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 sheets of
Princeton National Bancorp, Inc. and subsidiary (the Corporation) as of
December 31, 2008 and 2007, and the related consolidated statements of income,
stockholders equity and cash flows for each of the years in the two-year
period ended December 31, 2008. The Corporations management is responsible for
these financial statements. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Princeton
National Bancorp, Inc. as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2008, in conformity with accounting principles generally accepted
in the United States of America.

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), Princeton National Bancorp,
Inc.s internal control over financial reporting as of December 31, 2008, based
on criteria established in Internal
Control-Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 9,
2009 expressed an unqualified opinion on the effectiveness of the Corporations
internal control over financial reporting.

As discussed in Note 16, in 2008 the Company changed its method of
accounting for fair value measurements in accordance with Statement of
Financial Accounting Standards No. 157.

As discussed in Note 15, in 2008 the Company changed its method of
accounting for split-dollar life insurance policies in accordance with Emerging
Issues Task Force Issue No. 06-4.

|                  
|------------------
|-s- BKD, LLP      
|                  
|Decatur,
 Illinois
|March 9,
 2009    

9

---

Consolidated Balance Sheets(dollars in thousands except share data)

|                                                                                                                |  |             |           |      |   |           |  
|--------------------------------------------------------------------------------------------------------------- |  | ----------- | --------- | ---- | - | --------- | -
|                                                                                                                |  | December 31 |          
|                                                                                                                |  | 2008        |           | 2007 |  
|                                                                                                                |  |             |           |      |  
|ASSETS                                                                                                          |  |             |           |      |   |           |  
|Cash and due from banks                                                                                         |  | $           | 20,163    |      | $ | 25,801    |  
|Interest-bearing deposits with financial institutions                                                           |  |             | 98        |      |   | 1,803     |  
|                                                                                                                |  |             |           |      |   |           |  
|Total cash and cash equivalents                                                                                 |  |             | 20,261    |      |   | 27,604    |  
|                                                                                                               
|Loans held-for-sale, at lower of cost or market                                                                 |  |             | 2,155     |      |   | 928       |  
|                                                                                                               
|Investment securities:                                                                                          |  |             |           |      |   |           |  
|Available-for-sale, at fair value                                                                               |  |             | 236,883   |      |   | 213,997   |  
|Held-to-maturity, at amortized cost (fair value of $14,461 and
 $14,799)                                        |  |             | 14,232    |      |   | 14,578    |  
|                                                                                                                |  |             |           |      |   |           |  
|Total investment securities                                                                                     |  |             | 251,115   |      |   | 228,575   |  
|                                                                                                               
|Loans:                                                                                                          |  |             |           |      |   |           |  
|Loans, net of unearned interest                                                                                 |  |             | 790,837   |      |   | 722,647   |  
|Allowance for loan losses                                                                                       |  |             | (5,064    | )    |   | (3,248    | )
|                                                                                                                |  |             |           |      |   |           |  
|Net loans                                                                                                       |  |             | 785,773   |      |   | 719,399   |  
|                                                                                                               
|Premises and equipment, net of accumulated depreciation                                                         |  |             | 29,297    |      |   | 30,801    |  
|Land held for sale, at lower of cost or market                                                                  |  |             | 2,354     |      |   | 1,344     |  
|Federal Reserve and Federal Home Loan Bank stock                                                                |  |             | 4,211     |      |   | 4,098     |  
|Bank-owned life insurance                                                                                       |  |             | 21,588    |      |   | 22,461    |  
|Accrued interest receivable                                                                                     |  |             | 9,693     |      |   | 10,876    |  
|Other real estate owned                                                                                         |  |             | 2,487     |      |   | 833       |  
|Goodwill                                                                                                        |  |             | 24,521    |      |   | 24,521    |  
|Intangible assets, net of accumulated amortization                                                              |  |             | 4,207     |      |   | 5,090     |  
|Other assets                                                                                                    |  |             | 5,468     |      |   | 4,172     |  
|                                                                                                                |  |             |           |      |   |           |  
|TOTAL ASSETS                                                                                                    |  | $           | 1,163,130 |      | $ | 1,080,702 |  
|                                                                                                                |  |             |           |      |   |           |  
|                                                                                                                |  |             |           |      |   |           |  
|                                                                                                                |  |             |           |      |   |           |  
|LIABILITIES                                                                                                     |  |             |           |      |   |           |  
|Deposits:                                                                                                       |  |             |           |      |   |           |  
|Demand                                                                                                          |  | $           | 110,559   |      | $ | 102,452   |  
|Interest-bearing demand                                                                                         |  |             | 246,714   |      |   | 241,749   |  
|Savings                                                                                                         |  |             | 61,089    |      |   | 58,401    |  
|Time                                                                                                            |  |             | 543,770   |      |   | 488,805   |  
|                                                                                                                |  |             |           |      |   |           |  
|Total deposits                                                                                                  |  |             | 962,132   |      |   | 891,407   |  
|                                                                                                                |  |             |           |      |   |           |  
|Borrowings:                                                                                                     |  |             |           |      |   |           |  
|Customer repurchase agreements                                                                                  |  |             | 35,532    |      |   | 34,217    |  
|Federal funds purchased                                                                                         |  |             | 6,500     |      |   | 26,500    |  
|Interest-bearing demand notes issued to the U.S. Treasury                                                       |  |             | 2,441     |      |   | 1,838     |  
|Advances from the Federal Home Loan Bank                                                                        |  |             | 32,493    |      |   | 6,984     |  
|Trust preferred securities                                                                                      |  |             | 25,000    |      |   | 25,000    |  
|Note payable                                                                                                    |  |             | 16,050    |      |   | 14,550    |  
|                                                                                                                |  |             |           |      |   |           |  
|Total borrowings                                                                                                |  |             | 118,016   |      |   | 109,089   |  
|                                                                                                               
|Other liabilities                                                                                               |  |             | 10,511    |      |   | 11,599    |  
|                                                                                                                |  |             |           |      |   |           |  
|TOTAL LIABILITIES                                                                                               |  |             | 1,090,659 |      |   | 1,012,095 |  
|                                                                                                                |  |             |           |      |   |           |  
|                                                                                                                |  |             |           |      |   |           |  
|STOCKHOLDERS EQUITY                                                                                            |  |             |           |      |   |           |  
|Common stock: $5 par value, 7,000,000 shares authorized: 4,478,295
 shares issued at December 31, 2008 and 2007 |  |             | 22,391    |      |   | 22,391    |  
|Surplus                                                                                                         |  |             | 18,420    |      |   | 18,275    |  
|Retained earnings                                                                                               |  |             | 54,329    |      |   | 51,279    |  
|Accumulated other comprehensive income, net of tax                                                              |  |             | 1,402     |      |   | 344       |  
|Less: cost of 1,180,254 and 1,169,848 treasury shares at December 31,
 2008 and 2007, respectively              |  |             | (24,071   | )    |   | (23,682   | )
|                                                                                                                |  |             |           |      |   |           |  
|TOTAL STOCKHOLDERS EQUITY                                                                                      |  |             | 72,471    |      |   | 68,607    |  
|                                                                                                                |  |             |           |      |   |           |  
|                                                                                                                |  |             |           |      |   |           |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                      |  | $           | 1,163,130 |      | $ | 1,080,702 |  
|                                                                                                                |  |             |           |      |   |           |  
|                                                                                                                |  |             |           |      |   |           |  
|                                                                                                                |  |             |           |      |   |           |  

See accompanying notes to
consolidated financial statements.

