  | Ratio |        | Amount |      | Ratio | 
|                                             |  |        |        |                                 |       |                                                                      |  |       |        |        |      |       | 
|As of December 31, 2006:                     |  |        |        |                                 |       |                                                                      |  |       |        |        |      |       |  |   |        |  |       |   | 
|                                            
|Total Capital (to risk-weighted assets):     |  |        |        |                                 |       |                                                                      |  |       |        |        |      |       |  |   |        |  |       |   | 
|Princeton National Bancorp, Inc.             |  | $      | 65,210 |                                 | 9.18  | %                                                                    |  | $     | 56,832 |        | 8.00 | %     |  | $ | 71,040 |  | 10.00 | % | 
|Citizens First National Bank                 |  |        | 71,147 |                                 | 10.02 | %                                                                    |  |       | 56,818 |        | 8.00 | %     |  |   | 71,023 |  | 10.00 | % | 
|                                            
|Tier 1 Capital (to risk-weighted assets):    |  |        |        |                                 |       |                                                                      |  |       |        |        |      |       |  |   |        |  |       |   | 
|Princeton National Bancorp, inc.             |  | $      | 62,157 |                                 | 8.75  | %                                                                    |  | $     | 28,416 |        | 4.00 | %     |  | $ | 42,624 |  | 6.00  | % | 
|Citizens First National Bank                 |  |        | 68,094 |                                 | 9.59  | %                                                                    |  |       | 28,409 |        | 4.00 | %     |  |   | 42,614 |  | 6.00  | % | 
|                                            
|Tier 1 Capital (to average adjusted assets): |  |        |        |                                 |       |                                                                      |  |       |        |        |      |       |  |   |        |  |       |   | 
|Princeton National Bancorp, Inc.             |  | $      | 62,157 |                                 | 6.67  | %                                                                    |  | $     | 37,264 |        | 4.00 | %     |  | $ | 46,580 |  | 5.00  | % | 
|Citizens First National Bank                 |  |        | 68,094 |                                 | 7.31  | %                                                                    |  |       | 37,263 |        | 4.00 | %     |  |   | 46,578 |  | 5.00  | % | 
|                                             |  |        |        |                                 |       |                                                                      |  |       |        |        |      |       | 

|                                             |  |        |        |                                 |        |                                                                         |       |        |        |       |  |      |   |   |        |  |  |       |  
|-------------------------------------------- |  | ------ | ------ | ------------------------------- | ------ | ----------------------------------------------------------------------- | ----- | ------ | ------ | ----- |  | ---- | - | - | ------ |  |  | ----- | -
|                                             |  | Actual |        | For Capital
  Adequacy Purposes |        | To Be Well-
  Capitalized Under
  Prompt Corrective
  Action Provisions |      
|                                             |  | Amount |        | Ratio                           | Amount |                                                                         | Ratio | Amount |        | Ratio
|                                             |  |        |        |                                 |        |                                                                         |       |        |        |       |  |      |  
|As of December 31, 2005:                     |  |        |        |                                 |        |                                                                         |       |        |        |       |  |      |   |   |        |  |  |       |  
|                                            
|Total Capital (to risk-weighted assets):     |  |        |        |                                 |        |                                                                         |       |        |        |       |  |      |   |   |        |  |  |       |  
|Princeton National Bancorp, Inc.             |  | $      | 62,115 |                                 |        | 9.76                                                                    | %     | $      | 50,916 |       |  | 8.00 | % | $ | 63,645 |  |  | 10.00 | %
|Citizens First National Bank                 |  |        | 65,187 |                                 |        | 10.23                                                                   | %     |        | 50,912 |       |  | 8.00 | % |   | 63,639 |  |  | 10.00 | %
|                                            
|Tier 1 Capital (to risk-weighted assets):    |  |        |        |                                 |        |                                                                         |       |        |        |       |  |      |   |   |        |  |  |       |  
|Princeton National Bancorp, Inc.             |  | $      | 58,918 |                                 |        | 9.26                                                                    | %     | $      | 25,458 |       |  | 4.00 | % | $ | 38,187 |  |  | 6.00  | %
|Citizens First National Bank                 |  |        | 61,990 |                                 |        | 9.74                                                                    | %     |        | 25,456 |       |  | 4.00 | % |   | 38,184 |  |  | 6.00  | %
|                                            
|Tier 1 Capital (to average adjusted assets): |  |        |        |                                 |        |                                                                         |       |        |        |       |  |      |   |   |        |  |  |       |  
|Princeton National Bancorp, Inc.             |  | $      | 58,918 |                                 |        | 7.83                                                                    | %     | $      | 30,098 |       |  | 4.00 | % | $ | 37,623 |  |  | 5.00  | %
|Citizens First National Bank                 |  |        | 61,990 |                                 |        | 8.24                                                                    | %     |        | 30,091 |       |  | 4.00 | % |   | 37,613 |  |  | 5.00  | %
|                                             |  |        |        |                                 |        |                                                                         |       |        |        |       |  |      |  

13. Employee, Officer and Director Benefit Plans

The
subsidiary bank has a defined contribution investment 401(k) plan. Under this
plan, in 2006, employees could elect to contribute, on a tax-deferred basis, up
to a maximum of $15 ($20 for those employees eligible to make catch-up
contributions). In addition, the subsidiary bank will match employees
contributions up to three percent of each employees salary and match 50% of
the next two percent contributed. The subsidiary banks contribution to the
defined contribution investment 401(k) plan for 2006, 2005 and 2004 was $382,
$319 and $268, respectively.

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

The
subsidiary bank also has a profit sharing plan. Annual contributions to the
subsidiary banks plan are based on a formula. The total contribution is at the
discretion of the Board of Directors. The cost of the profit sharing plan
charged to operating expense was $350 in 2006, $357 in 2005 and $280 in 2004.

Additionally,
the Corporation has non-qualified stock option plans (the plans) for the
benefit of employees and directors of the subsidiary bank, as well as directors
of the Corporation. The plans permit the grant of share options and shares for
up to 502,500 shares of common stock. The Corporation believes that such awards
better align the interests of its employees with those of its stockholders.
Option awards are granted with an exercise price equal to the market price of
the Corporations stock at the date of grant. The option awards generally vest
based on 3 years of continuous service and have 10-year contractual terms.

The
fair value of each option award is estimated on the date of grant using a
Black-Scholes closed-form model that uses the assumptions noted in the
following table. Expected volatility is based on historical volatility of the
Corporations stock and other factors. In 2006, the volatility was much lower
than in previous years due to a more stable stock price as opposed to the
rapidly increasing stock price of the previous few years. The Corporation uses
historical data to estimate option exercise and employee termination within the
valuation model. The expected term of the options granted is derived from the
Corporations historical option exercise experience and represents the period
of time that options granted are expected to be outstanding. The risk-free

25

---



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

rate for
periods within the contractual life of the option is based on the U.S. Treasury
yield curve in effect at the time of the grant. The following assumptions were
used in estimating the fair value for options granted in 2006, 2005 and 2004:

|                           |  |      |  |        |   |      |  |  |        |   |  |  |  |        |   | 
|-------------------------- |  | ---- |  | ------ | - | ---- |  |  | ------ | - |  |  |  | ------ | - | 
|                           |  | 2006 |  | 2005   |   | 2004 | 
|                          
|Expected
  volatility      |  |      |  | .061   |   |      |  |  | .270   |   |  |  |  | .520   |   | 
|Expected
  dividends       |  |      |  | 3.23   | % |      |  |  | 3.10   | % |  |  |  | 2.62   | % | 
|Expected
  term (in years) |  |      |  | 3 yrs. |   |      |  |  | 3 yrs. |   |  |  |  | 7 yrs. |   | 
|Risk-free
  rate           |  |      |  | 4.74   | % |      |  |  | 4.37   | % |  |  |  | 4.67   | % | 

A summary of
option activity under the Plan as of December 31, 2006, 2005 and 2004, and
changes during the years then ended, is presented as follows:

|                                |  |        |         |                                        |   |                                                     |  |                               |           |  |   |     | 
|------------------------------- |  | ------ | ------- | -------------------------------------- | - | --------------------------------------------------- |  | ----------------------------- | --------- |  | - | --- | 
|                                |  | 2006   |         |                                        |   |                                                     |  |                               |          
|                                |  | Shares |         | Weighted
  Average
  Exercise 
  Price |   | Weighted
  Average
  Remaining
  Contractual
  Term |  | Aggregate
  Intrinsic
  Value |          
|                                |  |        |         |                                        |   |                                                     |  |                               |          
|Outstanding, beginning of year  |  |        | 302,718 |                                        | $ | 27.52                                               |  |                               |           |  |   |     | 
|Granted                         |  |        | 83,783  |                                        |   | 32.55                                               |  |                               |           |  |   |     | 
|Exercised                       |  |        | 62,765  |                                        |   | 23.81                                               |  |                               |           |  |   |     | 
|Forfeited or expired            |  |        | (4,200  | )                                      |   | 33.25                                               |  |                               |           |  |   |     | 
|                                |  |        |         |                                        |   |                                                     |  |                               |           |  |   |     | 
|Outstanding, end of year        |  |        | 319,536 |                                        | $ | 29.61                                               |  |                               | 8.28 yrs. |  | $ | 939 | 
|                                |  |        |         |                                        |   |                                                     |  |                               |           |  |   |     | 
|Options exercisable end of year |  |        | 235,753 |                                        | $ | 28.57                                               |  |                               | 7.67 yrs. |  | $ | 938 | 
|                                |  |        |         |                                        |   |                                                     |  |                               |           |  |   |     | 

|                                |  |        |         |                                       |   |                                          |  |                                |           |  |   |       | 
|------------------------------- |  | ------ | ------- | ------------------------------------- | - | ---------------------------------------- |  | ------------------------------ | --------- |  | - | ----- | 
|                                |  | 2005   |         |                                       |   |                                          |  |                                |          
|                                |  | Shares |         | Weighted
  Average
  Exercise
  Price |   | Average
  Remaining
  Contractual
  Term |  | Aggregate
  Intrinsic 
  Value |          
|                                |  |        |         |                                       |   |                                          |  |                                |          
|Outstanding, beginning of year  |  |        | 271,184 |                                       | $ | 24.10                                    |  |                                |           |  |   |       | 
|Granted                         |  |        | 80,700  |                                       |   | 33.25                                    |  |                                |           |  |   |       | 
|Exercised                       |  |        | 45,164  |                                       |   | 17.26                                    |  |                                |           |  |   |       | 
|Forfeited or expired            |  |        | (4,002  | )                                     |   | 27.46                                    |  |                                |           |  |   |       | 
|                                |  |        |         |                                       |   |                                          |  |                                |           |  |   |       | 
|Outstanding, end of year        |  |        | 302,718 |                                       | $ | 27.52                                    |  |                                | 8.41 yrs. |  | $ | 1,735 | 
|                                |  |        |         |                                       |   |                                          |  |                                |           |  |   |       | 
|Options exercisable end of year |  |        | 302,718 |                                       | $ | 27.52                                    |  |                                | 8.41 yrs. |  | $ | 1,735 | 
|                                |  |        |         |                                       |   |                                          |  |                                |           |  |   |       | 

|                                  |  |        |         |                                       |   |                                       |  |                               |           |  |   |       | 
|--------------------------------- |  | ------ | ------- | ------------------------------------- | - | ------------------------------------- |  | ----------------------------- | --------- |  | - | ----- | 
|                                  |  | 2004   |         |                                       |   |                                       |  |                               |          
|                                  |  | Shares |         | Weighted
  Average
  Exercise
  Price |   | Average
  Remaining
  ContractualTerm |  | Aggregate
  Intrinsic
  Value |          
|                                  |  |        |         |                                       |   |                                       |  |                               |          
|Outstanding,
  beginning of year  |  |        | 228,585 |                                       | $ | 21.09                                 |  |                               |           |  |   |       | 
|Granted                           |  |        | 74,400  |                                       |   | 28.83                                 |  |                               |           |  |   |       | 
|Exercised                         |  |        | 31,801  |                                       |   | 13.50                                 |  |                               |           |  |   |       | 
|Forfeited or
  expired            |  |        |        |                                       |   |                                      |  |                               |           |  |   |       | 
|                                  |  |        |         |                                       |   |                                       |  |                               |           |  |   |       | 
|Outstanding,
  end of year        |  |        | 271,184 |                                       | $ | 24.10                                 |  |                               | 8.55 yrs. |  | $ | 1,283 | 
|                                  |  |        |         |                                       |   |                                       |  |                               |           |  |   |       | 
|Options
  exercisable end of year |  |        | 125,017 |                                       | $ | 20.12                                 |  |                               | 7.63 yrs. |  | $ | 1,098 | 
|                                  |  |        |         |                                       |   |                                       |  |                               |           |  |   |       | 

The
weighted-average grant date fair value of options granted during the years
2006, 2005 and 2004 was $151, $490 and $969, respectively. The total intrinsic
value of options exercised during the years ended December 31, 2006, 2005 and
2004 was $455, $611 and $419, respectively.

26

---



A
summary of the status of the Corporations non-vested shares and changes during
the year ended December 31, 2006, 2005 and 2004 is presented below:

|                                |  |        |        |                                          |   |      | 
|------------------------------- |  | ------ | ------ | ---------------------------------------- | - | ---- | 
|                                |  | 2006   |       
|                                |  | Shares |        | Weighted
  Average Grant-Date Fair Value |  
|                                |  |        |        |                                          |  
|Non-vested,
  beginning of year |  |        |       |                                          |   | n/a  | 
|Granted                         |  |        | 83,783 |                                          | $ | 1.80 | 
|Vested                          |  |        |       |                                          |   | n/a  | 
|Forfeited                       |  |        |       |                                          |   | n/a  | 
|                                |  |        |        |                                          |   |      | 
|Non-vested,
  end of year       |  |        | 83,783 |                                          | $ | 1.80 | 
|                                |  |        |        |                                          |   |      | 

|                              |  |        |         |                                              |   |       | 
|----------------------------- |  | ------ | ------- | -------------------------------------------- | - | ----- | 
|                              |  | 2005   |        
|                              |  | Shares |         | Weighted
  Average
  Grant-Date
  Fair Value |  
|                              |  |        |         |                                              |  
|Non-vested, beginning of year |  |        | 146,167 |                                              | $ | 12.29 | 
|Granted                       |  |        | 80,700  |                                              |   | 6.07  | 
|Vested                        |  |        | 222,865 |                                              |   | 10.02 | 
|Forfeited                     |  |        | (4,002  | )                                            |   | 12.27 | 
|                              |  |        |         |                                              |   |       | 
|Non-vested, end of year       |  |        | -0-     |                                              | $ | -0-   | 
|                              |  |        |         |                                              |   |       | 

|                              |  |        |         |                                        |   |       | 
|----------------------------- |  | ------ | ------- | -------------------------------------- | - | ----- | 
|                              |  | 2004   |        
|                              |  | Shares |         | Weighted Average Grant-Date Fair Value |  
|                              |  |        |         |                                        |  
|Non-vested, beginning of year |  |        | 137,357 |                                        | $ | 10.73 | 
|Granted                       |  |        | 74,400  |                                        |   | 13.03 | 
|Vested                        |  |        | 65,590  |                                        |   | 10.02 | 
|Forfeited                     |  |        |        |                                        |   | n/a   | 
|                              |  |        |         |                                        |   |       | 
|Non-vested, end of year       |  |        | 146,167 |                                        | $ | 12.29 | 
|                              |  |        |         |                                        |   |       | 

As
of December 31, 2006, there was $151 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
plan. That cost is expected to be recognized over a weighted-average period of
3 years. The total fair value of shares vested during the years ended December
31, 2006, 2005 and 2004, was $0, $2,233 and $969, respectively.

14. Pension and Other Post-Retirement Benefits

The
Corporation does not have a defined benefit pension plan. The Corporation does
have a defined contribution investment plan which is discussed in footnote 13
(Employee, Officer, and Director Benefit Plans). The Corporation offers its
retirees the opportunity to continue benefits in the subsidiary banks Employee
Health Benefit Plan, provided the retiree agrees to pay a portion of their
monthly premiums. The Corporations level of contribution is based upon an age
and service formula and will provide benefits to active participants until age
65. The Corporation uses a December 31 measurement date for its plan.
Information about the plans funded status follows:

|                             |  |                                   |       |      |   |       |  
|---------------------------- |  | --------------------------------- | ----- | ---- | - | ----- | -
|                             |  | Post
  Retirement Health Benefits |      
|                             |  | 2006                              |       | 2005 |  
|Change in benefit obligation |  |                                   |       |      |   |       |  
|Beginning of year            |  | $                                 | 1,150 |      | $ | 800   |  
|Service cost                 |  |                                   | 61    |      |   | 51    |  
|Interest cost                |  |                                   | 66    |      |   | 48    |  
|Actuarial gain               |  |                                   | 309   |      |   | 297   |  
|Benefits paid                |  |                                   | (50   | )    |   | (46   | )
|                             |  |                                   |       |      |   |       |  
|Funded status at end of year |  | $                                 | 1,536 |      | $ | 1,150 |  
|                             |  |                                   |       |      |   |       |  

27

---



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

In
September 2006, the FASB issued FAS 158, Employers Accounting for Defined
Benefit Pension Plans and Other Post-Retirement Plans. Accordingly, the
Corporation recorded the liability for the excess of the accumulated benefit
obligation over plan assets as of December 31, 2006. The following table is the
incremental effect of applying FAS 158 on individual line items in the
financial statements:

| |                                        |  |                               |         |             |   |                                |   |   |         |  
| | -------------------------------------- |  | ----------------------------- | ------- | ----------- | - | ------------------------------ | - | - | ------- | -
| |                                        |  | Before application of FAS 158 |         | Adjustments |   | After application
  of FAS 158 |  
| |                                        |  |                               |         |             |   |                                |  
| |                                        |  |                               |         |             |   |                                |   |   |         |  
| | Liability for post-retirement benefits |  | $                             | 521     |             | $ | 1,015                          |   | $ | 1,536   |  
| | Deferred tax liability                 |  |                               | 2,261   |             |   | 393                            |   |   | 2,654   |  
| | Total liabilities                      |  |                               | 965,982 |             |   | 622                            |   |   | 966,604 |  
| | Accumulated other comprehensive loss   |  |                               | (338    | )           |   | (622                           | ) |   | (960    | )
| | Total stockholders equity             |  |                               | 65,977  |             |   | (622                           | ) |   | 65,355  |  

The
components of the 2006, 2005, and 2004 net periodic post-retirement benefit cost
are shown below:

| |                                           |  |      |     |      |   |      |  |   |     | 
| | ----------------------------------------- |  | ---- | --- | ---- | - | ---- |  | - | --- | 
| |                                           |  | 2006 |     | 2005 |   | 2004 | 
| |                                           |  |      |     |      |   |      | 
| | Service cost                              |  | $    | 61  |      | $ | 51   |  | $ | 51  | 
| | Interest cost                             |  |      | 66  |      |   | 48   |  |   | 48  | 
| | Amortization of prior service cost        |  |      | 16  |      |   | 16   |  |   | 30  | 
| | Amortization of net (gain) loss           |  |      | 31  |      |   | 14   |  |   | -0- | 
| |                                           |  |      |     |      |   |      |  |   |     | 
| | Net periodic post-retirement benefit cost |  | $    | 174 |      | $ | 129  |  | $ | 129 | 
| |                                           |  |      |     |      |   |      |  |   |     | 

There
is no estimated net loss or prior service cost and $16 of transition obligation
for the plan that will be amortized from accumulated other comprehensive income
into net periodic benefit cost over the next fiscal year.

Amounts
recognized in the balance sheets:

| |             |  |                                 |       |      |   |     | 
| | ----------- |  | ------------------------------- | ----- | ---- | - | --- | 
| |             |  | Post Retirement Health Benefits |      
| |             |  | 2006                            |       | 2005 |  
| |             |  |                                 |       |      |  
| | Liabilities |  | $                               | 1,536 |      | $ | 353 | 

Amounts
recognized in accumulated other comprehensive income consist of:

| |                                 |  |                                 |      |  |  |  | 
| | ------------------------------- |  | ------------------------------- | ---- |  |  |  | 
| |                                 |  | Post Retirement Health Benefits |     
| |                                 |  |                                 | 2006 |  |  |  | 
| |                                 |  |                                 |      |  |  | 
| | Net
  loss (gain)               |  | $                               | 918  |  |  |  | 
| | Transition
  obligation (asset) |  |                                 | 97   |  |  |  | 

The
accumulated benefit obligation for all defined benefit plans was $1,536 and
$1,150 at December 31, 2006 and 2005, respectively.Significant
assumptions include:

| |                                                                      |  |  |                                 |   |      |     |  
| | -------------------------------------------------------------------- |  |  | ------------------------------- | - | ---- | --- | -
| |                                                                      |  |  | Post Retirement Health Benefits
| |                                                                      |  |  | 2006                            |   | 2005
| |                                                                      |  |  |                                 |   |     
| | Weighted average assumptions used to determine
  benefit obligation: |  |  |                                 |   |      |     |  
| | Discount rate                                                        |  |  | 6.0                             | % |      | 6.0 | %
| | Rate of compensation increase                                        |  |  | n/a                             |   |      | n/a |  
| |                                                                      |  |  |                                 |   |      |     |  
| | Weighted average assumptions used to determine benefit
  cost:       |  |  |                                 |   |      |     |  
| | Discount rate                                                        |  |  | 6.0                             | % |      | 6.0 | %
| | Expected return on plan assets                                       |  |  | n/a                             |   |      | n/a |  
| | Rate of compensation increase                                        |  |  | n/a                             |   |      | n/a |  

For
measurement purposes, a 7.0% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2006 and 2005, respectively. The
rate was assumed to decrease gradually to 4.50% by the year 2011 and remain at
that level thereafter.

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

|                                                          |  |                                |     |                                |   |      |  
|--------------------------------------------------------- |  | ------------------------------ | --- | ------------------------------ | - | ---- | -
|                                                          |  | 1-Percentage-
  Point Increase |     | 1-Percentage-
  Point Decrease |  
|                                                          |  |                                |     |                                |   |      |  
|Effect on total of service and interest cost
  components |  | $                              | 19  |                                | $ | (16  | )
|Effect on post-retirement benefit obligation              |  |                                | 200 |                                |   | (165 | )

28

---



The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid as of December 31, 2006:

|          |  |                  |     | 
|--------- |  | ---------------- | --- | 
|          |  | Pension Benefits |    
|          |  |                  |    
|2007      |  | $                | 76  | 
|2008      |  |                  | 81  | 
|2009      |  |                  | 78  | 
|2010      |  |                  | 84  | 
|2011      |  |                  | 94  | 
|2012-2016 |  |                  | 441 | 

15. Fair Value of Financial
Instruments

Statement
of Financial Accounting Standards No. 107 (FAS 107), 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 FAS 107.
Many of the Corporations financial instruments, however, lack an available
trading market as characterized by a willing buyer and willing seller engaging
in an exchange transaction. It is also the Corporations general practice and
intent to hold its financial instruments to maturity and to not engage in
trading or sales activities except for loans held-for-sale and
available-for-sale securities. Therefore, significant estimations and
assumptions, as well as present value calculations, were used by the
Corporation for the purposes of this disclosure.

Estimated
fair values have been determined by the Corporation using the best available
data and an estimation methodology suitable for each category of financial
instruments. For those loans and deposits with floating interest rates, it is
presumed that estimated fair values generally approximate the recorded book
balances. The estimation methodologies used, the estimated fair values, and the
recorded book balances at December 31, 2006 and 2005, were as follows:

|                                                              |  |      |                  |      |   |               |  |   |                   |  |   |              | 
|------------------------------------------------------------- |  | ---- | ---------------- | ---- | - | ------------- |  | - | ----------------- |  | - | ------------ | 
|                                                              |  | 2006 |                  | 2005 |  
|                                                              |  |      |                  |      |  
|                                                              |  |      | Carrying
  Value |      |   | Fair 
  Value |  |   | Carrying 
  Value |  |   | Fair
  Value | 
|                                                              |  |      |                  |      |   |               |  |   |                   |  |   |              | 
|Financial Assets:                                             |  |      |                  |      |   |               |  |   |                   |  |   |              | 
|Cash and due from banks                                       |  | $    | 33,882           |      | $ | 33,882        |  | $ | 23,635            |  | $ | 23,635       | 
|Interest-bearing deposits in financial
  institutions         |  |      | 103              |      |   | 103           |  |   | 110               |  |   | 110          | 
|Federal funds sold                                            |  |      | 5,200            |      |   | 5,200         |  |   | -0-               |  |   | -0-          | 
|Investment securities                                         |  |      | 267,916          |      |   | 268,034       |  |   | 251,486           |  |   | 251,645      | 
|Loans, net                                                    |  |      | 630,931          |      |   | 628,725       |  |   | 583,789           |  |   | 582,376      | 
|Accrued interest receivable                                   |  |      | 11,139           |      |   | 11,139        |  |   | 8,714             |  |   | 8,714        | 
|                                                              |  |      |                  |      |   |               |  |   |                   |  |   |              | 
|Total Financial Assets                                        |  | $    | 949,171          |      | $ | 947,083       |  | $ | 867,734           |  | $ | 866,480      | 
|                                                              |  |      |                  |      |   |               |  |   |                   |  |   |              | 
|Financial Liabilities:                                        |  |      |                  |      |   |               |  |   |                   |  |   |              | 
|Non-interest-bearing demand deposits                          |  | $    | 107,834          |      | $ | 107,834       |  | $ | 103,622           |  | $ | 103,622      | 
|Interest-bearing deposits                                     |  |      | 774,065          |      |   | 778,192       |  |   | 694,936           |  |   | 694,936      | 
|Borrowings                                                    |  |      | 74,147           |      |   | 71,482        |  |   | 72,575            |  |   | 71,383       | 
|Accrued interest payable                                      |  |      | 4,611            |      |   | 4,611         |  |   | 3,097             |  |   | 3,097        | 
|                                                              |  |      |                  |      |   |               |  |   |                   |  |   |              | 
|Total Financial Liabilities                                   |  | $    | 960,657          |      | $ | 962,119       |  | $ | 874,230           |  | $ | 873,038      | 
|Unrecognized financial instruments (net of
  contract amount) |  |      |                  |      |   |               |  |   |                   |  |   |              | 
|Commitments to originate loans                                |  |      | -0-              |      |   | -0-           |  |   | -0-               |  |   | -0-          | 
|Lines of credit                                               |  |      | -0-              |      |   | -0-           |  |   | -0-               |  |   | -0-          | 
|                                                              |  |      |                  |      |   |               |  |   |                   |  |   |              | 

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

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

Financial
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 due.

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 FAS 107.

29

---



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

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

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

16.
Undistributed Earnings of Subsidiary Bank

National
banking regulations and capital guidelines limit the amount of dividends that
may be paid by banks. At December 31, 2006, the subsidiary bank had $6,050
available for dividends. Additionally, according to the guidelines, at January
1, 2007, the subsidiary bank had $5,015 available for dividends. Future
dividend payments by the subsidiary bank will be dependent upon individual
regulatory capital requirements and levels of profitability. Since the
Corporation is a legal entity, separate and distinct from the bank, the
dividends of the Corporation are not subject to such bank regulatory
guidelines.

17. Commitments,
Contingencies and Credit Risk

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

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

The
subsidiary banks exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional amount
of those instruments. The subsidiary bank uses the same credit policies in
making commitments and conditional obligations as they do for on-balance-sheet
instruments. At December 31, 2006, commitments to extend credit and standby
letters of credit were approximately $138,806 and $9,208, respectively.

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

Standby
letters of credit are conditional commitments issued by the subsidiary bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that
involved in extending loan facilities to customers. The subsidiary bank secures
the standby letters of credit with the same collateral used to secure the loan.
The maximum amount of credit that would be extended under standby letters of
credit is equal to the off-balance sheet contract amount. At December 31, 2006,
the standby letters of credit have terms that expire in one year or less.

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

18. FDIC
One-time Assessment Credit

Effective
November 17, 2006, the FDIC implemented a one-time credit of $4.7 billion to
eligible institutions. The purpose of the credit is to recognize contributions
made by certain institutions to capitalize the Bank insurance Fund and Savings
Association Insurance Fund, which have now been merged into the Deposit
Insurance Fund. The Bank is an eligible institution and has now received notice
from the FDIC that its share of the credit is $647. This amount is not
reflected in the accompanying financial statements as it represents contingent
future credits against future insurance assessment payments. As such, the
timing and ultimate recoverability of the one-time credit may change.

19.
Acquisition

During
November 2006, the Corporation announced it had entered into a branch purchase
and assumption agreement to acquire the Plainfield office of HomeStar Bank,
Manteno, Illinois for $9.7 million in cash, including a deposit premium of $1.5
million. The Corporation purchased the existing facility for $4.5 million plus
$16.8 million in loans (at book value) and assumed $13.1 million in deposit
liabilities. The acquisition closed on February 23, 2007. The office will
operate as a branch of the subsidiary bank.