10

---

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

|                                                     |  |                                 |           |      |   |           |  |   |           | 
|---------------------------------------------------- |  | ------------------------------- | --------- | ---- | - | --------- |  | - | --------- | 
|                                                     |  | For the Years Ended December 31 |          
|                                                     |  | 2008                            |           | 2007 |   | 2006      | 
|                                                     |  |                                 |           |      |   |           | 
|Interest
 and dividend income:                       |  |                                 |           |      |   |           |  |   |           | 
|                                                    
|Interest and fees on loans                           |  | $                               | 47,715    |      | $ | 49,982    |  | $ | 41,923    | 
|Interest and dividends on investment securities:     |  |                                 |           |      |   |           |  |   |           | 
|Taxable                                              |  |                                 | 6,834     |      |   | 6,822     |  |   | 6,370     | 
|Tax-exempt                                           |  |                                 | 4,148     |      |   | 4,302     |  |   | 4,620     | 
|Interest on federal funds sold                       |  |                                 | 71        |      |   | 332       |  |   | 499       | 
|Interest on interest-bearing deposits in other banks |  |                                 | 54        |      |   | 121       |  |   | 114       | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|Total interest income                                |  |                                 | 58,822    |      |   | 61,559    |  |   | 53,526    | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|Interest expense:                                    |  |                                 |           |      |   |           |  |   |           | 
|Interest on deposits                                 |  |                                 | 23,782    |      |   | 30,324    |  |   | 23,843    | 
|Interest on borrowings                               |  |                                 | 3,519     |      |   | 4,181     |  |   | 3,787     | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|                                                    
|Total interest expense                               |  |                                 | 27,301    |      |   | 34,505    |  |   | 27,630    | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|Net interest income                                  |  |                                 | 31,521    |      |   | 27,054    |  |   | 25,896    | 
|Provision for loan losses                            |  |                                 | 2,968     |      |   | 640       |  |   | 285       | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|                                                    
|Net interest income after provision for loan losses  |  |                                 | 28,553    |      |   | 26,414    |  |   | 25,611    | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|Non-interest income:                                 |  |                                 |           |      |   |           |  |   |           | 
|Trust & farm management fees                         |  |                                 | 1,530     |      |   | 1,507     |  |   | 1,467     | 
|Service charges on deposit accounts                  |  |                                 | 4,408     |      |   | 4,431     |  |   | 4,235     | 
|Other service charges                                |  |                                 | 2,137     |      |   | 1,966     |  |   | 1,782     | 
|Gain on sales of securities available-for-sale       |  |                                 | 405       |      |   | 541       |  |   | 250       | 
|Gain on sales of loans                               |  |                                 | -0-       |      |   | -0-       |  |   | 90        | 
|Brokerage fee income                                 |  |                                 | 913       |      |   | 920       |  |   | 736       | 
|Mortgage banking income, net                         |  |                                 | 1,069     |      |   | 903       |  |   | 755       | 
|Bank-owned life insurance income                     |  |                                 | 874       |      |   | 816       |  |   | 770       | 
|Other operating income                               |  |                                 | 257       |      |   | 214       |  |   | 160       | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|                                                    
|Total non-interest income                            |  |                                 | 11,593    |      |   | 11,298    |  |   | 10,245    | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|                                                    
|Non-interest expense:                                |  |                                 |           |      |   |           |  |   |           | 
|Salaries and employee benefits                       |  |                                 | 17,692    |      |   | 16,874    |  |   | 15,884    | 
|Occupancy                                            |  |                                 | 2,559     |      |   | 2,393     |  |   | 1,985     | 
|Equipment expense                                    |  |                                 | 2,996     |      |   | 3,158     |  |   | 2,933     | 
|Federal insurance assessments                        |  |                                 | 845       |      |   | 338       |  |   | 313       | 
|Intangible assets amortization                       |  |                                 | 714       |      |   | 704       |  |   | 651       | 
|Data processing                                      |  |                                 | 1,151     |      |   | 1,101     |  |   | 1,032     | 
|Advertising                                          |  |                                 | 742       |      |   | 722       |  |   | 841       | 
|Other operating expense                              |  |                                 | 4,424     |      |   | 4,275     |  |   | 4,696     | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|                                                    
|Total non-interest expense                           |  |                                 | 31,123    |      |   | 29,565    |  |   | 28,335    | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|Income before income taxes                           |  |                                 | 9,023     |      |   | 8,147     |  |   | 7,521     | 
|Income tax expense                                   |  |                                 | 1,697     |      |   | 1,377     |  |   | 1,033     | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|                                                    
|Net income                                           |  | $                               | 7,326     |      | $ | 6,770     |  | $ | 6,488     | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|Earnings per share:                                  |  |                                 |           |      |   |           |  |   |           | 
|Basic                                                |  | $                               | 2.22      |      | $ | 2.04      |  | $ | 1.93      | 
|Diluted                                              |  | $                               | 2.21      |      | $ | 2.03      |  | $ | 1.91      | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|Basic weighted average shares outstanding            |  |                                 | 3,297,990 |      |   | 3,326,467 |  |   | 3,369,567 | 
|Diluted weighted average shares outstanding          |  |                                 | 3,314,439 |      |   | 3,334,406 |  |   | 3,389,765 | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 
|                                                     |  |                                 |           |      |   |           |  |   |           | 

See accompanying notes to
consolidated financial statements.

11

---

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, 2006                                                     |  | $             | 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 $90 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 |  
|                                                                            
|Net income                                                                   |  |               |        |         |   |                    |  |                                                                     | 6,770  |                 |   |       |   |   |         |   |   | 6,770  |  
|Sale of 6,537 shares of treasury stock                                       |  |               |        |         |   | 63                 |  |                                                                     |        |                 |   |       |   |   | 112     |   |   | 175    |  
|Purchase of 50,000 shares of treasury stock                                  |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |   |   | (1,459  | ) |   | (1,459 | )
|Exercise of stock options and re-issuance of treasury stock (500
 shares)    |  |               |        |         |   | 7                  |  |                                                                     | (3     | )               |   |       |   |   | 8       |   |   | 12     |  
|Cash dividends ($1.08 per share)                                             |  |               |        |         |   |                    |  |                                                                     | (3,597 | )               |   |       |   |   |         |   |   | (3,597 | )
|Amortization of unearned compensation expense                                |  |               |        |         |   | 47                 |  |                                                                     |        |                 |   |       |   |   |         |   |   | 47     |  
|Other comprehensive income, net of $825 tax effect                           |  |               |        |         |   |                    |  |                                                                     |        |                 |   | 1,304 |   |   |         |   |   | 1,304  |  
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |   |   |         |   |   |        |  
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |   |   |         |   |   |        |  
|Balance, December 31, 2007                                                   |  | $             | 22,391 |         | $ | 18,275             |  | $                                                                   | 51,279 |                 | $ | 344   |   | $ | (23,682 | ) | $ | 68,607 |  
|                                                                            
|Net income                                                                   |  |               |        |         |   |                    |  |                                                                     | 7,326  |                 |   |       |   |   |         |   |   | 7,326  |  
|Sale of 4,894 shares of treasury stock                                       |  |               |        |         |   | 40                 |  |                                                                     |        |                 |   |       |   |   | 84      |   |   | 124    |  
|Purchase of 20,000 shares of treasury stock                                  |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |   |   | (553    | ) |   | (553   | )
|Exercise of stock options and re-issuance of treasury stock (4,700
 shares)  |  |               |        |         |   | 21                 |  |                                                                     |        |                 |   |       |   |   | 80      |   |   | 101    |  
|Cash dividends ($1.12 per share)                                             |  |               |        |         |   |                    |  |                                                                     | (3,696 | )               |   |       |   |   |         |   |   | (3,696 | )
|Amortization of unearned compensation expense                                |  |               |        |         |   | 84                 |  |                                                                     |        |                 |   |       |   |   |         |   |   | 84     |  
|Adjustment to initially apply EITF 06-4                                      |  |               |        |         |   |                    |  |                                                                     | (580   | )               |   |       |   |   |         |   |   | (580   | )
|Other comprehensive income, net of $660 tax effect                           |  |               |        |         |   |                    |  |                                                                     |        |                 |   | 1,058 |   |   |         |   |   | 1,058  |  
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |   |   |         |   |   |        |  
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |   |   |         |   |   |        |  
|Balance, December 31, 2008                                                   |  | $             | 22,391 |         | $ | 18,420             |  | $                                                                   | 54,329 |                 | $ | 1,402 |   | $ | (24,071 | ) | $ | 72,471 |  
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |   |   |         |   |   |        |  
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |   |   |         |   |   |        |  
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |   |   |         |   |   |        |  

See accompanying notes to
consolidated financial statements

12

---

Consolidated Statements of Cash Flows(dollars in thousands)