30

---



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

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

Condensed Balance Sheets

|                                                 |  |             |         |      |   |         |  
|------------------------------------------------ |  | ----------- | ------- | ---- | - | ------- | -
|                                                 |  | December 31 |        
|                                                 |  | 2006        |         | 2005 |  
|Assets                                           |  |             |         |      |   |         |  
|Cash                                             |  | $           | 693     |      | $ | 1,487   |  
|Interest-bearing deposits in subsidiary bank     |  |             | 901     |      |   | 2,594   |  
|Other assets                                     |  |             | 1,483   |      |   | 1,074   |  
|Investment in subsidiary bank                    |  |             | 96,140  |      |   | 91,057  |  
|                                                 |  |             |         |      |   |         |  
|Total assets                                     |  |             | 99,217  |      |   | 96,212  |  
|                                                 |  |             |         |      |   |         |  
|Liabilities                                      |  |             |         |      |   |         |  
|Borrowings                                       |  | $           | 33,500  |      | $ | 31,700  |  
|Other liabilities                                |  |             | 362     |      |   | 1,368   |  
|                                                 |  |             |         |      |   |         |  
|Total liabilities                                |  |             | 33,862  |      |   | 33,068  |  
|                                                 |  |             |         |      |   |         |  
|Stockholders Equity                             |  |             |         |      |   |         |  
|Common stock                                     |  |             | 22,391  |      |   | 22,392  |  
|Surplus                                          |  |             | 18,158  |      |   | 16,968  |  
|Retained earnings                                |  |             | 48,109  |      |   | 45,786  |  
|Accumulated other comprehensive loss, net of tax |  |             | (960    | )    |   | (482    | )
|Less: Cost of treasury shares                    |  |             | (22,343 | )    |   | (21,520 | )
|                                                 |  |             |         |      |   |         |  
|Total stockholders equity                       |  |             | 65,355  |      |   | 63,144  |  
|                                                 |  |             |         |      |   |         |  
|Total liabilities and stockholders
equity       |  | $           | 99,217  |      | $ | 96,212  |  
|                                                 |  |             |         |      |   |         |  

Condensed Statements of Income

|                                                                                   |  |                                 |       |      |   |       |   |   |       |  
|---------------------------------------------------------------------------------- |  | ------------------------------- | ----- | ---- | - | ----- | - | - | ----- | -
|                                                                                   |  | For the Years Ended December 31 |      
|                                                                                   |  | 2006                            |       | 2005 |   | 2004  |  
|Income                                                                             |  |                                 |       |      |   |       |   |   |       |  
|Dividends received from subsidiary bank                                            |  | $                               | 4,200 |      | $ | 6,800 |   | $ | 6,000 |  
|Interest income                                                                    |  |                                 | 24    |      |   | 22    |   |   | 14    |  
|Other income                                                                       |  |                                 | 37    |      |   | 24    |   |   | 21    |  
|                                                                                   |  |                                 |       |      |   |       |   |   |       |  
|Total income                                                                       |  |                                 | 4,261 |      |   | 6,846 |   |   | 6,035 |  
|                                                                                   |  |                                 |       |      |   |       |   |   |       |  
|Expenses                                                                           |  |                                 |       |      |   |       |   |   |       |  
|Interest expense                                                                   |  |                                 | 1,887 |      |   | 817   |   |   | 31    |  
|Amortization and depreciation                                                      |  |                                 | 7     |      |   | 7     |   |   | 7     |  
|Other expenses                                                                     |  |                                 | 212   |      |   | 248   |   |   | 241   |  
|                                                                                   |  |                                 |       |      |   |       |   |   |       |  
|Total expenses                                                                     |  |                                 | 2,106 |      |   | 1,072 |   |   | 279   |  
|                                                                                   |  |                                 |       |      |   |       |   |   |       |  
|Income before income taxes and equity in undistributed income of
  subsidiary bank |  |                                 | 2,155 |      |   | 5,774 |   |   | 5,756 |  
|Applicable income tax benefit                                                      |  |                                 | (772  | )    |   | (346  | ) |   | (81   | )
|                                                                                   |  |                                 |       |      |   |       |   |   |       |  
|Income before equity in undistributed income of subsidiary
bank                    |  |                                 | 2,927 |      |   | 6,120 |   |   | 5,837 |  
|Equity in undistributed income of subsidiary bank                                  |  |                                 | 3,561 |      |   | 1,454 |   |   | 1,035 |  
|                                                                                   |  |                                 |       |      |   |       |   |   |       |  
|Net
  income                                                                       |  | $                               | 6,488 |      | $ | 7,574 |   | $ | 6,872 |  
|                                                                                   |  |                                 |       |      |   |       |   |   |       |  

31

---



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

Condensed Statements of Cash Flows

| |                                                                                     |  |                                 |        |      |   |         |   |   |        |  
| | ----------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------- | - | - | ------ | -
| |                                                                                     |  | For the Years Ended December 31 |       
| |                                                                                     |  | 2006                            |        | 2005 |   | 2004    |  
| |                                                                                     |  |                                 |        |      |   |         |  
| | Operating activities:                                                               |  |                                 |        |      |   |         |   |   |        |  
| | Net
  income                                                                        |  | $                               | 6,488  |      | $ | 7,574   |   | $ | 6,872  |  
| | Adjustments
  to reconcile net income to net cash provided by operating activities: |  |                                 |        |      |   |         |   |   |        |  
| | Equity
  in undistributed income of subsidiary bank                                 |  |                                 | (3,561 | )    |   | (1,454  | ) |   | (1,035 | )
| | Amortization
  of other intangible assets                                           |  |                                 | 7      |      |   | 7       |   |   | 7      |  
| | (Increase)
  decrease in other assets                                               |  |                                 | (2,416 | )    |   | 4,105   |   |   | (546   | )
| | (Decrease)
  increase in other liabilities                                          |  |                                 | (1,006 | )    |   | 1,281   |   |   | (250   | )
| |                                                                                     |  |                                 |        |      |   |         |   |   |        |  
| | Net
  cash (used) provided by operating activities                                  |  |                                 | (488   | )    |   | 11,513  |   |   | 5,048  |  
| |                                                                                     |  |                                 |        |      |   |         |   |   |        |  
| |                                                                                     |  |                                 |        |      |   |         |   |   |        |  
| | Investing Activities:                                                               |  |                                 |        |      |   |         |   |   |        |  
| | Payment
  related to acquisition, net of cash and cash equivalents acquired         |  |                                 | -0-    |      |   | (43,559 | ) |   | -0-    |  
| |                                                                                     |  |                                 |        |      |   |         |   |   |        |  
| | Net
  cash used in investing activities                                             |  |                                 | -0-    |      |   | (43,559 | ) |   | -0-    |  
| |                                                                                     |  |                                 |        |      |   |         |   |   |        |  
| |                                                                                     |  |                                 |        |      |   |         |   |   |        |  
| | Financing activities:                                                               |  |                                 |        |      |   |         |   |   |        |  
| | Net
  increase in borrowings                                                        |  |                                 | 1,800  |      |   | 5,800   |   |   | (150   | )
| | Issuance
  of trust preferred securities                                            |  |                                 | -0-    |      |   | 25,000  |   |   | -0-    |  
| | Sale
  of treasury stock                                                            |  |                                 | 70     |      |   | 190     |   |   | 120    |  
| | Purchase
  of treasury stock                                                        |  |                                 | (2,024 | )    |   | (3,150  | ) |   | (2,884 | )
| | Exercise
  of stock options and issuance of treasury stock                          |  |                                 | 1,697  |      |   | 927     |   |   | 676    |  
| | Dividends
  paid                                                                    |  |                                 | (3,542 | )    |   | (3,333  | ) |   | (2,966 | )
| | Issuance
  of common stock                                                          |  |                                 | -0-    |      |   | 10,000  |   |   | -0-    |  
| |                                                                                     |  |                                 |        |      |   |         |   |   |        |  
| | Net
  cash (used) provided by financing activities                                  |  |                                 | (1,999 | )    |   | 35,434  |   |   | (5,204 | )
| |                                                                                     |  |                                 |        |      |   |         |   |   |        |  
| | (Decrease)
  increase in cash and cash equivalents                                  |  |                                 | (2,487 | )    |   | 3,388   |   |   | (156   | )
| | Cash
  and cash equivalents at beginning of year                                    |  |                                 | 4,081  |      |   | 693     |   |   | 849    |  
| |                                                                                     |  |                                 |        |      |   |         |   |   |        |  
| | Cash
  and cash equivalents at end of year                                          |  | $                               | 1,594  |      | $ | 4,081   |   | $ | 693    |  
| |                                                                                     |  |                                 |        |      |   |         |   |   |        |  

32

---



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

The
following discussion and analysis provides information about the Corporations
financial condition and results of operations for the years ended December 31,
2006, 2005 and 2004. This discussion and analysis should be read in conjunction
with Selected Statistical Data, and the Corporations Consolidated Financial
Statements and the Notes thereto included in this report.

Overview

2006
was a memorable year in terms of asset growth, as the Corporation exceeded the
$1 billion mark on October 11 and ended the year at $1.032 billion (growth of
$86.7 million or 9.2%). However, it was also marked by a significant decline in
the net interest margin due to an inverted yield curve as interest-bearing
liabilities repriced at incrementally higher rates than interest-earning
assets. As a result, net income decreased by 14.3% to $6,488 compared to $7,574
in 2005. Additionally, the return on average equity declined to 10.07% in 2006,
compared to 13.43% in 2005. The earnings per share figure, on a diluted basis,
decreased by 19.4% from $2.37 in 2005 to $1.91 in 2006.

During
the year, the Corporation continued its plan to manage capital balances through
stock repurchases and increased dividend payments, the goal of which is to
improve long-term shareholder return, as measured by return on average equity
and earnings per share. During 2006, the Corporation repurchased 60,000 shares
of its common stock at a total cost of $2,024. Since 1997, the Corporation has
repurchased 1,294,271 shares of common stock through repurchase programs.
Additionally, the Corporation paid dividends of $1.05 per share representing a
total of $3,542, increases of $.02 per share (or 1.9%) and $209 (or 6.3%), from
2005 and 2004 respectively. PNBC increased the quarterly dividend three times
in 2006, while also paying a special dividend for the sixth consecutive year.
Total stockholders equity increased by $2.2 million (or 3.5%) to $65,355 at
December 31, 2006, compared to $63,144 at December 31, 2005.

| |      |  |                       |           |                   |  |                       |       |                   |  |              |        |                  |  |  |       |   |  |   |       |  |  |  |        |    | 
| | ---- |  | --------------------- | --------- | ----------------- |  | --------------------- | ----- | ----------------- |  | ------------ | ------ | ---------------- |  |  | ----- | - |  | - | ----- |  |  |  | ------ | -- | 
| |      |  | Assets at 
  Year-End |           | Percent 
  Change |  | Equity at 
  Year-End |       | Percent 
  Change |  | Net
  Income |        | Percent
  Change | 
| |      |  |                       |           |                   |  |                       |       |                   |  |              |        |                  | 
| | 2006 |  | $                     | 1,031,959 |                   |  |                       | 9.17  | %                 |  | $            | 65,355 |                  |  |  | 3.50  | % |  | $ | 6,488 |  |  |  | (14.34 | )% | 
| | 2005 |  |                       | 945,263   |                   |  |                       | 44.15 |                   |  |              | 63,144 |                  |  |  | 20.58 |   |  |   | 7,574 |  |  |  | 10.22  |    | 
| | 2004 |  |                       | 655,738   |                   |  |                       | 7.54  |                   |  |              | 52,369 |                  |  |  | 2.94  |   |  |   | 6,872 |  |  |  | 4.07   |    | 

Mergers and Acquisition

During
November 2006, the Corporation announced it had entered into a branch purchase
and assumption agreement to acquire the Plainfield office of HomeStar Bank,
Manteno, Illinois, for $9.7 million in cash, including a deposit premium of
$1.5 million. The acquisition closed on February 23, 2007 with the Corporation
acquiring fixed assets of $4.5 million and loans of $16.8 million (at book
value). The Corporation assumed deposit liabilities of $13.1 million. The
office will operate as a branch of the subsidiary bank.

Analysis of Results of Operations

Net Income. Net income
for 2006 decreased
$1,086 (or 14.3%) to $6,488 (or $1.93 basic earnings per share and $1.91
diluted earnings per share), from $7,574 (or $2.39 basic earnings per share and
$2.37 diluted earnings per share) in 2005. Although average interest-earning
assets increased by $146.9 million during 2006 compared to 2005, the net yield
on average interest-earning assets declined to 3.33% from 3.73% over the same
time period. This compression of the net interest margin was the reason for the
lower net income figure. For a more detailed review of the net interest margin,
non-interest income and non-interest expense, please refer to those sections
contained in this Managements Discussion and Analysis.

Net
income for 2005 increased $702 (or 10.2%) to $7,574 (or $2.39 basic earnings
per share and $2.37 diluted earnings per share), from $6,872 (or $2.22 basic
earnings per share and $2.21 diluted earnings per share) in 2004. This increase
was due to growth in the Corporations balance sheet, not only from the
acquisition of Somonauk, but internal growth as well. Average interest-earning
assets increased from $566.2 million in 2004 to $705.6 million during 2005,
which generated an additional $4.0 million in net interest income.

Net
Interest Income. The compression of the net yield on
average interest-earning assets that began in 2005 continued in 2006. The
treasury yield curve remained inverted far most of the year, causing the
Corporations interest-bearing liabilities to be incrementally priced higher
than the Corporations interest-earning assets. The result was the
Corporations net yield on average interest-earning assets, on a
taxable-equivalent basis, decreased from 3.73% for 2005 to 3.33% in 2006. The
yield on interest-earning assets did increase to 6.57% in 2006 from 5.96% in
2005 (an increase of sixty-one basis points); however, the yield on
interest-bearing liabilities increased one-hundred three basis points to 3.49%
in 2006 from 2.46% in 2005. The effect of the net yield decrease was profound
as net interest income increased by a total of only $1.7 million, to $25,896 in
2006 as compared to $24,245 in 2005, despite an increase in the Corporations
total average interest-earning assets of $146.9 million to $852.5 million in
2006 from $705.6 million for 2005. The increase in average interest-earning
assets was more than enough to offset the aforementioned decrease in the net
yield on the average interest-earning assets, but only by $1.7 million, which
was far below expectations. Additionally, total average interest-bearing
liabilities increased by a total of $152.3 million to $791.0 million in 2006
from $638.7 million in 2005.

33

---



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

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

|                                                           |  |                                  |         |          |   |            |  |                |      |          |   |            |  |                |        |          |  |            |   |   |         |  |   |        |  |  |      |  
|---------------------------------------------------------- |  | -------------------------------- | ------- | -------- | - | ---------- |  | -------------- | ---- | -------- | - | ---------- |  | -------------- | ------ | -------- |  | ---------- | - | - | ------- |  | - | ------ |  |  | ---- | -
|                                                           |  | For the Years Ending December 31 |        
|                                                           |  |                                  |        
|                                                           |  | 2006                             |         | 2005     |   | 2004       | 
|                                                           |  |                                  |         |          |   |            | 
|                                                           |  | AverageBalance                   |         | Interest |   | Yield/Cost |  | AverageBalance |      | Interest |   | Yield/Cost |  | AverageBalance |        | Interest |  | Yield/Cost |  
|                                                           |  |                                  |         |          |   |            | 
|Average Interest- Earning Assets                           |  |                                  |         |          |   |            |  |                |      |          |   |            |  |                |        |          |  |            |   |   |         |  |   |        |  |  |      |  
|                                                           |  |                                  |         |          |   |            |  |                |      |          |   |            |  |                |        |          |  |            |   |   |         |  |   |        |  |  |      |  
|Interest-bearing deposits                                  |  | $                                | 2,232   |          | $ | 114        |  |                | 5.11 | %        | $ | 2,044      |  | $              | 67     |          |  | 3.26       | % | $ | 1,668   |  | $ | 24     |  |  | 1.43 | %
|Taxable investment securities                              |  |                                  | 154,576 |          |   | 6,370      |  |                | 4.12 |          |   | 131,913    |  |                | 4,621  |          |  | 3.50       |   |   | 107,358 |  |   | 3,259  |  |  | 3.04 |  
|Tax-exempt investment
  securities (a)                     |  |                                  | 100,519 |          |   | 7,001      |  |                | 6.96 |          |   | 86,039     |  |                | 5,794  |          |  | 6.73       |   |   | 64,453  |  |   | 4,376  |  |  | 6.79 |  
|Federal funds sold                                         |  |                                  | 9,777   |          |   | 499        |  |                | 5.10 |          |   | 3,162      |  |                | 120    |          |  | 3.79       |   |   | 1,944   |  |   | 30     |  |  | 1.53 |  
|Net loans (a) (b)                                          |  |                                  | 585,382 |          |   | 42,025     |  |                | 7.18 |          |   | 482,448    |  |                | 31,417 |          |  | 6.51       |   |   | 390,755 |  |   | 23,546 |  |  | 6.03 |  
|                                                           |  |                                  |         |          |   |            |  |                |      |          |   |            |  |                |        |          |  |            |   |   |         |  |   |        |  |  |      |  
|                                                          
|Total interest-earning assets                              |  |                                  | 852,486 |          |   | 56,009     |  |                | 6.57 |          |   | 705,606    |  |                | 42,019 |          |  | 5.96       |   |   | 566,178 |  |   | 31,235 |  |  | 5.52 |  
|                                                           |  |                                  |         |          |   |            |  |                |      |          |   |            |  |                |        |          |  |            |   |   |         |  |   |        |  |  |      |  
|Average non-interest-earning
  assets                      |  |                                  | 108,278 |          |   |            |  |                |      |          |   | 76,561     |  |                |        |          |  |            |   |   | 53,508  |  |   |        |  |  |      |  
|                                                           |  |                                  |         |          |   |            |  |                |      |          |   |            |  |                |        |          |  |            |   |   |         |  |   |        |  |  |      |  
|Total average assets                                       |  | $                                | 960,764 |          |   |            |  |                |      |          | $ | 782,167    |  |                |        |          |  |            |   | $ | 619,686 |  |   |        |  |  |      |  
|                                                           |  |                                  |         |          |   |            |  |                |      |          |   |            |  |                |        |          |  |            |   |   |         |  |   |        |  |  |      |  
|Average Interest-Bearing
  Liabilities                     |  |                                  |         |          |   |            |  |                |      |          |   |            |  |                |        |          |  |            |   |   |         |  |   |        |  |  |      |  
|                                                          
|Interest-bearing demand
  deposits                         |  | $                                | 216,540 |          |   | 4,877      |  |                | 2.25 | %        | $ | 209,903    |  |                | 3,224  |          |  | 1.54       | % | $ | 184,585 |  |   | 2,029  |  |  | 1.10 | %
|Savings deposits                                           |  |                                  | 115,537 |          |   | 326        |  |                | 0.28 |          |   | 86,771     |  |                | 267    |          |  | 0.31       |   |   | 59,506  |  |   | 208    |  |  | 0.35 |  
|Time deposits                                              |  |                                  | 386,342 |          |   | 18,640     |  |                | 4.82 |          |   | 294,642    |  |                | 10,296 |          |  | 3.49       |   |   | 235,556 |  |   | 6,359  |  |  | 2.70 |  
|Interest-bearing demand notes issued
to the U.S. Treasury  |  |                                  | 848     |          |   | 39         |  |                | 4.56 |          |   | 759        |  |                | 23     |          |  | 3.07       |   |   | 690     |  |   | 8      |  |  | 1.14 |  
|Federal funds purchased and customer
repurchase agreements |  |                                  | 32,416  |          |   | 1,486      |  |                | 4.58 |          |   | 24,844     |  |                | 756    |          |  | 3.04       |   |   | 12,689  |  |   | 147    |  |  | 1.16 |  
|Advances from Federal Home
  Loan Bank                     |  |                                  | 7,673   |          |   | 375        |  |                | 4.89 |          |   | 6,728      |  |                | 342    |          |  | 5.09       |   |   | 5,027   |  |   | 288    |  |  | 5.74 |  
|Trust preferred securities                                 |  |                                  | 25,000  |          |   | 1,410      |  |                | 5.64 |          |   | 11,644     |  |                | 621    |          |  | 5.33       |   |   | -0-     |  |   | -0-    |  |  | n/a  |  
|Note payable                                               |  |                                  | 6,613   |          |   | 477        |  |                | 7.22 |          |   | 3,424      |  |                | 196    |          |  | 5.73       |   |   | 1,002   |  |   | 31     |  |  | 3.07 |  
|                                                           |  |                                  |         |          |   |            |  |                |      |          |   |            |  |                |        |          |  |            |   |   |         |  |   |        |  |  |      |  
|Total interest-bearing liabilities                         |  |                                  | 790,969 |          |   | 27,630     |  |                | 3.49 |          |   | 638,715    |  |                | 15,725 |          |  | 2.46       |   |   | 499,055 |  |   | 9,070  |  |  | 1.82 |  
|                                                           |  |                                  |         |          |   |            |  |                |      |          |   |            |  |                |        |          |  |            |   |   |         |  |   |        |  |  |      |  
|Net yield on average
  interest-earning assets             |  |                                  |         |          | $ | 28,379     |  |                | 3.33 | %        |   |            |  | $              | 26,294 |          |  | 3.73       | % |   |         |  | $ | 22,165 |  |  | 3.92 | %
|                                                           |  |                                  |         |          |   |            |  |                |      |          |   |            |  |                |        |          |  |            |   |   |         |  |   |        |  |  |      |  
|Average non-interest-bearing liabilities                   |  |                                  | 105,381 |          |   |            |  |                |      |          |   | 87,037     |  |                |        |          |  |            |   |   | 69,592  |  |   |        |  |  |      |  
|                                                          
|Average stockholders equity                               |  |                                  | 64,414  |          |   |            |  |                |      |          |   | 56.415     |  |                |        |          |  |            |   |   | 51,039  |  |   |        |  |  |      |  
|                                                           |  |                                  |         |          |   |            |  |                |      |          |   |            |  |                |        |          |  |            |   |   |         |  |   |        |  |  |      |  
|Total average liabilities and
  stockholders equity       |  | $                                | 960,764 |          |   |            |  |                |      |          | $ | 782,167    |  |                |        |          |  |            |   | $ | 619,686 |  |   |        |  |  |      |  
|                                                           |  |                                  |         |          |   |            |  |                |      |          |   |            |  |                |        |          |  |            |   |   |         |  |   |        |  |  |      |  

|    |                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Interest income on non-taxable investment securities and
  non-taxable loans includes the effects of taxable-equivalent adjustments,
  using a tax rate of 34% in adjusting interest on tax-exempt securities and
  tax-exempt loans to a taxable-equivalent basis. The amount of
  taxable-equivalent adjustments were $2,483
  in 2006, $2,048 in 2005 and $1,516 in 2004.
|    |                                                                                                                                                                                                                                                                                                                                                                             
|(b) | Includes $78 in 2006, $26 in 2005 and $55 in 2004
  attributable to interest from non-accrual loans.                                                                                                                                                                                                                                                                        

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

|                                          |  |      |        |      |   |        |  |   |        | 
|----------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                                          |  | 2006 |        | 2005 |   | 2004   | 
|                                          |  |      |        |      |   |        | 
|Net interest income as stated             |  | $    | 25,896 |      | $ | 24,245 |  | $ | 20,649 | 
|Taxable-equivalent adjustment-investments |  |      | 2,381  |      |   | 1,971  |  |   | 1,488  | 
|Taxable-equivalent adjustment-loans       |  |      | 102    |      |   | 78     |  |   | 28     | 
|                                          |  |      |        |      |   |        |  |   |        | 
|                                         
|Taxable-equivalent net interest income    |  | $    | 28,379 |      | $ | 26,294 |  | $ | 22,165 | 
|                                          |  |      |        |      |   |        |  |   |        | 

34

---



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

|                                                        |  |      |      |      |  |      |   |  |      |  
|------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | - |  | ---- | -
|                                                        |  | 2006 |      | 2005 |  | 2004 |  
|                                                        |  |      |      |      |  |      |  
|Net yield on interest-earning assets                    |  |      | 3.04 | %    |  | 3.44 | % |  | 3.65 | %
|Taxable-equivalent
  adjustment-investments             |  |      | 0.28 |      |  | 0.28 |   |  | 0.26 |  
|Taxable-equivalent adjustment-loans                     |  |      | 0.01 |      |  | 0.01 |   |  | 0.01 |  
|                                                        |  |      |      |      |  |      |   |  |      |  
|                                                       
|Taxable-equivalent net yield on interest-earning assets |  |      | 3.33 | %    |  | 3.73 | % |  | 3.92 | %
|                                                        |  |      |      |      |  |      |   |  |      |  

During
2005, net interest income, on a taxable-equivalent basis, increased
significantly to $26,294 from $22,165 in 2004, representing an improvement of $4.1 million (or 18.6%). This enhancement is
attributable to an increase in average interest-earning assets during 2005 from
$566,178 in 2004 to $705,605, growth of $139.4 million (or 24.6%). The
acquisition of Somonauk accounts for the majority of this increase, but the
Corporation also had organic growth of nearly 8%. The average interest rate
earned on these assets increased from 5.52% in 2004 to 5.95% in 2005. Although
the Corporation has been asset-sensitive for most of the year, as interest
rates increased rapidly in 2005 (there were eight 25 basis-point increases to
the prime lending rate), the rates paid for maturing deposits had more room to
increase than those on loans and investments, causing compression to the net
yield. Accordingly, the net yield on interest-earning
assets decreased from 3.92% in 2004 to 3.73% in 2005. Additionally, the
Corporation issued $25,000 of trust preferred securities and increased the balance of an outstanding note
payable by $5,800 to help finance the acquisition of Somonauk. The interest
expense incurred from the additional debt
decreased the net yield by approximately nine basis-points. There was also an
increase in the interest-bearing liabilities from $499,055 in 2004 to $638,716 in 2005 (which includes the previously
mentioned debt), an increase of $139.7 million (or 28.0%). The average rate
paid on these liabilities increased from
1.82% in 2004 to 2.46% in 2005.

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

|                                                               |  |                          |       |                       |   |                       |   |           |        |         |   |       |  |           |       |         |   |        |  |   |       |   |   |        |   |   |        |  
|-------------------------------------------------------------- |  | ------------------------ | ----- | --------------------- | - | --------------------- | - | --------- | ------ | ------- | - | ----- |  | --------- | ----- | ------- | - | ------ |  | - | ----- | - | - | ------ | - | - | ------ | -
|                                                               |  | Year ended December
  31 |      
|                                                               |  |                          |      
|                                                               |  | 2006 compared to 2005    |       | 2005 compared to 2004 |   | 2004 compared to 2003 |  
|                                                               |  | Volume(a)                |       | Rate(a)               |   | Net                   |   | Volume(a) |        | Rate(a) |   | Net   |  | Volume(a) |       | Rate(a) |   | Net    | 
|                                                               |  |                          |       |                       |   |                       |  
|Interest from interest-earning assets                          |  |                          |       |                       |   |                       |   |           |        |         |   |       |  |           |       |         |   |        |  |   |       |   |   |        |   |   |        |  
|                                                              
|Interest-bearing time deposits                                 |  | $                        | 8     |                       | $ | 39                    |   | $         | 47     |         | $ | 9     |  | $         | 34    |         | $ | 43     |  | $ | (46   | ) | $ | 15     |   | $ | (31    | )
|Taxable investment securities                                  |  |                          | 800   |                       |   | 949                   |   |           | 1,749  |         |   | 803   |  |           | 559   |         |   | 1,362  |  |   | (80   | ) |   | 420    |   |   | 340    |  
|Tax-exempt investment
  securities (b)                         |  |                          | 1,027 |                       |   | 179                   |   |           | 1,206  |         |   | 1,460 |  |           | (42   | )       |   | 1,418  |  |   | 569   |   |   | (110   | ) |   | 459    |  
|Federal funds sold                                             |  |                          | 278   |                       |   | 101                   |   |           | 379    |         |   | 32    |  |           | 58    |         |   | 90     |  |   | (60   | ) |   | 18     |   |   | (42    | )
|Net loans (c)                                                  |  |                          | 7,047 |                       |   | 3,562                 |   |           | 10,609 |         |   | 5,748 |  |           | 2,123 |         |   | 7,871  |  |   | 1,326 |   |   | (1,558 | ) |   | (232   | )
|                                                               |  |                          |       |                       |   |                       |   |           |        |         |   |       |  |           |       |         |   |        |  |   |       |   |   |        |   |   |        |  
|Total income from interest-earning assets                      |  |                          | 9,160 |                       |   | 4,830                 |   |           | 13,990 |         |   | 8,052 |  |           | 2,732 |         |   | 10,784 |  |   | 1,709 |   |   | (1,215 | ) |   | 494    |  
|                                                               |  |                          |       |                       |   |                       |   |           |        |         |   |       |  |           |       |         |   |        |  |   |       |   |   |        |   |   |        |  
|Expense of
  interest-bearing liabilities                      |  |                          |       |                       |   |                       |   |           |        |         |   |       |  |           |       |         |   |        |  |   |       |   |   |        |   |   |        |  
|                                                              
|Interest-bearing demand
  deposits                             |  |                          | 126   |                       |   | 1,527                 |   |           | 1,653  |         |   | 334   |  |           | 861   |         |   | 1,195  |  |   | 192   |   |   | (221   | ) |   | (29    | )
|Savings deposits                                               |  |                          | 84    |                       |   | (25                   | ) |           | 59     |         |   | 90    |  |           | (31   | )       |   | 59     |  |   | 17    |   |   | (113   | ) |   | (96    | )
|Time deposits                                                  |  |                          | 3,814 |                       |   | 4,530                 |   |           | 8,344  |         |   | 1,830 |  |           | 2,107 |         |   | 3,937  |  |   | (223  | ) |   | (1,150 | ) |   | (1,373 | )
|Interest-bearing demand notes
  issued to the U.S. Treasury    |  |                          | 3     |                       |   | 13                    |   |           | 16     |         |   | 1     |  |           | 14    |         |   | 15     |  |   | (2    | ) |   | 2      |   |   | -0-    |  
|Federal funds purchased and
  securities repurchase agreements |  |                          | 289   |                       |   | 441                   |   |           | 730    |         |   | 255   |  |           | 354   |         |   | 609    |  |   | 28    |   |   | 55     |   |   | 83     |  
|Advances from Federal Home
  Loan Bank                         |  |                          | 48    |                       |   | (15                   | ) |           | 33     |         |   | 92    |  |           | (38   | )       |   | 54     |  |   | (28   | ) |   | 11     |   |   | (17    | )
|Trust preferred securities                                     |  |                          | 733   |                       |   | 56                    |   |           | 789    |         |   | 621   |  |           | -0-   |         |   | 621    |  |   | -0-   |   |   | -0-    |   |   | -0-    |  
|Note payable                                                   |  |                          | 207   |                       |   | 74                    |   |           | 281    |         |   | 106   |  |           | 59    |         |   | 165    |  |   | (6    | ) |   | (3     | ) |   | (9     | )
|                                                               |  |                          |       |                       |   |                       |   |           |        |         |   |       |  |           |       |         |   |        |  |   |       |   |   |        |   |   |        |  
|Total expense from interest-bearing
  liabilities              |  |                          | 5,304 |                       |   | 6,601                 |   |           | 11,905 |         |   | 3,329 |  |           | 3,326 |         |   | 6,655  |  |   | (22   | ) |   | (1,419 | ) |   | (1,441 | )
|                                                               |  |                          |       |                       |   |                       |   |           |        |         |   |       |  |           |       |         |   |        |  |   |       |   |   |        |   |   |        |  
|                                                              
|Net difference                                                 |  | $                        | 3,856 |                       | $ | (1,771                | ) | $         | 2,085  |         | $ | 4,723 |  | $         | (594  | )       | $ | 4,129  |  | $ | 1,731 |   | $ | 204    |   | $ | 1,935  |  
|                                                               |  |                          |       |                       |   |                       |   |           |        |         |   |       |  |           |       |         |   |        |  |   |       |   |   |        |   |   |        |  

|    |                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The change in interest due both to rate and volume has
  been allocated equally.                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                          
|(b) | Interest
  income on non-taxable investment securities and non-taxable loans includes
  the effects of taxable-equivalent adjustments using a tax rate of 34% in adjusting
  interest on tax-exempt securities and tax-exempt loans to a
  taxable-equivalent basis. The amount of taxable-equivalent adjustments were
  $2,483 in 2006, $2,048 in 2005 and $1,516 in 2004.              
|    |                                                                                                                                                                                                                                                                                                                                                                                          
|(c) | Includes loan fees of $780 in 2006, $774 in 2005 and $596 in 2004.
  Interest income on loans includes the effect of taxable-equivalent
  adjustments for non-taxable loans using a
  tax rate of 34% in adjusting interest on tax-exempt loans to a
  taxable-equivalent basis. Includes non-accrual loans, with year-end balances of $3,893 in 2006, $3,822 in 2005 and
  $328 in 2004.