|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------------------- | -------- | ---- | - | ------- | - | - | ------- | -
|                                                                                   |  | For the Years Ended December 31 |         
|                                                                                   |  | 2008                            |          | 2007 |   | 2006    |  
|                                                                                   |  |                                 |          |      |   |         |  
|Operating activities:                                                              |  |                                 |          |      |   |         |   |   |         |  
|Net income                                                                         |  | $                               | 7,326    |      | $ | 6,770   |   | $ | 6,488   |  
|Adjustments to reconcile net income to net cash provided by operating
 activities: |  |                                 |          |      |   |         |   |   |         |  
|Depreciation                                                                       |  |                                 | 2,219    |      |   | 2,482   |   |   | 2,304   |  
|Provision for loan losses                                                          |  |                                 | 2,968    |      |   | 640     |   |   | 285     |  
|Deferred income tax benefit                                                        |  |                                 | (602     | )    |   | (466    | ) |   | (916    | )
|Amortization of intangible assets and other purchase accounting
 adjustments, net  |  |                                 | 714      |      |   | 704     |   |   | 651     |  
|Amortization (accretion) of premiums on investment securities,
net                 |  |                                 | 56       |      |   | (217    | ) |   | 107     |  
|Gain on sales of securities available-for-sale, net                                |  |                                 | (405     | )    |   | (541    | ) |   | (250    | )
|Compensation expense for vested stock options                                      |  |                                 | 84       |      |   | 47      |   |   | -0-     |  
|Gain on sales of loans                                                             |  |                                 | -0-      |      |   | -0-     |   |   | (90     | )
|Loss (gain) on sales of other real estate owned, net                               |  |                                 | 2        |      |   | 47      |   |   | 122     |  
|FHLB Stock dividends                                                               |  |                                 | -0-      |      |   | -0-     |   |   | (24     | )
|Loans originated for sale                                                          |  |                                 | (77,851  | )    |   | (56,791 | ) |   | (56,864 | )
|Proceeds from sales of loans originated for sale                                   |  |                                 | 76,624   |      |   | 60,375  |   |   | 54,939  |  
|(Decrease) increase in accrued interest payable                                    |  |                                 | (669     | )    |   | 530     |   |   | 1,513   |  
|Decrease (increase) in accrued interest receivable                                 |  |                                 | 1,183    |      |   | 348     |   |   | (2,425  | )
|Increase in other assets                                                           |  |                                 | (398     | )    |   | (1,465  | ) |   | (1,804  | )
|(Decrease) increase in other liabilities                                           |  |                                 | (1,066   | )    |   | 466     |   |   | (1,737  | )
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|Net cash provided by operating activities                                          |  |                                 | 10,185   |      |   | 12,929  |   |   | 2,299   |  
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|Investing activities:                                                              |  |                                 |          |      |   |         |   |   |         |  
|Proceeds from sales of investment securities
available-for-sale                    |  |                                 | 38,499   |      |   | 17,455  |   |   | 8,904   |  
|Proceeds from maturities of investment securities
available-for-sale               |  |                                 | 53,568   |      |   | 63,876  |   |   | 40,247  |  
|Purchase of investment securities available-for-sale                               |  |                                 | (112,754 | )    |   | (44,431 | ) |   | (64,954 | )
|Proceeds from maturities of investment securities
held-to-maturity                 |  |                                 | 2,100    |      |   | 3,108   |   |   | 2,370   |  
|Purchase of investment securities held-to-maturity                                 |  |                                 | (1,944   | )    |   | (2,237  | ) |   | (2,025  | )
|Proceeds from sales of other real estate owned                                     |  |                                 | 891      |      |   | 410     |   |   | 377     |  
|Proceeds from sales of loan portfolios                                             |  |                                 | -0-      |      |   | -0-     |   |   | 19,579  |  
|Net increase in loans                                                              |  |                                 | (71,668  | )    |   | (77,600 | ) |   | (67,241 | )
|Purchase of premises and equipment                                                 |  |                                 | (1,725   | )    |   | (1,457  | ) |   | (4,562  | )
|Purchase of Federal Home Loan and Federal Reserve Bank
stock                       |  |                                 | (113     | )    |   | (141    | ) |   | (613    | )
|Payments related to acquisitions, net of cash and cash equivalents
 acquired       |  |                                 | -0-      |      |   | (10,182 | ) |   | -0-     |  
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|Net cash used in investing activities                                              |  |                                 | (93,146  | )    |   | (51,199 | ) |   | (67,918 | )
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|Financing activities:                                                              |  |                                 |          |      |   |         |   |   |         |  
|Net increase (decrease) in deposits                                                |  |                                 | 70,725   |      |   | (3,369  | ) |   | 83,310  |  
|Net increase (decrease) in short-term borrowings                                   |  |                                 | (18,082  | )    |   | 28,877  |   |   | 1,148   |  
|Proceeds from borrowings                                                           |  |                                 | 33,000   |      |   | 6,050   |   |   | 2,200   |  
|Repayment of borrowings                                                            |  |                                 | (6,001   | )    |   | -0-     |   |   | (1,800  | )
|Dividends paid                                                                     |  |                                 | (3,696   | )    |   | (3,597  | ) |   | (3,542  | )
|Purchase of treasury stock                                                         |  |                                 | (553     | )    |   | (1,459  | ) |   | (2,024  | )
|Exercise of stock options and issuance of treasury stock                           |  |                                 | 101      |      |   | 12      |   |   | 1,697   |  
|Sales of treasury stock                                                            |  |                                 | 124      |      |   | 175     |   |   | 70      |  
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|Net cash provided by financing activities                                          |  |                                 | 75,618   |      |   | 26,689  |   |   | 81,059  |  
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|(Decrease) increase in cash and cash equivalents                                   |  |                                 | (7,343   | )    |   | (11,581 | ) |   | 15,440  |  
|Cash and cash equivalents at beginning of year                                     |  |                                 | 27,604   |      |   | 39,185  |   |   | 23,745  |  
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|Cash and cash equivalents at end of year                                           |  | $                               | 20,261   |      | $ | 27,604  |   | $ | 39,185  |  
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|Cash paid during the year for:                                                     |  |                                 |          |      |   |         |   |   |         |  
|Interest                                                                           |  | $                               | 27,970   |      | $ | 33,975  |   | $ | 26,117  |  
|Income taxes                                                                       |  | $                               | 3,123    |      | $ | 1,817   |   | $ | 1,267   |  
|Supplemental disclosure of non-cash flow activities:                               |  |                                 |          |      |   |         |   |   |         |  
|Loans transferred to other real estate owned                                       |  | $                               | 2,547    |      | $ | 1,290   |   | $ | 31      |  
|Land transferred to held-for-sale                                                  |  | $                               | 1,010    |      | $ | 1,344   |   | $ | -0-     |  
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  
|                                                                                   |  |                                 |          |      |   |         |   |   |         |  

See accompanying notes to
consolidated financial statements.

13

---

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

1. Summary of Significant Accounting Policies

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

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

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

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

Material
estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses, the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans, fair
value measurements of investment securities, income tax accruals and deferrals,
and in the evaluation of impairment of goodwill, and mortgage servicing rights.
In connection with the determination of the allowance for loan losses and the
valuation of foreclosed assets held-for-sale, management obtains independent
appraisals for significant properties. In connection with goodwill, management
obtains an independent appraisal of the fair value of Corporation stock. In
connection with the mortgage servicing rights and investment securities,
management obtains an independent analysis of the fair value of the assets.

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

Federal Reserve and Federal Home Loan
Bank Stock -The
subsidiary bank held Federal Home Loan Bank and Federal Reserve Bank stock
totaling $2,373 and $1,838 at December 31, 2008, and $2,373 and $1,725 at
December 31, 2007 respectively. During the third quarter of 2007, the Federal
Home Loan Bank of Chicago received a Cease and Desist Order from their
regulator, the Federal Housing Finance Board. The Federal Home Loan Bank will
continue to provide liquidity and funding through advances, however, the order
prohibits capital stock repurchases and redemptions until a time to be
determined by the Federal Housing Finance Board and requires their approval for
dividends. With regard to dividends, the Federal Home Loan Bank will continue
to assess its dividend capacity each quarter and make appropriate request for
approval. There were no dividends paid by the Federal Home Loan Bank of Chicago
during 2008. Management performed an analysis and deemed the investment in
Federal Home Loan Bank stock was not impaired as of December 31, 2008 or
December 31, 2007.

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

14

---

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.

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

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

Income Taxes -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 966 trust accounts with assets totaling approximately
$174,753 at December 31, 2008 and 1,014 trust accounts with assets totaling
approximately $197,702 at December 31, 2007.

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.

Cash Flows -The Corporation
considers all
liquid investments with original maturities of three months or less to be cash
equivalents. At December 31, 2008 and 2007, cash equivalents consisted
primarily of non-interest bearing cash accounts. The financial institution
holding the Corporations cash accounts is participating in the FDICs
Transaction Account Guarantee Program. Under that program, through December 31,
2009, all non-interest bearing transaction accounts are fully guaranteed by the
FDIC for the entire amount in the account.

Reclassification -Certain amounts
in the
2007 and 2006 consolidated financial statements have been reclassified to
conform to the 2008 presentation. These reclassifications had no effect on net
income.

Stock Options -At December 31, 2008
and
2007, the Corporation has a share-based employee compensation plan, which is
described more fully in Note 14. The Corporation accounts for this plan under
the recognition and measurement principles of Statement of Financial Accounting
Standards No. 123R (FAS 123R), Share-Based Payment. The number of shares of
common stock authorized under the stock option plans is 802,500. The exercise
price must be at least 100% of the fair market value of the common stock on the
date of the grant, and the option term cannot exceed ten years.

Fair Value Measurements -The
Corporation
records certain of its assets and liabilities at fair value. Fair value is
defined as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. Fair value measurements are classified
within one of three levels in a valuation hierarchy based upon the transparency
of inputs to the valuation of an asset or liability as of the measurement date.
The three levels are defined as follows:

| |            |                                                                                                                                                                                                                                                                           
| | ---------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Level
 1 - | inputs
 to the valuation methodology are quoted prices (unadjusted) for identical
 assets or liabilities in active markets.                                                                                                                                               
| |            |                                                                                                                                                                                                                                                                           
| | Level
 2 - | inputs
 to the valuation methodology include quoted prices for similar assets and
 liabilities in active markets, and inputs that are observable for the asset
 or liability, either directly or indirectly, for substantially the full term
 of the financial instrument.
| |            |                                                                                                                                                                                                                                                                           
| | Level
 3 - | inputs
 to the valuation methodology are unobservable and significant to the fair
 value measurement. A financial instruments categorization within the
 valuation hierarchy is based upon the lowest level of input that is
 significant to the fair value measurement. 

Impact of New Accounting Standards -In
September 2006, the FASB issued Statement No. 157. This Statement establishes a
common definition for fair value to be applied to GAAP guidance requiring use
of fair value, establishes a framework for measuring fair value, and expands
disclosure about such fair value measurements. FAS 157 is effective for fiscal
years beginning after November 15, 2007. The Corporation adopted FAS 157
effective January 1, 2008. The financial impact of this pronouncement was not
material to the Corporations consolidated financial statements.

In
February 2008, the FASB issued two Staff Positions (FSPs) on Statement No. 157:
FSP 157-1 Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Measurement
Under Statement 13,and FSP 157-2, Effective
Date of FASB Statement No. 157.FSP 157-1 excludes fair value
measurements related to leases from the disclosure requirements of Statement
No. 157. FSP 157-2 delays the effective date of Statement No. 157 for all
non-recurring fair value measurements of nonfinancial assets and nonfinancial
liabilities until fiscal years beginning after November 15, 2008. The
Corporation is applying the deferral guidance in FSP 157-2, and accordingly,
has not applied the non-recurring disclosure to non-financial assets or
non-financial liabilities valued at fair value on a non-recurring basis.

In
October 2008, the FASB issued FASB Staff Position No. 157-3 (FSP 157-3), Determining the Fair Value of a Financial Asset When
the Market for That Asset is Not Active.FSP 157-3 clarifies the
application of Statement of Financial Accounting Standards No. 157 (FAS 157), Fair Value Measurements,in a market
that is not active and provides an example to illustrate key considerations in
determining fair value of financial assets when the market for that financial
asset is not active. FSP 157-3 applies to financial assets within the scope of
accounting pronouncements that require or permit fair value measurements in
accordance with FAS 157. FSP 157-3 was effective upon issuance and included
prior periods for which financial statements had not been issued. The
application of FSP 157-3 did not have a material impact on the Corporations
consolidated financial statements.

15

---

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

In
February 2007, the FASB issued SFAS No. 159 (FAS 159), The Fair Value Option
for Financial Assets and Financial Liabilities  Including an amendment of FASB
Statement No. 115. FAS 159 allows companies to report selected financial
assets and liabilities at fair value. The changes in fair value are recognized
in earnings and the assets and liabilities measured under this methodology are
required to be displayed separately in the balance sheet. The main intent of
the Statement is to mitigate the difficulty in determining reported earnings
caused by a mixed-attribute model (or reporting some assets at fair value and
others using a different valuation attribute such as amortized cost). The
project is separated into two phases. This first phase addresses the creation
of a fair value option for financial assets and liabilities. A second phase
will address creating a fair value option for selected non-financial items. FAS
159 is effective for all financial statements issued for fiscal years beginning
after November 15, 2007. The Corporation has not elected the fair value option
for any financial assets or liabilities at December 31, 2008.

In
December 2007, the FASB issued SFAS No. 141R (FAS 141R), Business
Combinations, which revises FAS 141 and changes multiple aspects of the
accounting for business combinations. Under the guidance in FAS 141R, the
acquisition method must be used, which requires the acquirer to recognize most
identifiable assets acquired, liabilities assumed, and non-controlling
interests in the acquiree at their full fair value on the acquisition date.
Goodwill is to be recognized as the excess of the consideration transferred
plus the fair value of the non-controlling interest over the fair values of the
identifiable net assets acquired. Subsequent changes in the fair value of
contingent consideration classified as a liability are to be recognized in
earnings, while contingent consideration classified as equity is not to be
re-measured. Costs such as transaction costs are to be excluded from
acquisition accounting, generally leading to recognizing expense and
additionally, restructuring costs that do not meet certain criteria at
acquisition date are to be subsequently recognized as post-acquisition costs.
FAS 141R is effective for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. The Corporation is currently evaluating the impact
that this issuance will have on its financial position and results of
operations; however, it anticipates that the standard will lead to more
volatility in the results of operations during the periods subsequent to an
acquisition.

In
March 2008, the FASB issued SFAS No. 161 (FAS 161), Disclosures About
Derivative Instruments and Hedging Activities  an amendment of FAS 133. FAS
161 requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of gains and
losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. FAS 161 is effective for fiscal
years beginning after November 15, 2008. The Corporation does not expect the
implementation of FAS 161 to have a material impact on its consolidated
financial statements.

The
FASB issued Statement No. 162 in 2008. FAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement became effective on
November 15, 2008. The impact of adoption was not material to the Corporations
consolidated financial statements.

In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) About
Transfers of Financial Assets and Interests in Variable Interest Entities.This
FSP amends the disclosure guidance in Statement No. 140 and Interpretation No.
46 (revised December 2003). The FSP requires public entities to provide
additional disclosures about transfers of financial assets and their
involvement with variable interest entities. The application of FSP did not
have a material impact on the Corporations consolidated financial statements.

In
January 2009, the FASB issued FSP EITF 99-20-1, Amendments to the Impairment and Interest Income Measurement Guidance
of EITF Issue No. 99-20.FSP EITF 99-20-1 amends the impairment
guidance in EITF Issue No. 99-20 in order to achieve more consistent
determination of whether an other-than-temporary impairment (OTTI) has
occurred. Prior to the FSP, the impairment model in EITF 99-20 was different
from FASB Statement No. 115, Accounting for Certain Investments in Debt and
Equity Securities. This FSP amended EITF 99-20 to more closely align the OTTI
guidance therein to the guidance in Statement No. 115. Retrospective
application to a prior interim or annual period is prohibited. The guidance in
this FSP was considered in the assessment of OTTI for various securities at
December 31, 2008.

In
December 2007 the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial
Statements  an amendment of ARB No. 51 (FAS 160).The Statement
requires that noncontrolling interests in subsidiaries be initially measured at
fair valued and classified as a separate component of equity. The Statement is
effective for fiscal years beginning on or after December 15, 2008. Earlier
adoption is prohibited. The adoption of this new Statement will not have a
material impact on the Corporations consolidated financial statements.

2. Earnings Per Share

The
following table sets forth the computation for basic and diluted earnings per
share for the years ended December 31, 2008, 2007 and 2006:

|                                                                           |  |      |           |      |   |           |  |   |           | 
|-------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | --------- | 
|                                                                           |  | 2008 |           | 2007 |   | 2006      | 
|Numerator:                                                                 |  |      |           |      |   |           |  |   |           | 
|Net income                                                                 |  | $    | 7,326     |      | $ | 6,770     |  | $ | 6,488     | 
|Denominator:                                                               |  |      |           |      |   |           |  |   |           | 
|Basic earnings per share - weighted average shares
outstanding             |  |      | 3,297,990 |      |   | 3,326,467 |  |   | 3,369,567 | 
|Effect of dilutive securities - stock
options                              |  |      | 16,449    |      |   | 7,939     |  |   | 20,198    | 
|                                                                           |  |      |           |      |   |           |  |   |           | 
|Diluted earnings per share - adjusted weighted
average shares
 outstanding |  |      | 3,314,439 |      |   | 3,334,406 |  |   | 3,389,765 | 
|Earnings per share:                                                        |  |      |           |      |   |           |  |   |           | 
|Basic                                                                      |  | $    | 2.22      |      | $ | 2.04      |  | $ | 1.93      | 
|Diluted                                                                    |  | $    | 2.21      |      | $ | 2.03      |  | $ | 1.91      | 

The
earnings per share calculation for the years ended December 31, 2008, 2007 and
2006 does not include 341,516, 221,583 and 76,500 shares, respectively, which
were anti-dilutive.

3. Cash and Due From Banks

The
average compensating balances held at correspondent banks during 2008 and 2007
were $2,847 and $2,666, 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 $2,590 and
$1,913, for 2008 and 2007, respectively, as reserve requirements.

16

---

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:

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

|                                    |  |                 |         |                          |   |                           |  |                        |      |   |   |         | 
|----------------------------------- |  | --------------- | ------- | ------------------------ | - | ------------------------- |  | ---------------------- | ---- | - | - | ------- | 
|                                    |  | 2007            |        
|                                    |  | Amortized
 Cost |         | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Estimated
 Fair
 Value |     
|                                    |  |                 |         |                          |   |                           |  |                        |     
|Available-for-sale:                 |  |                 |         |                          |   |                           |  |                        |      |   |   |         | 
|United States Government Agencies   |  | $               | 63,198  |                          | $ | 647                       |  | $                      | (105 | ) | $ | 63,740  | 
|State and Municipal                 |  |                 | 80,171  |                          |   | 853                       |  |                        | (468 | ) |   | 80,556  | 
|Collateralized mortgage obligations |  |                 | 69,511  |                          |   | 320                       |  |                        | (130 | ) |   | 69,701  | 
|                                    |  |                 |         |                          |   |                           |  |                        |      |   |   |         | 
|Total                               |  |                 | 212,880 |                          |   | 1,820                     |  |                        | (703 | ) |   | 213,997 | 
|                                    |  |                 |         |                          |   |                           |  |                        |      |   |   |         | 
|Held-to-maturity:                   |  |                 |         |                          |   |                           |  |                        |      |   |   |         | 
|State and Municipal                 |  |                 | 14,578  |                          |   | 246                       |  |                        | (25  | ) |   | 14,799  | 
|                                    |  |                 |         |                          |   |                           |  |                        |      |   |   |         | 
|Total                               |  | $               | 227,458 |                          | $ | 2,066                     |  | $                      | (728 | ) | $ | 228,796 | 
|                                    |  |                 |         |                          |   |                           |  |                        |      |   |   |         | 

Maturities
of investment securities classified as available-for-sale and held-to-maturity
were as follows at December 31, 2008:

|                                       |  |                 |         |                        |   |         | 
|-------------------------------------- |  | --------------- | ------- | ---------------------- | - | ------- | 
|                                       |  | Amortized
 Cost |         | Estimated
 Fair
 Value |  
|                                       |  |                 |         |                        |  
|Available-for-sale:                    |  |                 |         |                        |   |         | 
|Due in one year or less                |  | $               | 958     |                        | $ | 970     | 
|Due after one year through five years  |  |                 | 11,478  |                        |   | 11,787  | 
|Due after five years through ten years |  |                 | 66,510  |                        |   | 68,007  | 
|Due after ten years                    |  |                 | 53,088  |                        |   | 52,756  | 
|                                       |  |                 |         |                        |   |         | 
|                                       |  |                 | 132,034 |                        |   | 133,520 | 
|                                       |  |                 |         |                        |   |         | 
|Mortgage-backed securities             |  |                 | 47,625  |                        |   | 48,406  | 
|Collateralized mortgage obligations    |  |                 | 54,405  |                        |   | 54,957  | 
|                                       |  |                 |         |                        |   |         | 
|                                       |  | $               | 234,064 |                        | $ | 236,883 | 
|                                       |  |                 |         |                        |   |         | 
|Held-to-maturity:                      |  |                 |         |                        |   |         | 
|Due in one year or less                |  | $               | 3,639   |                        | $ | 3,674   | 
|Due after one year through five years  |  |                 | 4,937   |                        |   | 5,024   | 
|Due after five years through ten years |  |                 | 5,050   |                        |   | 5,179   | 
|Due after ten years                    |  |                 | 606     |                        |   | 584     | 
|                                       |  |                 |         |                        |   |         | 
|                                       |  | $               | 14,232  |                        | $ | 14,461  | 
|                                       |  |                 |         |                        |   |         | 

Proceeds
from sales of investment securities available-for-sale during 2008, 2007 and
2006 were $38,499, $17,455, and $8,904, respectively. Gross gains of $431 in
2008, $541 in 2007 and $250 in 2006 (resulting in tax expense of $167, $210 and
$97, respectively) were realized on those sales. Gross losses of $26 were
realized on the sales in 2008. There were no gross losses from these sales in
2007 or 2006. There were no sales of investment securities classified as
held-to-maturity during 2008, 2007 and 2006.