35

---



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

Non-interest
income. Total non-interest income of $10,245 in 2006 represents an increase of
$1,405 (or 15.9%) from the 2005 total of $8,840. The service charge categories
continued to account for the majority of the growth, as service charges on
deposits increased $787 (or 22.8%) while other service charges increased $375
(or 26.7%), primarily from additional check card income and sales of credit
life insurance. The Corporation also recorded $250 in net gains from the sale
of investment securities in 2006, compared to $89 in 2005. Additionally,
bank-owned life insurance income increased to $770 in 2006, compared to $604 in
2005, due to the additional policies which were purchased following the
Somonauk acquisition in 2005. Offsetting these increases was a $134 (or 8.4%)
decline in trust and farm management fees to $1,467 in 2006 from $1,601 in
2005. This was due to the sale of the subsidiary banks farm management
department in 2006.

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

|                                                 |  |                                 |        |      |   |       |   |   |       |  
|------------------------------------------------ |  | ------------------------------- | ------ | ---- | - | ----- | - | - | ----- | -
|                                                 |  | For the Years ended December 31 |       
|                                                 |  |                                
|                                                 |  | 2006                            |        | 2005 |   | 2004  |  
|                                                 |  |                                 |        |      |   |       |  
|Trust
  and farm management fees                 |  | $                               | 1,467  |      | $ | 1,601 |   | $ | 1,451 |  
|Service
  charges on deposit accounts            |  |                                 | 4,235  |      |   | 3,448 |   |   | 3,149 |  
|Other
  service charges                          |  |                                 | 1,782  |      |   | 1,407 |   |   | 1,165 |  
|Gain on
  sales of securities available-for-sale |  |                                 | 250    |      |   | 89    |   |   | 216   |  
|Gain on
  sale of loans                          |  |                                 | 90     |      |   | 63    |   |   | 465   |  
|Brokerage
  fee income                           |  |                                 | 736    |      |   | 697   |   |   | 607   |  
|Mortgage
  banking income                        |  |                                 | 755    |      |   | 780   |   |   | 561   |  
|Bank-owned
  life insurance income               |  |                                 | 770    |      |   | 604   |   |   | 555   |  
|Other
  operating income                         |  |                                 | 160    |      |   | 151   |   |   | 146   |  
|                                                 |  |                                 |        |      |   |       |   |   |       |  
|Total non-interest income                        |  | $                               | 10,245 |      | $ | 8,840 |   | $ | 8,315 |  
|                                                 |  |                                 |        |      |   |       |   |   |       |  
|Non-interest
  income to average total assets    |  |                                 | 1.07   | %    |   | 1.13  | % |   | 1.34  | %

Total
non-interest income of $8,840 in 2005 represents an increase of $525 (or 6.3%)
from the 2004 total of $8,315. With an increase in the customer base from the
acquisition, the service charge categories accounted for the majority of the
growth, as service charges on deposits increased $299 (or 9.5%) and other
service charges increased $242 (or 20.8%). Citizens Financial Advisors, a
department of the subsidiary bank combining trust, insurance and brokerage
services, had growth in the number of clients served, assets under management,
and profits from farmland sales. As a result, trust and farm management fees
increased by $150 (or 10.3%) and brokerage fee income increased by $490 (or
14.8%). Mortgage banking income also grew in 2005, improving $219 (or 39.0%) as
the Corporations serviced loan portfolio grew from $148.0 million at December
31, 2004 to $202.0 million at December 31, 2005. Offsetting these increases was a
lower amount of net gains received from sales of investment securities of $127
(from $216 in 2004 to $89 in 2005) and the Corporations recording of a gain
from the sale of the subsidiary banks credit card portfolio acquired from
Somonauk of $63 in 2005, compared to $465 from the sale of the Corporations
credit card portfolio in 2004.

Non-interest Expense. Total non-interest expense
increased to $28,335 in 2006 from $23,253 in 2005 (an increase of $5,082 or
21.9%), as all categories of non-interest expense experienced increases. The
majority of the increase resulted in the category of salaries and employee
benefits, which increased $2,484 or 18.5% (from $13,400 at December 31, 2005 to
$15,884 at December 31, 2006). Contributing to this increase was the addition of
employees in 2006 to staff the new offices of Aurora and Piano. Additionally,
an entire year of salary expense was incurred for employees from the former
Somonauk offices, compared to just five months in 2005. As a percentage of
average total assets, however, non-interest expense continued to decrease to
2.95% in 2006, compared to 2.97% in 2005 and 3.15% in 2004. The following table
provides non-interest expense, and non-interest expense to average total assets
for the periods indicated:

|                                               |  |                                 |        |      |   |        |   |   |        |  
|---------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                               |  | For the Years ended December 31 |       
|                                               |  |                                 |       
|                                               |  | 2006                            |        | 2005 |   | 2004   |  
|                                               |  |                                 |        |      |   |        |   |   |        |  
|Salaries
  and employee benefits               |  | $                               | 15,884 |      | $ | 13,400 |   | $ | 11,129 |  
|Occupancy                                      |  |                                 | 1,458  |      |   | 1,144  |   |   | 986    |  
|Equipment
  expense                            |  |                                 | 2,933  |      |   | 2,124  |   |   | 1,653  |  
|Federal
  insurance assessments                |  |                                 | 313    |      |   | 244    |   |   | 229    |  
|Intangible
  assets amortization               |  |                                 | 651    |      |   | 324    |   |   | 208    |  
|Data
  processing                              |  |                                 | 1,032  |      |   | 870    |   |   | 747    |  
|Advertising                                    |  |                                 | 841    |      |   | 770    |   |   | 743    |  
|Postage                                        |  |                                 | 539    |      |   | 431    |   |   | 401    |  
|Property
  taxes                               |  |                                 | 527    |      |   | 414    |   |   | 382    |  
|Supplies                                       |  |                                 | 427    |      |   | 378    |   |   | 290    |  
|Other
  real estate owned expense (income)     |  |                                 | 149    |      |   | (21    | ) |   | (171   | )
|Other
  operating expense                      |  |                                 | 3,581  |      |   | 3,175  |   |   | 2,906  |  
|                                               |  |                                 |        |      |   |        |   |   |        |  
|                                              
|Total non-interest expense                     |  | $                               | 28,335 |      | $ | 23,253 |   | $ | 19,503 |  
|                                               |  |                                 |        |      |   |        |   |   |        |  
|                                              
|Non-interest
  expense to average total assets |  |                                 | 2.95   | %    |   | 2.97   | % |   | 3.15   | %

Total
non-interest expense increased to $23,253 in 2005 from $19,503 in 2004 (an
increase of $3,750 or 19.2%). All categories of non-interest expense saw
increases, primarily due to the acquisition of Somonauk, which increased the
number of employees and facilities. The majority of the increase was in

36

---



salaries and benefits, which increased $2,271 (or
20.4%) during the past year as the number of full-time equivalent employees
increased from 225 at December 31, 2004 to 290 at December 31, 2005 (an increase
of 65 or 28.9%). In addition, the categories of equipment expense and occupancy
expense increased by $471 (or 28.5%) and $190 (or 13.9%), respectively, from
2005 to 2004. However, as a percentage of average total assets, non-interest
expense decreased to 2.97% in 2005, compared to 3.15% in 2004.

Income
taxes.Income tax expense totaled $1,033 in 2006, $2,258 in
2005 and $2,214 in 2004. The effective tax rates were 13.7%, 23.0% and 24.4%
for the respective years then ended. The lower effective tax rate in 2006 was
primarily due to an increase in the amount of interest income earned from
municipal (tax-exempt) securities.

Analysis of Financial Condition

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

|                      |  |             |           |           |  |        |   |             |         |        |  |             |   |        |         |             |  |        |   |             |         |  |  |       |   |   |         |  |  |       |  
|--------------------- |  | ----------- | --------- | --------- |  | ------ | - | ----------- | ------- | ------ |  | ----------- | - | ------ | ------- | ----------- |  | ------ | - | ----------- | ------- |  |  | ----- | - | - | ------- |  |  | ----- | -
|                      |  | December 31
|                      |  |            
|                      |  | 2006        |           | 2005      |  | 2004   |   | 2003        |         | 2002  
|                      |  | Amount      |           | % ofTotal |  | Amount |   | %
of 
Total |         | Amount |  | %
of 
Total |   | Amount |         | %
of 
Total |  | Amount |   | % of 
Total |        
|                      |  |             |           |           |  |        |   |             |         |        | 
|Agricultural          |  | $           | 83,610    |           |  | 13.3   | % | $           | 73,884  |        |  | 12.7        | % | $      | 42,063  |             |  | 10.3   | % | $           | 42,954  |  |  | 11.2  | % | $ | 38,656  |  |  | 10.8  | %
|Commercial            |  |             | 134,402   |           |  | 21.4   |   |             | 114,342 |        |  | 19.7        |   |        | 96,390  |             |  | 23.5   |   |             | 80,711  |  |  | 21.1  |   |   | 73,169  |  |  | 20.5  |  
|Real Estate           |  |             |           |           |  |        |   |             |         |        |  |             |   |        |         |             |  |        |   |             |         |  |  |       |   |   |         |  |  |       |  
|1-4 family residences |  |             | 120,585   |           |  | 19.1   |   |             | 138,959 |        |  | 23.9        |   |        | 76,644  |             |  | 18.7   |   |             | 66,070  |  |  | 17.2  |   |   | 62,265  |  |  | 17.4  |  
|Agricultural          |  |             | 61,511    |           |  | 9.8    |   |             | 56,069  |        |  | 9.6         |   |        | 39,688  |             |  | 9.7    |   |             | 38,683  |  |  | 10.1  |   |   | 35,806  |  |  | 10.0  |  
|Construction          |  |             | 42,991    |           |  | 6.8    |   |             | 37,286  |        |  | 6.4         |   |        | 17,271  |             |  | 4.2    |   |             | 13,302  |  |  | 3.5   |   |   | 10,223  |  |  | 2.9   |  
|Commercial            |  |             | 130,302   |           |  | 20.7   |   |             | 113,110 |        |  | 19.4        |   |        | 105,073 |             |  | 25.6   |   |             | 107,672 |  |  | 28.1  |   |   | 101,353 |  |  | 28.4  |  
|                      |  |             |           |           |  |        |   |             |         |        |  |             |   |        |         |             |  |        |   |             |         |  |  |       |   |   |         |  |  |       |  
|Real Estate Total     |  |             | 355,389   |           |  | 56.4   |   |             | 345,424 |        |  | 59.3        |   |        | 238,676 |             |  | 58.2   |   |             | 225,727 |  |  | 58.9  |   |   | 209,647 |  |  | 58.7  |  
|Installment           |  |             | 56,071    |           |  | 8.9    |   |             | 48,074  |        |  | 8.3         |   |        | 32,915  |             |  | 8.0    |   |             | 33,661  |  |  | 8.8   |   |   | 35,887  |  |  | 10.0  |  
|                      |  |             |           |           |  |        |   |             |         |        |  |             |   |        |         |             |  |        |   |             |         |  |  |       |   |   |         |  |  |       |  
|Total loans           |  | $           | 629,472   |           |  | 100.0  | % | $           | 581,724 |        |  | 100.0       | % | $      | 410,044 |             |  | 100.0  | % | $           | 383,053 |  |  | 100.0 | % | $ | 357,359 |  |  | 100.0 | %
|                      |  |             |           |           |  |        |   |             |         |        |  |             |   |        |         |             |  |        |   |             |         |  |  |       |   |   |         |  |  |       |  
|Total assets          |  | $           | 1,031,959 |           |  |        |   | $           | 945,263 |        |  |             |   | $      | 655,738 |             |  |        |   | $           | 609,737 |  |  |       |   | $ | 587,375 |  |  |       |  
|Loans to total assets |  |             |           |           |  | 61.0   | % |             |         |        |  | 61.6        | % |        |         |             |  | 62.5   | % |             |         |  |  | 62.8  | % |   |         |  |  | 60.8  | %

Total
loans increased $47.7 million (or 8.2%) in 2006 as compared to an increase of
$171.8 million (41.9%) in 2005. The increase reflects business expansion in
growth markets served by the subsidiary bank in 2006 as well as expansion of
relationship banking in all markets. This loan growth is after a bulk
residential mortgage loan sale of approximately $19.4 million during 2006. The
2005 increase was dominated by the Somonauk acquisition.

Commercial
loans increased $20.1 million (or 17.5%) in 2006, which compares to an increase
of $18.0 million (or 18.7%) in 2005. Building relationships with commercial
businesses has been the largest component of loan growth in recent years.
Increases occurred in both higher-growth areas and established markets served
by the subsidiary bank. Competition for high quality commercial and
agricultural customers remains strong.

Loans
to agricultural operations increased $9.7 million (or 13.2%) in 2006, which
compares to an increase of $31.8 million (or 75.5%) in 2005. Short-term
agricultural loans are seasonal in nature with paydowns from grain sales
occurring near the end of each year. Rapid growth in the bio-fuels industry
(primarily ethanol) dramatically influenced corn prices (the primary crop of
the Corporations market area) in the latter part of 2006. At year-end 2006,
corn prices were approaching $4 per bushel, nearly double the price of a year
ago. it is anticipated the ethanol industry will continue to grow for the next
several years. This creates an environment for significant profitability in
agricultural crop production. The highly-experienced agricultural staff
continues to effectively manage risk in this portfolio. Agricultural loans as a
percentage of total loans were 13.3% at year-end 2006, compared to 12.7% at
year-end 2005.

Real
estate loans increased $10.0 million (or 2.9%) in 2006 compared to an increase
of $106.7 million (or 44.7%) in 2005. The growth in real estate loans was
primarily in the commercial and agricultural areas. Approximately $19.4 million
of adjustable-rate residential mortgages were sold into the secondary market
during the first and second quarters of 2006 as part of the subsidiary banks
capital and liquidity management planning. Residential real estate loans with
fixed rates of more than 5 years are generally sold into the Secondary market.
The Corporation retains the servicing of sold loans, maintaining the local
relationship with customers and generating servicing fee income. Total home
mortgage closings were over $100 million in 2006. This is a notable achievement
in a time of slowing real estate sales.

Consumer
installment loans increased $8.0 million (or 16.6%) in 2006 from 2005. This follows
an increase of $15.2 million (or 46.2%) in 2005. The growth in 2006 is
attributed to a focus on increasing consumer loans. Home equity loans have seen
the largest growth, comprising over 60% of the installment portfolio.

Although
the risk of non-payment for any reason exists with respect to all loans,
certain other more specific risks are associated with each type of loan. The
primary risks associated with commercial loans are quality of the borrowers
management and the impact of national economic factors. With respect to
agricultural loans, the primary risks are weather and, like commercial loans,
the quality of the borrowers management. Risks associated with real estate
loans include concentrations of loans in a loan type, such as commercial or
agricultural, and fluctuating land values. Installment loans also have risks
associated with concentrations of loans in a single type of loan. Installment
loans additionally carry the risk of a borrowers unemployment as a result of
deteriorating economic conditions.

The
Corporations strategy with respect to addressing and managing these types of
risks, whether loan demand is weak or strong, is for the subsidiary bank to
follow its conservative loan policies and underwriting practices, which include
(i) granting loans on a sound and collectible basis, (ii) investing funds
profitably for the benefit of the stockholders and the protection of
depositors, (iii) serving the legitimate needs of the community and the
subsidiary banks general market area while obtaining a balance between maximum
yield and minimum risk, (iv) ensuring primary and secondary sources of
repayment are

37

---



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

adequate in relation to the
amount of the loan, (v) administering loan policies through a Directors Loan
Committee and Officer approvals, (vi) developing and maintaining adequate
diversification of the loan portfolio as a whole and of the loans within each
loan category, and (vii) ensuring each loan is properly documented and, if
appropriate, secured or guaranteed by government agencies, and insurance
coverage is adequate, especially with respect to certain agricultural loans
because of the risk of poor weather.