17

---

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

Securities
with unrealized losses at December 31, 2008 and 2007 not recognized in income
are as follows:

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

|                                    |  |                     |        |                           |   |             |   |                         |        |              |   |                           |   |   |        |  |   |      |  
|----------------------------------- |  | ------------------- | ------ | ------------------------- | - | ----------- | - | ----------------------- | ------ | ------------ | - | ------------------------- | - | - | ------ |  | - | ---- | -
|                                    |  | 2007                |       
|                                    |  | Less than 12 Months |        | 12 Months or More         |   | Total       |  
|                                    |  | Fair 
 Value        |        | Gross 
 Unrealized 
 Loss |   | Fair
 Value |   | Gross
 Unrealized
 Loss |        | Fair 
 Value |   | Gross 
 Unrealized 
 Loss |  
|                                    |  |                     |        |                           |   |             |   |                         |        |              |   |                           |  
|United States Government Agencies   |  | $                   | 2,040  |                           | $ | (14         | ) | $                       | 19,344 |              | $ | (91                       | ) | $ | 21,384 |  | $ | (105 | )
|State and Municipal                 |  |                     | 5,295  |                           |   | (75         | ) |                         | 33,428 |              |   | (418                      | ) |   | 38,723 |  |   | (493 | )
|Collateralized mortgage obligations |  |                     | 3,768  |                           |   | (21         | ) |                         | 18,672 |              |   | (109                      | ) |   | 22,440 |  |   | (130 | )
|                                    |  |                     |        |                           |   |             |   |                         |        |              |   |                           |   |   |        |  |   |      |  
|Total temporarily impaired          |  | $                   | 11,103 |                           | $ | (110        | ) | $                       | 71,444 |              | $ | (618                      | ) | $ | 82,547 |  | $ | (728 | )
|                                    |  |                     |        |                           |   |             |   |                         |        |              |   |                           |   |   |        |  |   |      |  

There
are 385 securities in an unrealized loss position in the investment portfolio
at December 31, 2008, all due to interest rate changes and not credit events.
These unrealized losses are considered temporary and, therefore, have not been
recognized into income, because the issuers are of high credit quality (99.7%
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 $234,525 at December 31, 2008 and $212,190 at
December 31, 2007.

5.Loans

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

|                           |  |      |         |      |   |         | 
|-------------------------- |  | ---- | ------- | ---- | - | ------- | 
|                           |  | 2008 |         | 2007 |  
|Loans                      |  |      |         |      |   |         | 
|Commercial                 |  | $    | 225,806 |      | $ | 168,936 | 
|Agricultural               |  |      | 79,536  |      |   | 85,571  | 
|Real estate  construction |  |      | 31,444  |      |   | 46,874  | 
|Real estate  mortgage     |  |      | 378,926 |      |   | 348,920 | 
|Installment                |  |      | 75,125  |      |   | 72,346  | 
|                           |  |      |         |      |   |         | 
|Total                      |  | $    | 790,837 |      | $ | 722,647 | 
|                           |  |      |         |      |   |         | 

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

|                                           |  |      |        |      |   |       |   |   |       |  
|------------------------------------------ |  | ---- | ------ | ---- | - | ----- | - | - | ----- | -
|                                           |  | 2008 |        | 2007 |   | 2006  |  
|Balance, January 1                         |  | $    | 3,248  |      | $ | 3,053 |   | $ | 3,109 |  
|Provision for loan losses                  |  |      | 2,968  |      |   | 640   |   |   | 285   |  
|Loans charged off                          |  |      | (1,334 | )    |   | (664  | ) |   | (604  | )
|Recoveries of loans previously charged off |  |      | 182    |      |   | 219   |   |   | 263   |  
|                                           |  |      |        |      |   |       |   |   |       |  
|Balance, December 31                       |  | $    | 5,064  |      | $ | 3,248 |   | $ | 3,053 |  
|                                           |  |      |        |      |   |       |   |   |       |  

Non-accrual
loans at December 31, 2008, 2007 and 2006 were $30,383, $7,361 and $3,893,
respectively. Interest income that would have been recorded on these loans, had
they remained current, was approximately $1,449, $734 and $397, respectively.
At December 31, 2008, 2007 and 2006, accruing loans delinquent 90 days or more
totaled $2,655, $73 and $33, respectively.

Impaired
loans at December 31, 2008, 2007 and 2006 totaled $25,128, $4,523 and $2,123,
respectively. Of these totals, $1,976, $540 and $522 of loans had valuation
reserves totaling $370, $207 and $150 at December 31, 2008, 2007 and 2006,
respectively. For the years ended December 31, 2008, 2007 and 2006, the average
recorded investment in impaired loans was approximately $10,414, $3,301 and
$2,296, respectively. Interest recognized on impaired loans during the portion
of the year that they were impaired was not material.

18

---

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 $6,356, $8,275, and $5,530, at December 31,
2008, 2007 and 2006, 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 2008 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, 2008 is as follows:

|                         |        |           |  |          |  |               |           |                            |  |         |  |  |        | 
|------------------------ | ------ | --------- |  | -------- |  | ------------- | --------- | -------------------------- |  | ------- |  |  | ------ | 
|Balance
 January 1, 2008 |        | Additions |  | Payments |  | Other Changes |           | Balance
 December 31, 2008 | 
|                         |        |           |  |          |  |               |           |                            | 
|                         | $8,275 |           |  | $10,546  |  |               | ($12,248) |                            |  | $ (217) |  |  | $6,356 | 

6. Premises and Equipment

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

|                                |  |      |        |      |   |        | 
|------------------------------- |  | ---- | ------ | ---- | - | ------ | 
|                                |  | 2008 |        | 2007 |  
|Land                            |  | $    | 6,163  |      | $ | 7,138  | 
|Buildings                       |  |      | 30,271 |      |   | 30,391 | 
|Furniture
 and Equipment        |  |      | 21,887 |      |   | 20,464 | 
|                                |  |      |        |      |   |        | 
|                                |  |      | 58,321 |      |   | 57,993 | 
|Less:
 accumulated depreciation |  |      | 29,024 |      |   | 27,192 | 
|                                |  |      |        |      |   |        | 
|Total                           |  | $    | 29,297 |      | $ | 30,801 | 
|                                |  |      |        |      |   |        | 

The
Corporation owns separate lots in Elburn, Aurora and Somonauk, Illinois that
have been removed from the land balance and are now shown on the Corporations
balance sheet as land held-for-sale, at the lower of cost or market. The land
in Elburn, approximately 2 acres, was purchased in 2003 for $930 in
anticipation of the construction of a branch facility. The land in Aurora,
consisting of two lots remaining from the original purchase of 14 acres in 2004
which was used to construct a branch facility, has a cost basis of $1,344. The
land in Somonauk, acquired in 2005 during the acquisition of FSB Bancorp, Inc.,
consists of approximately 2 acres with a cost basis of $80. Recent real estate
appraisals have been completed indicating the market value of the lots to be
$1,190 (Elburn), $2,000 (Aurora) and $495 (Somonauk).

Depreciation
expense charged to operating expense for 2008, 2007 and 2006 was $2,219, $2,482
and $2,304, respectively.

7. Acquisition

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

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

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

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

19

---

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

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

|                                             |  |                                                  |   |                                                  |  |  |  |   |           |  | 
|-------------------------------------------- |  | ------------------------------------------------ | - | ------------------------------------------------ |  |  |  | - | --------- |  | 
|                                             |  | Pro Forma
 For the Year Ended
 December 31, 2007 |   | Pro Forma
 For the Year Ended
 December 31, 2006 | 
|                                             |  |                                                  |   |                                                  | 
|Net interest
 income                         |  |                                                  | $ | 27,094                                           |  |  |  | $ | 26,169    |  | 
|Provision
 for loan losses                   |  |                                                  |   | 640                                              |  |  |  |   | 285       |  | 
|Non-interest
 income                         |  |                                                  |   | 11,333                                           |  |  |  |   | 10,465    |  | 
|Non-interest
 expense                        |  |                                                  |   | 29,580                                           |  |  |  |   | 29,014    |  | 
|                                             |  |                                                  |   |                                                  |  |  |  |   |           |  | 
|Income
 before income taxes                  |  |                                                  |   | 8,207                                            |  |  |  |   | 7,335     |  | 
|Income tax
 expense                          |  |                                                  |   | 1,401                                            |  |  |  |   | 961       |  | 
|                                             |  |                                                  |   |                                                  |  |  |  |   |           |  | 
|Net income                                   |  |                                                  | $ | 6,806                                            |  |  |  | $ | 6,374     |  | 
|Earnings per
 share:                         |  |                                                  |   |                                                  |  |  |  |   |           |  | 
|Basic                                        |  |                                                  | $ | 2.05                                             |  |  |  | $ | 1.89      |  | 
|Diluted                                      |  |                                                  | $ | 2.04                                             |  |  |  | $ | 1.88      |  | 
|Basic
 weighted average shares outstanding   |  |                                                  |   | 3,326,467                                        |  |  |  |   | 3,369,567 |  | 
|Diluted
 weighted average shares outstanding |  |                                                  |   | 3,334,406                                        |  |  |  |   | 3,389,765 |  | 

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

8. Goodwill and Intangible Assets

The balance
of goodwill, net of accumulated amortization, totaled $24,521 at December 31,
2008 and 2007. 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 $4,207
and $5,090 at December 31, 2008 and December 31, 2007, respectively.

The
following table summarizes the Corporations intangible assets, which are
subject to amortization, as of December 31, 2008 and 2007:

|                         |  |                      |   |                         |  |                      |  |                         |        |   |  |  |   |       |  |  |  |   |        |   | 
|------------------------ |  | -------------------- | - | ----------------------- |  | -------------------- |  | ----------------------- | ------ | - |  |  | - | ----- |  |  |  | - | ------ | - | 
|                         |  | 2008                 |   | 2007                    | 
|                         |  | Gross CarryingAmount |   | AccumulatedAmortization |  | Gross CarryingAmount |  | AccumulatedAmortization |       
|                         |  |                      |   |                         |  |                      |  |                         |       
|Core deposit
 intangible |  |                      | $ | 9,004                   |  |                      |  | $                       | (4,869 | ) |  |  | $ | 9,004 |  |  |  | $ | (4,006 | ) | 
|Other
 acquisition costs |  |                      |   | 234                     |  |                      |  |                         | (162   | ) |  |  |   | 234   |  |  |  |   | (142   | ) | 
|                         |  |                      |   |                         |  |                      |  |                         |        |   |  |  |   |       |  |  |  |   |        |   | 
|Total                    |  |                      | $ | 9,238                   |  |                      |  | $                       | (5,031 | ) |  |  | $ | 9,238 |  |  |  | $ | (4,148 | ) | 
|                         |  |                      |   |                         |  |                      |  |                         |        |   |  |  |   |       |  |  |  |   |        |   | 

Intangible
asset amortization expense charged to operating expense for 2008, 2007 and 2006
was $714, $704 and $651, respectively. The following table shows the future
estimated amortization expense for the Corporations intangible assets based on
existing balances as of December 31, 2008:

Estimated Amortization Expense for
the year ended December 31:

|           |  |   |     | 
|---------- |  | - | --- | 
|2009       |  | $ | 860 | 
|2010       |  |   | 816 | 
|2011       |  |   | 653 | 
|2012       |  |   | 549 | 
|2013       |  |   | 526 | 
|Thereafter |  |   | 803 | 

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, 2008, 2007
and 2006 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:

|                                                                                                               |  |      |       |      |   |       |   |   |       |  
|-------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | - | - | ----- | -
|                                                                                                               |  | 2008 |       | 2007 |   | 2006  |  
|Balance, January 1                                                                                             |  | $    | 2,498 |      | $ | 2,079 |   | $ | 2,002 |  
|Servicing rights capitalized                                                                                   |  |      | 815   |      |   | 662   |   |   | 773   |  
|Amortization of servicing rights                                                                               |  |      | (377  | )    |   | (243  | ) |   | (345  | )
|Adjustment to recorded mortgage servicing
 rights related to the Somonauk acquisition reclassified to goodwill |  |      | -0-   |      |   | -0-   |   |   | (351  | )
|                                                                                                               |  |      |       |      |   |       |   |   |       |  
|Balance, December 31                                                                                           |  | $    | 2,936 |      | $ | 2,498 |   | $ | 2,079 |  
|                                                                                                               |  |      |       |      |   |       |   |   |       |  

The
following table shows the future estimated amortization expense for mortgage
servicing rights based on existing balances as of December 31, 2008. 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.

20

---

Estimated
amortization expense for the year ended December 31:

|           |  |   |       | 
|---------- |  | - | ----- | 
|2009       |  | $ | 328   | 
|2010       |  |   | 307   | 
|2011       |  |   | 288   | 
|2012       |  |   | 271   | 
|2013       |  |   | 254   | 
|2014       |  |   | 238   | 
|Thereafter |  |   | 1,250 | 

The
Corporation services loans for others with unpaid principal balances at
December 31, 2008, 2007 and 2006 of approximately $304,551, $268,391 and
$236,893, 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:

|                               |  |      |         |      |   |         |  |   |         | 
|------------------------------ |  | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                               |  | 2008 |         | 2007 |   | 2006    | 
|Amount                         |  | $    | 232,811 |      | $ | 158,542 |  | $ | 140,300 | 
|Interest
 expense for the year |  |      | 4,124   |      |   | 4,204   |  |   | 4,285   | 

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

|                         |  |   |        |  |   |        |  |   |        | 
|------------------------ |  | - | ------ |  | - | ------ |  | - | ------ | 
|                         |  |   | 2008   |  |   | 2007   |  |   | 2006   | 
|Interest-bearing
 demand |  | $ | 3,647  |  | $ | 6,567  |  | $ | 4,877  | 
|Savings                  |  |   | 67     |  |   | 249    |  |   | 326    | 
|Time                     |  |   | 20,068 |  |   | 23,508 |  |   | 18,640 | 
|                         |  |   |        |  |   |        |  |   |        | 
|Total                    |  | $ | 23,782 |  | $ | 30,324 |  | $ | 23,843 | 
|                         |  |   |        |  |   |        |  |   |        | 

At
December 31, 2008, the scheduled maturities of time deposits are as follows:

|           |  |   |         | 
|---------- |  | - | ------- | 
|2009       |  | $ | 463,332 | 
|2010       |  |   | 60,828  | 
|2011       |  |   | 12,041  | 
|2012       |  |   | 6,884   | 
|2013       |  |   | 635     | 
|Thereafter |  |   | 50      | 
|           |  |   |         | 
|Total      |  | $ | 543,770 | 
|           |  |   |         | 

10. Borrowings

As
of December 31, borrowings consisted of the following:

|                                                           |  |        |         |                         |  |        |   |                         |         |  |  |      |  
|---------------------------------------------------------- |  | ------ | ------- | ----------------------- |  | ------ | - | ----------------------- | ------- |  |  | ---- | -
|                                                           |  | 2008   |         | 2007                    | 
|                                                           |  | Amount |         | Weighted
 Average
 Rate |  | Amount |   | Weighted
 Average
 Rate |        
|                                                           |  |        |         |                         |  |        |   |                         |        
|Customer repurchase agreements                             |  | $      | 35,532  |                         |  | 0.86   | % | $                       | 34,217  |  |  | 3.69 | %
|Advances from the Federal Home Loan Bank of
 Chicago due:  |  |        |         |                         |  |        |   |                         |         |  |  |      |  
|February 1, 2008                                           |  |        | -0-     |                         |  | n/a    |   |                         | 1,000   |  |  | 4.00 |  
|February 27, 2008                                          |  |        | -0-     |                         |  | n/a    |   |                         | 2,500   |  |  | 5.37 |  
|June 19, 2008                                              |  |        | -0-     |                         |  | n/a    |   |                         | 2,500   |  |  | 5.44 |  
|February 27, 2009                                          |  |        | 2,500   |                         |  | 2.74   |   |                         | -0-     |  |  | n/a  |  
|September 19, 2009                                         |  |        | 4,000   |                         |  | 3.40   |   |                         | -0-     |  |  | n/a  |  
|November 2, 2009                                           |  |        | 993     |                         |  | 3.84   |   |                         | 984     |  |  | 3.84 |  
|November 21, 2009                                          |  |        | 5,000   |                         |  | 2.67   |   |                         | -0-     |  |  | n/a  |  
|February 1, 2010                                           |  |        | 5,000   |                         |  | 2.87   |   |                         | -0-     |  |  | n/a  |  
|March 19, 2010                                             |  |        | 4,000   |                         |  | 3.45   |   |                         | -0-     |  |  | n/a  |  
|September 19, 2010                                         |  |        | 4,000   |                         |  | 3.60   |   |                         | -0-     |  |  | n/a  |  
|December 19, 2010                                          |  |        | 7,000   |                         |  | 2.19   |   |                         | -0-     |  |  | n/a  |  
|Federal funds purchased                                    |  |        | 6,500   |                         |  | 0.45   |   |                         | 26,500  |  |  | 4.33 |  
|Interest-bearing demand notes issued to the
 U.S. Treasury |  |        | 2,441   |                         |  | 0.00   |   |                         | 1,838   |  |  | 4.00 |  
|Trust preferred securities                                 |  |        | 25,000  |                         |  | 5.68   |   |                         | 25,000  |  |  | 5.68 |  
|Note payable                                               |  |        | 16,050  |                         |  | 4.50   |   |                         | 14,550  |  |  | 6.25 |  
|                                                           |  |        |         |                         |  |        |   |                         |         |  |  |      |  
|Total                                                      |  | $      | 118,016 |                         |  | 2.91   | % | $                       | 109,089 |  |  | 4.73 | %
|                                                           |  |        |         |                         |  |        |   |                         |         |  |  |      |  

21

---

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

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 2.19% to 3.84% as of December 31, 2008, are subject to
restrictions or penalties in the event of prepayment. All stock in the FHLB is
also pledged as additional collateral for these advances.

On July 15,
2005, the Corporation, through its subsidiary PNBC Capital Trust I, issued
trust preferred securities in the amount of $25,000. These securities were
issued to help finance the acquisition of Somonauk FSB Bancorp, Inc.
Additionally, these securities have a maturity of thirty years and a fixed
interest rate of 5.68% for the first five years. 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 had a note payable with a balance of $16,050 and $14,550 at
December 31, 2008 and 2007, respectively. The note payable was a demand note
that carried a floating interest rate equal to the higher of two-month LIBOR
plus 200 basis points or 4.50% (4.50% at December 31, 2008). The note, which
was secured by the capital stock certificates of the subsidiary bank, had a
maturity of January 30, 2009 and contained the covenant the subsidiary bank
would maintain risk-based capital at a minimum of 10% of risk-weighted assets.
The loan was paid off on February 24, 2009 with proceeds from the sale of preferred
stock under the Capital Purchase Program.