Non-performing Loans and Other Real Estate Owned.
Non-performing loans amounted to .62% of total loans at year-end 2006 compared
to .66% at year-end 2005. Problem credits are closely monitored by the lending
staff, and an independent loan review staff provides further assistance in
identifying problem situations. Loans over 90 days past due are normally either
charged off, or if well-secured and in the process of collection, placed on a
non-accrual status. Problem credits have a life cycle. They either improve or
they move through a workout/liquidation process. The workout process often
includes non-accrual status. The allowance for possible loan losses was 77.8%
and 81.3% of non-performing loans at year-end 2006 and 2005, respectively. The
Corporation does not have any significant concentration of commercial real
estate loans or commitments in areas which are experiencing deteriorating
economic conditions. Total other real estate owned as of December 31, 2006 was
$0. The Corporation had $468 in other real estate owned as of December 31, 2005.
The following table provides information on the Corporations non-performing
loans since 2002:

|                                                               |  |             |       |      |   |       |   |      |      |      |   |      |   |   |       |  
|-------------------------------------------------------------- |  | ----------- | ----- | ---- | - | ----- | - | ---- | ---- | ---- | - | ---- | - | - | ----- | -
|                                                               |  | December 31 |      
|                                                               |  |             |      
|                                                               |  | 2006        |       | 2005 |   | 2004  |   | 2003 |      | 2002 |  
|                                                               |  |             |       |      |   |       |   |      |      |      |  
|Non-accrual                                                    |  | $           | 3,893 |      | $ | 3,822 |   | $    | 328  |      | $ | 925  |   | $ | 3,797 |  
|90 days past due and accruing                                  |  |             | 33    |      |   | 3     |   |      | -0-  |      |   | 44   |   |   | 23    |  
|Restructured                                                   |  |             | -0-   |      |   | -0-   |   |      | -0-  |      |   | -0-  |   |   | -0-   |  
|                                                               |  |             |       |      |   |       |   |      |      |      |   |      |   |   |       |  
|Total non-performing
 loans                                    |  | $           | 3,926 |      | $ | 3,825 |   | $    | 328  |      | $ | 969  |   | $ | 3,820 |  
|                                                               |  |             |       |      |   |       |   |      |      |      |   |      |   |   |       |  
|                                                               |  |             |       |      |   |       |   |      |      |      |   |      |   |   |       |  
|Non-performing loans to total loans (net of unearned
interest) |  |             | 0.62  | %    |   | 0.66  | % |      | 0.08 | %    |   | 0.25 | % |   | 1.07  | %

As
of December 31, 2006 and 2005, loans which the Corporations management had
serious doubts as to the ability of borrowers to comply with loan repayment
terms not carried as non-performing loans totaled approximately $199 (or .03% of
the total loan portfolio), and $554 (or .09% of the total loan portfolio),
respectively.

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

|                                                                                     |  |                                   |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|------------------------------------------------------------------------------------ |  | --------------------------------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                     |  | For the
  Years Ended December 31 |        
|                                                                                     |  |                                   |        
|                                                                                     |  | 2006                              |         | 2005 |   | 2004    |   | 2003 |         | 2002 |  
|                                                                                     |  |                                   |         |      |   |         |   |      |         |      |  
|Amount of loans outstanding at end of year
(net of unearned interest)                |  | $                                 | 629,472 |      | $ | 581,812 |   | $    | 410,044 |      | $ | 383,053 |   | $ | 357,359 |  
|Average amount of loans outstanding for the year
(net of unearned interest)          |  | $                                 | 585,382 |      | $ | 482,448 |   | $    | 390,755 |      | $ | 369,469 |   | $ | 346,260 |  
|Allowance for loan losses at beginning of year                                       |  | $                                 | 3,109   |      | $ | 2,524   |   | $    | 2,250   |      | $ | 2,660   |   | $ | 2,300   |  
|Allowance of bank acquired                                                           |  |                                   | -0-     |      |   | 752     |   |      | -0-     |      |   | -0-     |   |   | -0-     |  
|Charge-offs:                                                                         |  |                                   |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Agricultural                                                                         |  |                                   | 162     |      |   | -0-     |   |      | -0-     |      |   | 106     |   |   | 5       |  
|Commercial                                                                           |  |                                   | 227     |      |   | 85      |   |      | 54      |      |   | 479     |   |   | 338     |  
|Real estate-mortgage                                                                 |  |                                   | 21      |      |   | 10      |   |      | 3       |      |   | 45      |   |   | 2       |  
|Installment                                                                          |  |                                   | 194     |      |   | 252     |   |      | 301     |      |   | 448     |   |   | 389     |  
|                                                                                     |  |                                   |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total charge-offs                                                                    |  |                                   | 604     |      |   | 347     |   |      | 358     |      |   | 1,078   |   |   | 734     |  
|                                                                                     |  |                                   |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Recoveries:                                                                          |  |                                   |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Agricultural                                                                         |  |                                   | -0-     |      |   | -0-     |   |      | -0-     |      |   | -0-     |   |   | -0-     |  
|Commercial                                                                           |  |                                   | 90      |      |   | 2       |   |      | 54      |      |   | 6       |   |   | 185     |  
|Real estate-mortgage                                                                 |  |                                   | 5       |      |   | -0-     |   |      | 4       |      |   | 4       |   |   | 30      |  
|Installment                                                                          |  |                                   | 168     |      |   | 178     |   |      | 199     |      |   | 198     |   |   | 236     |  
|                                                                                     |  |                                   |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total recoveries                                                                     |  |                                   | 263     |      |   | 180     |   |      | 257     |      |   | 208     |   |   | 451     |  
|                                                                                     |  |                                   |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Net loans charged off                                                                |  |                                   | 341     |      |   | 167     |   |      | 101     |      |   | 870     |   |   | 283     |  
|Provision for loan losses                                                            |  |                                   | 285     |      |   | -0-     |   |      | 375     |      |   | 460     |   |   | 643     |  
|                                                                                     |  |                                   |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Allowance for loan losses at end of year                                             |  | $                                 | 3,053   |      | $ | 3,109   |   | $    | 2,524   |      | $ | 2,250   |   | $ | 2,660   |  
|                                                                                     |  |                                   |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Net loans charged off to average loans                                               |  |                                   | 0.06    | %    |   | 0.03    | % |      | 0.03    | %    |   | 0.24    | % |   | 0.08    | %
|Allowance for loan losses to non-performing loans                                    |  |                                   | 77.76   | %    |   | 81.28   | % |      | 769.51  | %    |   | 232.20  | % |   | 69.63   | %
|Allowance for loan losses to total loans at end of year (net of
  unearned interest) |  |                                   | 0.49    | %    |   | 0.53    | % |      | 0.62    | %    |   | 0.59    | % |   | 0.74    | %

38

---



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

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

Net
charge-offs were .06% of average total loans in 2006. The allowance for loan
losses at year-end 2006 was $3.05 million, .49% of total loans, net of unearned
interest, and 77.76% of non-performing loans. Non-performing loans are
comprised of credits that management believes will not result in significant
losses to the Corporation. There are $230 specific loan loss reserves for the
non-performing or impaired loans as of December 31, 2006. Management considers
the allowance for loan losses adequate to meet probable losses as of December
31, 2006.

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

|                                      |  |             |         |      |   |         | 
|------------------------------------- |  | ----------- | ------- | ---- | - | ------- | 
|                                      |  | December 31 |        
|                                      |  |             |        
|                                      |  | 2006        |         | 2005 |  
|                                      |  |             |         |      |  
|U.S. Treasuries                       |  | $           | 1,001   |      | $ | 1,513   | 
|U.S. Government Agencies              |  |             | 63,748  |      |   | 61,843  | 
|State and Municipal                   |  |             | 105,928 |      |   | 108,310 | 
|Collateralized mortgage
  obligations |  |             | 93,282  |      |   | 76,476  | 
|Other securities                      |  |             | 3,957   |      |   | 3,344   | 
|                                      |  |             |         |      |   |         | 
|Total                                 |  | $           | 267,916 |      | $ | 251,486 | 
|                                      |  |             |         |      |   |         | 

Total
investment securities at December 31, 2006 were $267.9 million, an increase of
$16.4 million (or 6.5%) from the December 31, 2005 total of $251.5 million. The
composition of the portfolio changed in 2006 as the amount invested in
collateralized mortgage obligations (CMOs) increased by $16.8 million and now
represents 34.8% of the portfolio at December 31, 2006 compared to 30.4% at
December 31, 2005. CMOs offer the Corporation a predictable and stable cash
flow to meet liquidity needs, while also offering an attractive rate. The
amount the Corporation had invested in U.S. Government Agencies increased by a
total of just $1.9 million. By contrast, investments in State and Municipal
obligations and U.S. Treasuries decreased by $2.4 million and $512,000,
respectively. The yield on average taxable investment securities improved to
4.12% in 2006 from 3.50% in 2005, while the taxable-equivalent yield on
tax-exempt securities increased to 6.96% in 2006 from 6.73% in 2005.

Total
investment securities increased by $62.7 million during 2005 to $251.5 million
at December 31, 2005. Investments increased by approximately $82.8 million as a
result of the Somonauk acquisition. Total investment balances were $275.5
million as of August 31, 2005. As loan demand continued to be strong throughout
the remaining four months of 2005, deposit pricing increased dramatically. Many
investments that matured over this time period were used to meet liquidity
demands rather than being re-invested. Additionally, some securities were sold
during the fourth quarter to better position the portfolio. The yield on
taxable investment securities improved from 3.04% in 2004, to 3.50% in 2005,
while the taxable-equivalent yield on tax-exempt securities decreased to 6.73%
in 2005 from 6.79% in 2004.

Deposits. Total deposits increased in 2006
by approximately $83.3 million, a 10.4% increase over 2005. Time deposits
increased by $63.1 million, a 17.4% increase over the prior year, largely due
to customers continuing their prior year trend of investing in term accounts
rather than liquid accounts. Interest-bearing demand accounts increased $9.3
million, or 4.2%, over 2005. Non-interest bearing demand accounts showed an
increase of $4.2 million. Regular savings accounts represented an increase of
approximately $6.8 million, which is an increase of 6.2% over prior year. The
increases in savings accounts results were primarily due to an increase in our
passbook IRA portfolio as a result of further developing customer relationships
and customers investing their retirement funds in secure investments. The
average rate for overall deposits increased .9% in 2006, primarily as a result
of lower rate certificates maturing and repricing. Also, liquid account pricing
stayed relatively flat, with the exception of the portfolio of $91.5 million in
the High Yield Money Market investments being offered at slightly higher rates.
These depositor trends are a continuation of customers moving to FDIC-insured
investments over the last several years, as well as customer and deposit growth
in all markets served by the subsidiary bank, including new offices opened in
Plano (October, 2005) and Aurora (May, 2006).

Over
the last three years, the subsidiary bank has seen overall deposits increase
64%. The increase in consumer deposits reflects our continued focus on
investing in offices in high-growth areas, and continued focus of officers
calling on customers and potential customers through our officer call program
to develop deposit relationships. This growth also reflects the well-trained
staff that looks to assist customers by identifying needs and providing sound
solutions. There continues to be considerable interest in the alternative
delivery mechanisms, such as ATMs, Internet Banking with Bill Payment and
Telebanker as a convenient means for customers to better manage their money,
maximize return, and have peace of mind by dealing safely and securely with
only one financial institution. Due to the diversity within our various market
areas, such delivery mechanisms will continue to position us well for the
future.

39

---



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

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

|                            |  |                                   |         |      |      |         |  |      |         |         |      |      |  |   |         |  |      |   | 
|--------------------------- |  | --------------------------------- | ------- | ---- | ---- | ------- |  | ---- | ------- | ------- | ---- | ---- |  | - | ------- |  | ---- | - | 
|                            |  | For the
  Years Ended December 31 |        
|                            |  |                                   |        
|                            |  | 2006                              |         | 2005 |      | 2004    | 
|                            |  | Balance                           |         | Rate |      | Balance |  | Rate |         | Balance |      | Rate | 
|                            |  |                                   |         |      |      |         |  |      |         |         |      |      | 
|Non-interest bearing demand |  | $                                 | 107,834 |      | n/a  |         |  | $    | 103,622 |         | n/a  |      |  | $ | 75,015  |  | n/a  |   | 
|Interest-bearing demand     |  |                                   | 231,953 |      | 2.25 | %       |  |      | 222,675 |         | 1.54 | %    |  |   | 191,271 |  | 1.10 | % | 
|Savings                     |  |                                   | 116,246 |      | 0.28 |         |  |      | 109,491 |         | 0.31 |      |  |   | 58,675  |  | 0.35 |   | 
|Time deposits               |  |                                   | 425,866 |      | 4.82 |         |  |      | 362,770 |         | 3.49 |      |  |   | 248,600 |  | 2.70 |   | 
|                            |  |                                   |         |      |      |         |  |      |         |         |      |      |  |   |         |  |      |   | 
|Total                       |  | $                                 | 881,899 |      | 2.96 | %       |  | $    | 798,558 |         | 2.06 | %    |  | $ | 573,561 |  | 1.57 | % | 
|                            |  |                                   |         |      |      |         |  |      |         |         |      |      |  |   |         |  |      |   | 

The following table
summarizes time deposits in amounts of $100 or more by time remaining until
maturity as of December 31, 2006. These time deposits are made by individuals,
corporations and public entities.

|                                       |  |   |         | 
|-------------------------------------- |  | - | ------- | 
|Three months or less                   |  | $ | 44,139  | 
|Over three months through
  six months |  |   | 32,832  | 
|Over six months through one
  year     |  |   | 46,633  | 
|Over one year                          |  |   | 16,696  | 
|                                       |  |   |         | 
|Total                                  |  | $ | 140,300 | 
|                                       |  |   |         | 

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

The
ratio of temporary investments and other short-term available funds (those
investments maturing within one year plus twelve months projected payments on
mortgage-backed securities and collateralized mortgage obligations, and cash
and due from banks balances) to volatile liabilities (50% of non-public entity
certificates of deposit over $100, repurchase agreements issued to public
entities, Treasury tax and loan deposits, short-term borrowings from banks, and
deposits of public entities) was 59.0% at December 31, 2006 and 38.9% at
December 31, 2005, respectively. Core deposits (demand deposits,
interest-bearing checking accounts, total savings, and certificates of deposit
less than $100) were 87.4 % of total deposits at December 31, 2006 and 88.2% of
total deposits at December 31, 2005. Money market accounts of approximately
$119.9 million at December 31, 2006 are classified by the Corporation as core
deposits.

In
2006, the Corporation experienced a net increase of $15.4 million in cash and
cash equivalents. Financing activities provided the Corporation with $81.1
million, accounted for by an increase in deposits of $83.3 million. Offsetting
this increase, investing activities, consisting of a net increase in loans and
a net increase in investments, used $67.9 million. Cash and cash equivalents of
$39.2 million at December 31, 2006, along with established lines of credit, are
deemed more than adequate to meet short-term liquidity needs.

In
2005, the Corporation experienced a net increase of $9.7 million in cash and
cash equivalents. Investing activities (consisting mostly of a net increase in
loans of $57.1 million and the net purchase of Somonauk FSB Bancorp, Inc. of
$43.6 million) used $87.2 million of the Corporations funds. Financing
activities, consisting of a net increase in deposits of $43.1 million, the
issuance of trust preferred securities of $25.0 million, the issuance of common
stock of $10.0 million, and a net increase in borrowings of $17.6 million
offset by treasury stock purchases of $3.2 million, and dividend payments of
$3.3 million, provided the Corporation with $90.3 million. Additionally,
operating activities provided the Corporation with $6.5 million.

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

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

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

40

---



The
following table shows the estimated changes to net interest income from the
base scenario as of December 31, 2006 and 2005:

|                          |  |                               |   |             |  |      |  |             |       |   |  |  |   |        |  |  |  |  |       |   | 
|------------------------- |  | ----------------------------- | - | ----------- |  | ---- |  | ----------- | ----- | - |  |  | - | ------ |  |  |  |  | ----- | - | 
|                          |  | Estimated Net Interest Income |  
|Change in
  Interest Rate |  | 2006                          |   | % of change |  | 2005 |  | %
of change |      
|                          |  |                               |   |             |  |      |  |             |      
|300 basis point rise      |  |                               | $ | 34,839      |  |      |  |             | 5.60  | % |  |  | $ | 35,382 |  |  |  |  | 2.39  | % | 
|200 basis point rise      |  |                               |   | 34,321      |  |      |  |             | 4.03  |   |  |  |   | 35,263 |  |  |  |  | 2.04  |   | 
|100 basis point rise      |  |                               |   | 33,717      |  |      |  |             | 2.20  |   |  |  |   | 34,996 |  |  |  |  | 1.27  |   | 
|Base scenario             |  |                               |   | 32,992      |  |      |  |             |      |   |  |  |   | 34,557 |  |  |  |  |      |   | 
|100 basis point decline   |  |                               |   | 32,142      |  |      |  |             | -2.58 |   |  |  |   | 34,044 |  |  |  |  | -1.48 |   | 
|200 basis point decline   |  |                               |   | 31,088      |  |      |  |             | -5.77 |   |  |  |   | 33,398 |  |  |  |  | -3.35 |   | 
|300 basis point decline   |  |                               |   | 29,919      |  |      |  |             | -9.31 |   |  |  |   | 32,623 |  |  |  |  | -5.60 |   | 

Contractual
Obligations and Commercial Commitments.As disclosed in the
Notes to Consolidated Financial Statements, the Corporation has certain
obligations and commitments to make future payments under contracts. At
December 31, 2006, the aggregate contracted obligations (excluding bank
deposits) and commercial commitments are as fallows:

---

|                                                            |  |       |         |                     |   |           |  |           |        |              |   |       |  |   |        |    
|----------------------------------------------------------- |  | ----- | ------- | ------------------- | - | --------- |  | --------- | ------ | ------------ | - | ----- |  | - | ------ | ---
|                                                            |  | Total |         | Less Than 
  1 Year |   | 1-3 Years |  | 3-5 Years |        | Over 5 Years |  
|                                                            |  |       |         |                     |   |           |  |           |        |              |  
|Contractual
  Obligations:                                  |  |       |         |                     |   |           |  |           |        |              |   |       |  |   |        |    
|Time Deposits                                               |  | $     | 425,866 |                     | $ | 352,591   |  | $         | 68,376 |              | $ | 4,813 |  | $ | 86     |    
|Customer
  repurchase arrangements                          |  |       | 31,344  |                     |   | 31,344    |  |           | -0-    |              |   | -0-   |  | $ | -0-    |    
|Interest-bearing
  demand notes issued to the U.S. Treasury |  |       | 2,333   |                     |   | 2,333     |  |           | -0-    |              |   | -0-   |  |   | -0-    |    
|Advances from
  the Federal Home Loan Bank                  |  |       | 6,970   |                     |   | -0-       |  |           | 6,970  |              |   | -0-   |  |   | -0-    |    
|Trust preferred
  securities                                |  |       | 25,000  |                     |   | -0-       |  |           | -0-    |              |   | -0-   |  |   | 25,000 |    
|Note payable                                                |  |       | 8,500   |                     |   | 8,500     |  |           | -0-    |              |   | -0-   |  |   | -0-    |    
|Post-retirement
  health insurance                          |  |       | 854     |                     |   | 76        |  |           | 159    |              |   | 178   |  |   | 441    | (1)
|                                                            |  |       |         |                     |   |           |  |           |        |              |   |       |  |   |        |    
|Total                                                       |  | $     | 500,867 |                     | $ | 394,844   |  | $         | 75,505 |              | $ | 4,991 |  | $ | 25,527 |    
|                                                            |  |       |         |                     |   |           |  |           |        |              |   |       |  |   |        |    
|                                                            |  |       |         |                     |   |           |  |           |        |              |   |       |  |   |        |    
|Off-Balance
  Sheet Arrangements:                           |  |       |         |                     |   |           |  |           |        |              |   |       |  |   |        |    
|Commitments to
  lend                                       |  | $     | 138,806 |                     | $ | 138,806   |  | $         | -0-    |              | $ | -0-   |  | $ | -0-    |    
|Standby letters
  of credit                                 |  |       | 9,208   |                     |   | 9,208     |  |           | -0-    |              |   | -0-   |  |   | -0-    |    
|                                                            |  |       |         |                     |   |           |  |           |        |              |   |       |  |   |        |    
|Total                                                       |  | $     | 148,014 |                     | $ | 148,014   |  | $         | -0-    |              | $ | -0-   |  | $ | -0-    |    
|                                                            |  |       |         |                     |   |           |  |           |        |              |   |       |  |   |        |    

(1) For the years 2012
through 2016

The
following table sets forth the Corporations interest rate repricing gaps for
selected maturity periods at December 31, 2006 (dollars in thousands):

|                                                            |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |           |   |   |         |  |   |         | 
|----------------------------------------------------------- |  | --------------------- | -------- | -------- | - | -------- | - | -------- | -------- | ---------- | - | ------- | - | ---------- | --------- | - | - | ------- |  | - | ------- | 
|                                                            |  | Rate Sensitive Within |         
|                                                            |  |                       |         
|                                                            |  | 1 year                |          | 1-2 yrs. |   | 2-3 yrs. |   | 3-5 yrs. |          | Thereafter |   | Total   |   | Fair Value |          
|                                                            |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |          
|Interest-earning
  assets:                                  |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |           |   |   |         |  |   |         | 
|Interest-bearing
  deposits                                 |  | $                     | 103      |          | $ | -0-      |   | $        | -0-      |            | $ | -0-     |   | $          | -0-       |   | $ | 103     |  | $ | 103     | 
|Taxable
  investment securities                             |  |                       | 55,077   |          |   | 41,552   |   |          | 22,757   |            |   | 19,810  |   |            | 22,792    |   |   | 161,988 |  |   | 161,438 | 
|Tax-exempt
  investment securities                          |  |                       | 3,984    |          |   | 2,126    |   |          | 2,252    |            |   | 45,368  |   |            | 52,198    |   |   | 105,928 |  |   | 106,595 | 
|Federal Funds
  sold                                        |  |                       | 5,200    |          |   | -0-      |   |          | -0-      |            |   | -0-     |   |            | -0-       |   |   | 5,200   |  |   | 5,200   | 
|Loans                                                       |  |                       | 369,170  |          |   | 71,586   |   |          | 68,156   |            |   | 100,329 |   |            | 21,690    |   |   | 630,931 |  |   | 628,725 | 
|                                                            |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |           |   |   |         |  |   |         | 
|Total rate
  sensitive assets (RSA)                       |  | $                     | 433,534  |          | $ | 115,264  |   | $        | 93,165   |            | $ | 165,507 |   | $          | 96,680    |   | $ | 904,150 |  | $ | 902,062 | 
|                                                            |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |           |   |   |         |  |   |         | 
|                                                            |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |           |   |   |         |  |   |         | 
|Interest-bearing
  liabilities:                             |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |           |   |   |         |  |   |         | 
|Interest-bearing
  demand deposits                          |  | $                     | 231,953  |          | $ | -0-      |   | $        | -0-      |            | $ | -0-     |   | $          | -0-       |   | $ | 231,953 |  | $ | 231,953 | 
|Savings deposits                                            |  |                       | 116,246  |          |   | -0-      |   |          | -0-      |            |   | -0-     |   |            | -0-       |   |   | 116,246 |  |   | 116,246 | 
|Time deposits                                               |  |                       | 352,591  |          |   | 51,049   |   |          | 17,327   |            |   | 4,813   |   |            | 86        |   |   | 425,866 |  |   | 429,993 | 
|Customer
  repurchase agreements                            |  |                       | 31,344   |          |   | -0-      |   |          | -0-      |            |   | -0-     |   |            | -0-       |   |   | 31,344  |  |   | 31,344  | 
|Advances from
  the Federal Home Loan Bank                  |  |                       | -0-      |          |   | 6,000    |   |          | 970      |            |   | -0-     |   |            | -0-       |   |   | 6,970   |  |   | 7,003   | 
|Interest-bearing
  demand notes issued to the U.S. Treasury |  |                       | 2,333    |          |   | -0-      |   |          | -0-      |            |   | -0-     |   |            | -0-       |   |   | 2,333   |  |   | 2,333   | 
|Trust preferred
  securities                                |  |                       | -0-      |          |   | -0-      |   |          | -0-      |            |   | 25,000  |   |            | -0-       |   |   | 25,000  |  |   | 22,302  | 
|Note payable                                                |  |                       | 8,500    |          |   | -0-      |   |          | -0-      |            |   | -0-     |   |            | -0-       |   |   | 8,500   |  |   | 8,500   | 
|                                                            |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |           |   |   |         |  |   |         | 
|Total rate
  sensitive liabilities (RSL)                  |  | $                     | 742,967  |          | $ | 57,049   |   | $        | 18,297   |            | $ | 29,813  |   | $          | 86        |   | $ | 848,212 |  | $ | 849,674 | 
|                                                            |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |           |   |   |         |  |   |         | 
|                                                            |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |           |   |   |         |  |   |         | 
|Interest rate
  sensitivity GAP (RSA less RSL)              |  | $                     | (309,433 | )        | $ | 58,215   |   | $        | 74,868   |            | $ | 135,694 |   | $          | 96,594    |   |   |         |  |   |         | 
|Cumulative GAP                                              |  | $                     | (309,433 | )        | $ | (251,218 | ) | $        | (176,350 | )          | $ | (40,656 | ) | $          | 55,938    |   |   |         |  |   |         | 
|RSA/RSL                                                     |  |                       | 58.35    | %        |   | 202.04   | % |          | 509.18   | %          |   | 555.15  | % |            | 112418.60 | % |   |         |  |   |         | 
|Cumulative
  RSA/RSL                                        |  |                       | 58.35    | %        |   | 68.60    | % |          | 78.45    | %          |   | 95.21   | % |            | 106.59    | % |   |         |  |   |         | 

41

---



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

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

Management
of the Corporation considers $56.0 million (one-half) of the interest-bearing
checking account bafances and $60.0 million (one-half) of the money market
account balances (both being the components of interest-bearing demand
deposits) and all savings deposits as core, or non-rate sensitive deposits,
primarily since interest-bearing demand and savings deposits historically have
not been rate sensitive. As a general rule, the subsidiary banks policy is to
maintain RSA as a percent of RSL within a range of +70% to +120% within a
six-month time period.

At
December 31, 2006, savings deposits totaled approximately $116.2 million. If
that amount, the $56.0 million of interest-bearing checking account balances
and $60.0 million in money market account balances reflected in the less than
one year time frame are adjusted to exclude these amounts (consistent with the
consideration mentioned in the paragraph above), rate sensitive liabilities
would be approximately $508.8 million reducing the negative gap to
approximately $77.2 million. RSA as a percent of RSL would be 84.9%.

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

Investment
Maturities and Yields. The following table sets forth the contractual
maturities of the amortized cost of investment securities at December 31, 2006,
and the taxable equivalent yields of such securities:

|                                    |  |                    |        |                                    |      |                     |  |                           |        |        |      |       |  |        |         |       |      |   |  |   |       |  |      |   | 
|----------------------------------- |  | ------------------ | ------ | ---------------------------------- | ---- | ------------------- |  | ------------------------- | ------ | ------ | ---- | ----- |  | ------ | ------- | ----- | ---- | - |  | - | ----- |  | ---- | - | 
|                                    |  | Due withinone year |        | Due after one butwithin five years |      | Due afterfive years |  | Other(no stated maturity) |       
|                                    |  |                    |        |                                    |      |                     |  |                           |       
|                                    |  | Amount             |        | Yield                              |      | Amount              |  | Yield                     |        | Amount |      | Yield |  | Amount |         | Yield |     
|                                    |  |                    |        |                                    |      |                     |  |                           |        |        |      |       |  |        |         |       |     
|U.S. Government Treasuries          |  | $                  | 1,003  |                                    | 3.93 | %                   |  | $                         | -0-    |        |     |       |  | $      | -0-     |       |     |   |  | $ | -0-   |  |     |   | 
|U.S. Government Agencies            |  |                    | 29,427 |                                    | 4.24 |                     |  |                           | 31,721 |        | 4.03 | %     |  |        | 3,347   |       | 5.01 | % |  |   | -0-   |  |     |   | 
|State and Municipal                 |  |                    | 3,980  |                                    | 4.83 |                     |  |                           | 9,106  |        | 5.56 |       |  |        | 92,347  |       | 6.67 |   |  |   | -0-   |  |     |   | 
|Collateralized mortgage obligations |  |                    | -0-    |                                    |     |                     |  |                           | 2,736  |        | 3.44 |       |  |        | 90,845  |       | 4.58 |   |  |   | -0-   |  |     |   | 
|Other (no stated maturity)          |  |                    | -0-    |                                    |     |                     |  |                           | -0-    |        |     |       |  |        | -0-     |       |     |   |  |   | 3,957 |  | 4.26 | % | 
|                                    |  |                    |        |                                    |      |                     |  |                           |        |        |      |       |  |        |         |       |      |   |  |   |       |  |      |   | 
|Total                               |  | $                  | 34,410 |                                    | 4.30 | %                   |  | $                         | 43,563 |        | 4.31 | %     |  | $      | 186,539 |       | 5.62 | % |  | $ | 3,957 |  | 4.26 | % | 
|                                    |  |                    |        |                                    |      |                     |  |                           |        |        |      |       |  |        |         |       |      |   |  |   |       |  |      |   | 

Loan Maturities. The following table sets
forth scheduled loan repayments on agricultural, commercial and real estate
construction loans at December 31, 2006:

|                         |  |                       |         |  |                                       |   |                        |  |             |     |       |   |       |  |   |         | 
|------------------------ |  | --------------------- | ------- |  | ------------------------------------- | - | ---------------------- |  | ----------- | --- | ----- | - | ----- |  | - | ------- | 
|                         |  | Due within
  one year |         |  | Due after one but
  within five years |   | Due after
  five years |  | Non-accrual |     | Total |  
|                         |  |                       |         |  |                                       |   |                        |  |             |     |       |  
|Agricultural             |  | $                     | 76,092  |  |                                       | $ | 7,479                  |  | $           | 39  |       | $ | -0-   |  | $ | 83,610  | 
|Commercial               |  |                       | 108,367 |  |                                       |   | 23,262                 |  |             | 650 |       |   | 2,123 |  |   | 134,402 | 
|Real Estate-Construction |  |                       | 41,203  |  |                                       |   | 1,544                  |  |             | 244 |       |   | -0-   |  |   | 42,991  | 
|                         |  |                       |         |  |                                       |   |                        |  |             |     |       |   |       |  |   |         | 
|Total                    |  | $                     | 225,662 |  |                                       | $ | 32,285                 |  | $           | 933 |       | $ | 2,123 |  | $ | 261,003 | 
|                         |  |                       |         |  |                                       |   |                        |  |             |     |       |   |       |  |   |         | 

Of
the loans shown above, the following table sets forth loans due after one year
which have predetermined (fixed) interest rates or adjustable (variable)
interest rates at December 31, 2006:

|                   |  |            |        |               |   |       |  |   |        | 
|------------------ |  | ---------- | ------ | ------------- | - | ----- |  | - | ------ | 
|                   |  | Fixed rate |        | Variable rate |   | Total | 
|                   |  |            |        |               |   |       | 
|Due after one year |  | $          | 23,821 |               | $ | 9,397 |  | $ | 33,218 | 

42

---



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

|                       |  |                    |       |                                                            |       |                    |  |                                                            |       |                    |       |                                                            |  |                    |       |                                                            |       |                    |  |                                                            |       |  |       |   |  |   |       |  |       |   | 
|---------------------- |  | ------------------ | ----- | ---------------------------------------------------------- | ----- | ------------------ |  | ---------------------------------------------------------- | ----- | ------------------ | ----- | ---------------------------------------------------------- |  | ------------------ | ----- | ---------------------------------------------------------- | ----- | ------------------ |  | ---------------------------------------------------------- | ----- |  | ----- | - |  | - | ----- |  | ----- | - | 
|                       |  | December 31        |      
|                       |  |                    |      
|                       |  | 2006               |       | 2005                                                       |       | 2004               |  | 2003                                                       |       | 2002               |      
|                       |  | Allowance
  amount |       | Percent
  of loans
  in each
  category
  to total
  loans |       | Allowance
  amount |  | Percent
  of loans
  in each
  category
  to total
  loans |       | Allowance
  amount |       | Percent
  of loans
  in each
  category
  to total
  loans |  | Allowance
  amount |       | Percent
  of loans
  in each
  category
  to total
  loans |       | Allowance
  amount |  | Percent
  of loans
  in each
  category
  to total
  loans |      
|                       |  |                    |       |                                                            |       |                    |  |                                                            |       |                    |       |                                                            |  |                    |       |                                                            |       |                    |  |                                                            |      
|Agricultural           |  | $                  | 830   |                                                            | 13.3  | %                  |  | $                                                          | 1,011 |                    | 12.7  | %                                                          |  | $                  | 656   |                                                            | 10.3  | %                  |  | $                                                          | 687   |  | 11.2  | % |  | $ | 706   |  | 10.8  | % | 
|Commercial             |  |                    | 1,022 |                                                            | 21.4  |                    |  |                                                            | 890   |                    | 19.7  |                                                            |  |                    | 770   |                                                            | 23.5  |                    |  |                                                            | 692   |  | 21.1  |   |  |   | 972   |  | 20.5  |   | 
|Real
  estate-mortgage |  |                    | 490   |                                                            | 56.4  |                    |  |                                                            | 420   |                    | 59.3  |                                                            |  |                    | 193   |                                                            | 58.2  |                    |  |                                                            | 178   |  | 58.9  |   |  |   | 222   |  | 58.7  |   | 
|Installment            |  |                    | 540   |                                                            | 8.9   |                    |  |                                                            | 484   |                    | 8.3   |                                                            |  |                    | 359   |                                                            | 8.0   |                    |  |                                                            | 466   |  | 8.8   |   |  |   | 549   |  | 10.0  |   | 
|Unallocated            |  |                    | 171   |                                                            | n/a   |                    |  |                                                            | 304   |                    | n/a   |                                                            |  |                    | 546   |                                                            | n/a   |                    |  |                                                            | 227   |  | n/a   |   |  |   | 211   |  | n/a   |   | 
|                       |  |                    |       |                                                            |       |                    |  |                                                            |       |                    |       |                                                            |  |                    |       |                                                            |       |                    |  |                                                            |       |  |       |   |  |   |       |  |       |   | 
|Total                  |  | $                  | 3,053 |                                                            | 100.0 | %                  |  | $                                                          | 3,109 |                    | 100.0 | %                                                          |  | $                  | 2,524 |                                                            | 100.0 | %                  |  | $                                                          | 2,250 |  | 100.0 | % |  | $ | 2,660 |  | 100.0 | % | 
|                       |  |                    |       |                                                            |       |                    |  |                                                            |       |                    |       |                                                            |  |                    |       |                                                            |       |                    |  |                                                            |       |  |       |   |  |   |       |  |       |   | 

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

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

|                                                      |  |                              |        |         |   |         |  |         |        |  |   |        | 
|----------------------------------------------------- |  | ---------------------------- | ------ | ------- | - | ------- |  | ------- | ------ |  | - | ------ | 
|                                                      |  | Year Ended December 31, 2006 |       
|                                                      |  |                              |       
|                                                      |  | 1st Qtr                      |        | 2nd Qtr |   | 3rd Qtr |  | 4th Qtr |       
|Interest income                                       |  | $                            | 12,313 |         | $ | 12,839  |  | $       | 13,746 |  | $ | 14,628 | 
|Interest expense                                      |  |                              | 5,784  |         |   | 6,385   |  |         | 7,358  |  |   | 8,103  | 
|                                                      |  |                              |        |         |   |         |  |         |        |  |   |        | 
|Net interest
  income                                 |  |                              | 6,529  |         |   | 6,454   |  |         | 6,388  |  |   | 6,525  | 
|Provision for
  loan losses                           |  |                              | 10     |         |   | 85      |  |         | 80     |  |   | 110    | 
|                                                      |  |                              |        |         |   |         |  |         |        |  |   |        | 
|Net interest
  income after provision for loan losses |  |                              | 6,519  |         |   | 6,369   |  |         | 6,308  |  |   | 6,415  | 
|Non-interest
  income                                 |  |                              | 2,499  |         |   | 2,640   |  |         | 2,564  |  |   | 2,542  | 
|Non-interest
  expense                                |  |                              | 7,082  |         |   | 7,146   |  |         | 6,966  |  |   | 7,141  | 
|                                                      |  |                              |        |         |   |         |  |         |        |  |   |        | 
|Income before
  income taxes                          |  |                              | 1,936  |         |   | 1,863   |  |         | 1,906  |  |   | 1,816  | 
|Income tax
  expense                                  |  |                              | 286    |         |   | 282     |  |         | 299    |  |   | 166    | 
|                                                      |  |                              |        |         |   |         |  |         |        |  |   |        | 
|Net income                                            |  | $                            | 1,650  |         | $ | 1,581   |  | $       | 1,607  |  | $ | 1,650  | 
|                                                      |  |                              |        |         |   |         |  |         |        |  |   |        | 
|Earnings per
  share:                                 |  |                              |        |         |   |         |  |         |        |  |   |        | 
|Basic                                                 |  | $                            | 0.49   |         | $ | 0.47    |  | $       | 0.48   |  | $ | 0.49   | 
|Diluted                                               |  | $                            | 0.49   |         | $ | 0.46    |  | $       | 0.47   |  | $ | 0.49   | 
|Cash dividends
  declared per share                   |  | $                            | 0.24   |         | $ | 0.25    |  | $       | 0.25   |  | $ | 0.31   | 

|                                                      |  |                              |       |         |   |         |  |         |        |  |   |        | 
|----------------------------------------------------- |  | ---------------------------- | ----- | ------- | - | ------- |  | ------- | ------ |  | - | ------ | 
|                                                      |  | Year Ended December 31, 2005 |      
|                                                      |  |                              |      
|                                                      |  | 1st Qtr                      |       | 2nd Qtr |   | 3rd Qtr |  | 4th Qtr |       
|Interest income                                       |  | $                            | 7,998 |         | $ | 8,503   |  | $       | 11,065 |  | $ | 12,406 | 
|Interest expense                                      |  |                              | 2,623 |         |   | 3,008   |  |         | 4,539  |  |   | 5,556  | 
|                                                      |  |                              |       |         |   |         |  |         |        |  |   |        | 
|Net interest
  income                                 |  |                              | 5,375 |         |   | 5,495   |  |         | 6,526  |  |   | 6,850  | 
|Provision for
  loan losses                           |  |                              | -0-   |         |   | -0-     |  |         | -0-    |  |   | -0-    | 
|                                                      |  |                              |       |         |   |         |  |         |        |  |   |        | 
|Net interest
  income after provision for loan losses |  |                              | 5,375 |         |   | 5,495   |  |         | 6,526  |  |   | 6,850  | 
|Non-interest
  income                                 |  |                              | 1,875 |         |   | 2,037   |  |         | 2,295  |  |   | 2,634  | 
|Non-interest
  expense                                |  |                              | 4,997 |         |   | 5,299   |  |         | 6,202  |  |   | 6,756  | 
|                                                      |  |                              |       |         |   |         |  |         |        |  |   |        | 
|Income before
  income taxes                          |  |                              | 2,253 |         |   | 2,233   |  |         | 2,619  |  |   | 2,728  | 
|Income tax
  expense                                  |  |                              | 545   |         |   | 540     |  |         | 580    |  |   | 593    | 
|                                                      |  |                              |       |         |   |         |  |         |        |  |   |        | 
|Net income                                            |  | $                            | 1,708 |         | $ | 1,693   |  | $       | 2,039  |  | $ | 2,135  | 
|                                                      |  |                              |       |         |   |         |  |         |        |  |   |        | 
|Earnings per
  share:                                 |  |                              |       |         |   |         |  |         |        |  |   |        | 
|Basic                                                 |  | $                            | 0.56  |         | $ | 0.56    |  | $       | 0.63   |  | $ | 0.64   | 
|Diluted                                               |  | $                            | 0.55  |         | $ | 0.55    |  | $       | 0.62   |  | $ | 0.63   | 

43

---



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

|                                                                                     |  |                                   |           |      |   |         |   |      |         |      |   |         |   |   |         |  
|------------------------------------------------------------------------------------ |  | --------------------------------- | --------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                     |  | For the Years Ended
  December 31 |          
|                                                                                     |  |                                   |          
|                                                                                     |  | 2006                              |           | 2005 |   | 2004    |   | 2003 |         | 2002 |  
|                                                                                     |  |                                   |           |      |   |         |   |      |         |      |  
|Summary of Income                                                                    |  |                                   |           |      |   |         |   |      |         |      |   |         |   |   |         |  
|Interest income                                                                      |  | $                                 | 53,526    |      | $ | 39,971  |   | $    | 29,719  |      | $ | 29,394  |   | $ | 32,669  |  
|Interest expense                                                                     |  |                                   | 27,630    |      |   | 15,726  |   |      | 9,070   |      |   | 10,511  |   |   | 13,559  |  
|Net interest income                                                                  |  |                                   | 25,896    |      |   | 24,245  |   |      | 20,649  |      |   | 18,883  |   |   | 19,110  |  
|Provision for loan losses                                                            |  |                                   | 285       |      |   | -0-     |   |      | 375     |      |   | 460     |   |   | 643     |  
|Non-interest income                                                                  |  |                                   | 10,245    |      |   | 8,840   |   |      | 8,315   |      |   | 9,408   |   |   | 7,563   |  
|Non-interest expense                                                                 |  |                                   | 28,335    |      |   | 23,253  |   |      | 19,503  |      |   | 18,707  |   |   | 17,692  |  
|Income before income taxes                                                           |  |                                   | 7,521     |      |   | 9,832   |   |      | 9,086   |      |   | 9,124   |   |   | 8,338   |  
|Income tax expense                                                                   |  |                                   | 1,033     |      |   | 2,258   |   |      | 2,214   |      |   | 2,521   |   |   | 2,204   |  
|Net income                                                                           |  |                                   | 6,488     |      |   | 7,574   |   |      | 6,872   |      |   | 6,603   |   |   | 6,134   |  
|                                                                                    
|Per Share Data                                                                       |  |                                   |           |      |   |         |   |      |         |      |   |         |   |   |         |  
|Basic earnings per share                                                             |  | $                                 | 1.93      |      | $ | 2.39    |   | $    | 2.22    |      | $ | 2.08    |   | $ | 1.87    |  
|Diluted earnings per share                                                           |  |                                   | 1.91      |      |   | 2.37    |   |      | 2.21    |      |   | 2.05    |   |   | 1.86    |  
|Book value (at end of period)                                                        |  |                                   | 19.50     |      |   | 18.87   |   |      | 17.13   |      |   | 16.29   |   |   | 15.79   |  
|Cash dividends declared                                                              |  |                                   | 1.05      |      |   | 1.03    |   |      | 0.96    |      |   | 0.89    |   |   | 0.85    |  
|Dividend payout ratio                                                                |  |                                   | 54.6      | %    |   | 44.0    | % |      | 43.2    | %    |   | 42.8    | % |   | 45.3    | %
|                                                                                    
|Selected Balances (at end of year)                                                   |  |                                   |           |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total assets                                                                         |  | $                                 | 1,031,959 |      | $ | 945,263 |   | $    | 655,738 |      | $ | 609,737 |   | $ | 587,375 |  
|Earning assets                                                                       |  |                                   | 904,504   |      |   | 852,286 |   |      | 616,089 |      |   | 571,965 |   |   | 542,450 |  
|Investments                                                                          |  |                                   | 267,916   |      |   | 251,486 |   |      | 188,809 |      |   | 169,892 |   |   | 169,318 |  
|Gross loans                                                                          |  |                                   | 633,984   |      |   | 584,311 |   |      | 411,345 |      |   | 385,376 |   |   | 364,120 |  
|Allowance for loan losses                                                            |  |                                   | 3,053     |      |   | 3,109   |   |      | 2,524   |      |   | 2,250   |   |   | 2,660   |  
|Deposits                                                                             |  |                                   | 881,899   |      |   | 798,558 |   |      | 573,561 |      |   | 537,827 |   |   | 511,267 |  
|Borrowings                                                                           |  |                                   | 74,147    |      |   | 72,575  |   |      | 25,535  |      |   | 16,161  |   |   | 19,491  |  
|Stockholders equity                                                                 |  |                                   | 65,355    |      |   | 63,144  |   |      | 52,369  |      |   | 50,875  |   |   | 51,074  |  
|                                                                                    
|Selected Financial Ratios                                                            |  |                                   |           |      |   |         |   |      |         |      |   |         |   |   |         |  
|Net income to average stockholders equity                                           |  |                                   | 10.07     | %    |   | 13.43   | % |      | 13.46   | %    |   | 13.01   | % |   | 12.37   | %
|Net income to average assets                                                         |  |                                   | 0.68      |      |   | 0.97    |   |      | 1.11    |      |   | 1.10    |   |   | 1.08    |  
|Average stockholders equity to average assets                                       |  |                                   | 6.70      |      |   | 7.21    |   |      | 8.24    |      |   | 8.49    |   |   | 8.75    |  
|Average earning assets to average assets                                             |  |                                   | 88.73     |      |   | 90.21   |   |      | 91.37   |      |   | 91.56   |   |   | 92.62   |  
|Non-performing loans to total loans at end of year (net of
  unearned interest)      |  |                                   | 0.62      |      |   | 0.66    |   |      | 0.08    |      |   | 0.25    |   |   | 1.07    |  
|Tier 1 capital to average adjusted assets                                            |  |                                   | 6.67      |      |   | 7.83    |   |      | 7.88    |      |   | 7.70    |   |   | 7.80    |  
|Risk-based capital to risk-adjusted assets                                           |  |                                   | 9.18      |      |   | 9.76    |   |      | 11.49   |      |   | 11.22   |   |   | 11.74   |  
|Net loans charged-off to average loans                                               |  |                                   | 0.06      |      |   | 0.03    |   |      | 0.03    |      |   | 0.24    |   |   | 0.08    |  
|Allowance for loan losses to total loans at end of year
  (net of unearned interest) |  |                                   | 0.49      |      |   | 0.53    |   |      | 0.62    |      |   | 0.59    |   |   | 0.74    |  
|Average interest-bearing deposits to average deposits                                |  |                                   | 88.27     |      |   | 88.29   |   |      | 88.10   |      |   | 88.96   |   |   | 89.51   |  
|Average non-interest-bearing deposits to average deposits                            |  |                                   | 11.73     |      |   | 11.71   |   |      | 11.90   |      |   | 11.04   |   |   | 10.49   |  

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44

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