Customer
repurchase agreements consist of obligations of the Bank to other parties. The
obligations are secured by government agency securities and mortgage-backed
securities and such collateral is held by the Bank. The maximum amount of
outstanding agreements at any month-end during 2008 and 2007 totaled $41,193
and $38,011, respectively, and the daily average of such agreements totaled
$36,918 and $33,042 for 2008 and 2007, respectively. The agreements at December
31, 2008 are ongoing 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, 2008:  |  |         |       |          |   |       |   |   |       | 
|Federal                        |  | $       | 1,690 |          | $ | (391  | ) | $ | 1,299 | 
|State                          |  |         | 609   |          |   | (211  | ) |   | 398   | 
|                               |  |         |       |          |   |       |   |   |       | 
|Total                          |  | $       | 2,299 |          | $ | (602  | ) | $ | 1,697 | 
|                               |  |         |       |          |   |       |   |   |       | 
|Year ended
 December 31, 2007: |  |         |       |          |   |       |   |   |       | 
|Federal                        |  | $       | 1,490 |          | $ | (440  | ) | $ | 1,050 | 
|State                          |  |         | 353   |          |   | (26   | ) |   | 327   | 
|                               |  |         |       |          |   |       |   |   |       | 
|Total                          |  | $       | 1,843 |          | $ | (466  | ) | $ | 1,377 | 
|                               |  |         |       |          |   |       |   |   |       | 
|Year ended
 December 31, 2006: |  |         |       |          |   |       |   |   |       | 
|Federal                        |  | $       | 1,605 |          | $ | (966  | ) | $ | 639   | 
|State                          |  |         | 344   |          |   | 50    |   |   | 394   | 
|                               |  |         |       |          |   |       |   |   |       | 
|Total                          |  | $       | 1,949 |          | $ | (916  | ) | $ | 1,033 | 
|                               |  |         |       |          |   |       |   |   |       | 

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:

|                                                                       |  |      |        |      |   |        |   |   |        |  
|---------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                       |  | 2008 |        | 2007 |   | 2006   |  
|Computed expected tax expense                                        |  | $    | 3,068  |      | $ | 2,770  |   | $ | 2,557  |  
|Increase (decrease) in income taxes
 resulting from: Tax-exempt income |  |      | (1,439 | )    |   | (1,499 | ) |   | (1,603 | )
|Non-deductible interest expense                                        |  |      | 131    |      |   | 203    |   |   | 197    |  
|State income taxes, net of federal tax
 benefit                        |  |      | 240    |      |   | 204    |   |   | 170    |  
|Bank-owned life insurance income                                       |  |      | (285   | )    |   | (271   | ) |   | (265   | )
|Other, net                                                             |  |      | (18    | )    |   | (30    | ) |   | (23    | )
|                                                                       |  |      |        |      |   |        |   |   |        |  
|                                                                       |  | $    | 1,697  |      | $ | 1,377  |   | $ | 1,033  |  
|                                                                       |  |      |        |      |   |        |   |   |        |  

22

---

The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2008 and 2007
are presented below:

|                                                                         |  |      |        |      |   |        |  
|------------------------------------------------------------------------ |  | ---- | ------ | ---- | - | ------ | -
|                                                                         |  | 2008 |        | 2007 |  
|                                                                        
|Deferred tax assets:                                                     |  |      |        |      |   |        |  
|Deferred compensation                                                    |  | $    | 164    |      | $ | 153    |  
|Allowance for loan losses                                                |  |      | 1,966  |      |   | 1,261  |  
|Nonaccrual loan interest income                                          |  |      | 562    |      |   | 285    |  
|AMT credit carry forwards                                                |  |      | -0-    |      |   | 577    |  
|FAS 158 benefit accrual                                                  |  |      | 440    |      |   | 427    |  
|Other, net                                                               |  |      | 110    |      |   | 14     |  
|                                                                         |  |      |        |      |   |        |  
|Total gross deferred tax assets                                          |  |      | 3,242  |      |   | 2,717  |  
|                                                                         |  |      |        |      |   |        |  
|Deferred tax liabilities:                                                |  |      |        |      |   |        |  
|Buildings and equipment, principally due to
 differences in depreciation |  |      | (569   | )    |   | (527   | )
|Accretion                                                                |  |      | (39    | )    |   | (125   | )
|Purchase accounting adjustments                                          |  |      | (2,289 | )    |   | (2,464 | )
|FHLB Stock dividends                                                     |  |      | (276   | )    |   | (276   | )
|Mortgage servicing rights                                                |  |      | (1,140 | )    |   | (970   | )
|Prepaid expenses                                                         |  |      | (83    | )    |   | (134   | )
|Unrealized gain on investment securities
 available-for-sale             |  |      | (1,117 | )    |   | (434   | )
|                                                                         |  |      |        |      |   |        |  
|Total gross deferred tax liabilities                                     |  |      | (5,513 | )    |   | (4,930 | )
|                                                                         |  |      |        |      |   |        |  
|Net deferred tax liabilities                                             |  | $    | (2,271 | )    | $ | (2,213 | )
|                                                                         |  |      |        |      |   |        |  

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,
2008 and 2007.

12. Comprehensive Income

Other
comprehensive income components and related taxes were as follows:

|                                                                         |  |      |       |      |   |       |  
|------------------------------------------------------------------------ |  | ---- | ----- | ---- | - | ----- | -
|                                                                         |  | 2008 |       | 2007 |   | 2006  |  
|Net unrealized gains (losses) on securities
 available-for-sale          |  | $    | 2,107 |      | $ | 2,211 |  
|Less: Reclassification adjustment for
 realized gains included in income |  |      | (405  | )    |   | (541  | )
|                                                                         |  |      |       |      |   |       |  
|                                                                         |  |      | 1,702 |      |   | 1,670 |  
|Defined benefit pension plan                                             |  |      |       |      |   |       |  
|Net prior service credit                                                 |  |      | -0-   |      |   | 640   |  
|Amortization of transition obligation                                    |  |      | 16    |      |   | 16    |  
|Net loss                                                                 |  |      | -0-   |      |   | (197  | )
|                                                                         |  |      |       |      |   |       |  
|Other comprehensive income, before tax
 effect                           |  |      | 1,718 |      |   | 2,129 |  
|Tax expense                                                              |  |      | 660   |      |   | 825   |  
|                                                                         |  |      |       |      |   |       |  
|Other comprehensive income                                               |  | $    | 1,058 |      | $ | 1,304 |  
|                                                                         |  |      |       |      |   |       |  

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

|                                                             |  |      |       |      |   |       |   |   |        |  
|------------------------------------------------------------ |  | ---- | ----- | ---- | - | ----- | - | - | ------ | -
|                                                             |  | 2008 |       | 2007 |   | 2006  |  
|Net unrealized gain (loss) on securities
 available-for-sale |  | $    | 2,820 |      | $ | 1,118 |   | $ | (552   | )
|Net unrealized benefit obligations                           |  |      | (540  | )    |   | (556  | ) |   | -0-    |  
|Adjustment to initially apply FAS 158                        |  |      | -0-   |      |   | -0-   |   |   | (1,016 | )
|                                                             |  |      |       |      |   |       |   |   |        |  
|                                                             |  |      | 2,280 |      |   | 562   |   |   | (1,568 | )
|Tax effect                                                   |  |      | (878  | )    |   | (218  | ) |   | 608    |  
|                                                             |  |      |       |      |   |       |   |   |        |  
|Net-of-tax amount                                            |  | $    | 1,402 |      | $ | 344   |   | $ | (960   | )
|                                                             |  |      |       |      |   |       |   |   |        |  

13. 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,

23

---

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

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, 2008 and
2007, 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, 2008 and 2007.

The
most recent notifications, at December 31, 2008 and 2007, 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, 2008.

The
Corporations and the subsidiary banks actual capital amounts and ratios as of
December 31, 2008 and 2007 are as follows:

|                                              |  |        |        |                                |  |                                                                      |   |       |        |        |  |       |   |   |        |  |  |       |  
|--------------------------------------------- |  | ------ | ------ | ------------------------------ |  | -------------------------------------------------------------------- | - | ----- | ------ | ------ |  | ----- | - | - | ------ |  |  | ----- | -
|                                              |  | Actual |        | For Capital
 Adequacy Purposes |  | To Be Well-
 Capitalized Under
 Prompt Corrective
 Action Provisions |  
|                                              |  | Amount |        | Ratio                          |  | Amount                                                               |   | Ratio |        | Amount |  | Ratio |  
|                                              |  |        |        |                                |  |                                                                      |   |       |        |        |  |       |  
|As of
 December 31, 2008:                     |  |        |        |                                |  |                                                                      |   |       |        |        |  |       |   |   |        |  |  |       |  
|                                             
|Total
 Capital (to risk-weighted assets):     |  |        |        |                                |  |                                                                      |   |       |        |        |  |       |   |   |        |  |  |       |  
|Princeton National Bancorp,
Inc.              |  | $      | 72,112 |                                |  | 8.30                                                                 | % | $     | 69,490 |        |  | 8.00  | % | $ | 86,862 |  |  | 10.00 | %
|Citizens First National
Bank                  |  |        | 86,935 |                                |  | 10.00                                                                | % |       | 69,528 |        |  | 8.00  | % |   | 86,909 |  |  | 10.00 | %
|                                             
|Tier 1
 Capital (to risk-weighted assets):    |  |        |        |                                |  |                                                                      |   |       |        |        |  |       |   |   |        |  |  |       |  
|Princeton National Bancorp,
Inc.              |  | $      | 67,048 |                                |  | 7.72                                                                 | % | $     | 34,745 |        |  | 4.00  | % | $ | 52,117 |  |  | 6.00  | %
|Citizens First National
Bank                  |  |        | 81,870 |                                |  | 9.42                                                                 | % |       | 34,764 |        |  | 4.00  | % |   | 52,146 |  |  | 6.00  | %
|                                             
|Tier 1
 Capital (to average adjusted assets): |  |        |        |                                |  |                                                                      |   |       |        |        |  |       |   |   |        |  |  |       |  
|Princeton National Bancorp,
Inc.              |  | $      | 67,048 |                                |  | 6.22                                                                 | % | $     | 43,132 |        |  | 4.00  | % | $ | 53,916 |  |  | 5.00  | %
|Citizens First National
Bank                  |  |        | 81,870 |                                |  | 7.59                                                                 | % |       | 43,127 |        |  | 4.00  | % |   | 53,909 |  |  | 5.00  | %
|                                              |  |        |        |                                |  |                                                                      |   |       |        |        |  |       |   |   |        |  |  |       |  
|                                             
|                                              |  | Actual |        | For Capital
 Adequacy Purposes |  | To Be Well-
 Capitalized Under
 Prompt Corrective
 Action Provisions |  
|                                              |  | Amount |        | Ratio                          |  | Amount                                                               |   | Ratio |        | Amount |  | Ratio |  
|                                              |  |        |        |                                |  |                                                                      |   |       |        |        |  |       |  
|As of December 31, 2007:                      |  |        |        |                                |  |                                                                      |   |       |        |        |  |       |   |   |        |  |  |       |  
|                                             
|Total
 Capital (to risk-weighted assets):     |  |        |        |                                |  |                                                                      |   |       |        |        |  |       |   |   |        |  |  |       |  
|Princeton National Bancorp,
Inc.              |  | $      | 66,914 |                                |  | 8.44                                                                 | % | $     | 63,393 |        |  | 8.00  | % | $ | 79,242 |  |  | 10.00 | %
|Citizens First National
Bank                  |  |        | 79,798 |                                |  | 10.07                                                                | % |       | 63,384 |        |  | 8.00  | % |   | 79,230 |  |  | 10.00 | %
|                                             
|Tier 1 Capital (to
 risk-weighted assets):    |  |        |        |                                |  |                                                                      |   |       |        |        |  |       |   |   |        |  |  |       |  
|Princeton National Bancorp,
Inc.              |  | $      | 63,667 |                                |  | 8.03                                                                 | % | $     | 31,697 |        |  | 4.00  | % | $ | 47,545 |  |  | 6.00  | %
|Citizens First National
Bank                  |  |        | 76,550 |                                |  | 9.66                                                                 | % |       | 31,692 |        |  | 4.00  | % |   | 47,538 |  |  | 6.00  | %
|                                             
|Tier 1 Capital (to average
 adjusted assets): |  |        |        |                                |  |                                                                      |   |       |        |        |  |       |   |   |        |  |  |       |  
|Princeton National Bancorp,
Inc.              |  | $      | 63,667 |                                |  | 6.33                                                                 | % | $     | 40,255 |        |  | 4.00  | % | $ | 50,318 |  |  | 5.00  | %
|Citizens First National
Bank                  |  |        | 76,550 |                                |  | 7.61                                                                 | % |       | 40,249 |        |  | 4.00  | % |   | 50,311 |  |  | 5.00  | %
|                                              |  |        |        |                                |  |                                                                      |   |       |        |        |  |       |   |   |        |  |  |       |  

14. Employee, Officer and Director Benefit Plans

The
subsidiary bank has a defined contribution investment 401(k) plan. Under this
plan employees could elect to contribute, on a tax-deferred basis, up to a
maximum of $16 ($21 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 2008, 2007 and 2006 was $404,
$410 and $382, 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 $409 in 2008, $350 in 2007 and $350 in 2006.

Stock Based Compensation Plan

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

The
fair value of each option award is estimated on the date of grant using a
Black-Scholes closed-form model that uses the assumptions noted in the
following table. Expected volatility is based on historical volatility of the
Corporations stock and other factors. In 2008, 2007 and 2006, the volatility
was much lower than in previous years due to a more stable or decreasing stock
price as opposed to the rapidly increasing stock price of the preceding 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 rate for

24

---

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 2008, 2007 and 2006:

|                         |  |      |        |      |  |         |   |  |         |  
|------------------------ |  | ---- | ------ | ---- |  | ------- | - |  | ------- | -
|                         |  | 2008 |        | 2007 |  | 2006    |  
|                        
|Expected volatility      |  |      | .080   |      |  | .100    |   |  | .061    |  
|Expected dividends       |  |      | 4.96   | %    |  | 4.03    | % |  | 3.23    | %
|Expected term (in years) |  |      | 3 yrs. |      |  | 3
 yrs. |   |  | 3
 yrs. |  
|Risk-free rate           |  |      | 1.00   | %    |  | 3.07    | % |  | 4.74    | %

A
summary of option activity under the Plan as of December 31, 2008, 2007 and
2006, and changes during the years then ended, is presented as follows:

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

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

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

The
intrinsic value of the outstanding shares and the options exercisable noted
above excludes 366,566 shares and 224,627 shares, respectively, which were
anti-dilutive for 2007.

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

There
were no anti-dilutive shares for 2006.

The
weighted-average grant date fair value of options granted during the years
2008, 2007 and 2006 was $31, $103 and $151, respectively. The total intrinsic
value of options exercised during the years ended December 31, 2008, 2007 and
2006 was $21, $2 and $455, respectively.

25

---

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

A
summary of the status of the Corporations non-vested shares and changes during
the year ended December 31, 2008, 2007 and 2006 is presented below:

|                               |  |        |         |                                           |   |      | 
|------------------------------ |  | ------ | ------- | ----------------------------------------- | - | ---- | 
|                               |  | 2008   |        
|                               |  | Shares |         | Weighted
 Average
 Grant-Date
 Fair Value |  
|                               |  |        |         |                                           |  
|Non-vested, beginning of
year  |  |        | 141,939 |                                           | $ | 1.43 | 
|Granted                        |  |        | 86,125  |                                           |   | 0.36 | 
|Vested                         |  |        | (37,495 | )                                         |   | 1.43 | 
|Forfeited                      |  |        | (25,550 | )                                         |   | 1.43 | 
|                               |  |        |         |                                           |   |      | 
|Non-vested, end of year        |  |        | 165,019 |                                           | $ | 0.59 | 
|                               |  |        |         |                                           |   |      | 
|                               |  |        |         |                                           |   |      | 
|                               |  | 2007   |        
|                               |  | Shares |         | Weighted
 Average
 Grant-Date
 Fair Value |  
|                               |  |        |         |                                           |  
|Non-vested, beginning of
 year |  |        | 83,783  |                                           | $ | 1.80 | 
|Granted                        |  |        | 86,750  |                                           |   | 1.19 | 
|Vested                         |  |        | (27,594 | )                                         |   | 1.80 | 
|Forfeited                      |  |        | (1,000  | )                                         |   | 1.80 | 
|                               |  |        |         |                                           |   |      | 
|Non-vested, end of year        |  |        | 141,939 |                                           | $ | 1.43 | 
|                               |  |        |         |                                           |   |      | 
|                               |  |        |         |                                           |   |      | 
|                               |  | 2006   |        
|                               |  | Shares |         | Weighted
 Average
 Grant-Date
 Fair Value |  
|                               |  |        |         |                                           |  
|Non-vested, beginning of
 year |  |        | -0-     |                                           |   | n/a  | 
|Granted                        |  |        | 83,783  |                                           | $ | 1.80 | 
|Vested                         |  |        | -0-     |                                           |   | n/a  | 
|Forfeited                      |  |        | -0-     |                                           |   | n/a  | 
|                               |  |        |         |                                           |   |      | 
|Non-vested, end of year        |  |        | 83,783  |                                           | $ | 1.80 | 
|                               |  |        |         |                                           |   |      | 

As
of December 31, 2008, there was $150 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, 2008, 2007, and 2006, was $54, $50 and $0, respectively.

15. Pension and Other Post-Retirement Benefits

Employee Health Benefit Plan

The
Corporation does not have a defined benefit pension plan. The Corporation does
have a defined contribution investment plan which is discussed in footnote 14
(Employee, Officer, and Director Benefit Plans). The Corporation offers
certain retirees the opportunity to continue benefits in the subsidiary banks
Employee Health Benefit Plan. The Corporations level of contribution is based
upon an age, service formula, date of employment and retirement date. Employees
hired prior to October 1, 1994 who retired prior to July 1, 2008 were eligible
to receive benefits under the Banks Health Benefit Plan for life. All
employees hired on or before October 1, 1994 previously were allowed coverage
for life. The plan was amended on December 31, 2007 to require employees hired
on or before October 1, 1994 who retire after July 1, 2008 to convert to a
Medicare Supplement Plan at age 65. Coverage stops at age 65 for employees
hired after October 1, 1994. The Corporation uses a December 31 measurement
date for its plan. Information about the plans funded status follows:

|                                      |  |                                 |       |      |   |       |  
|------------------------------------- |  | ------------------------------- | ----- | ---- | - | ----- | -
|                                      |  | Post Retirement Health Benefits |      
|                                      |  | 2008                            |       | 2007 |  
|Change in benefit
 obligation         |  |                                 |       |      |   |       |  
|Beginning of year                     |  | $                               | 1,096 |      | $ | 1,536 |  
|Service cost                          |  |                                 | 20    |      |   | 37    |  
|Interest cost                         |  |                                 | 66    |      |   | 92    |  
|Amortization of transition
obligation |  |                                 | (16   | )    |   | -0-   |  
|Amortization of prior service
cost    |  |                                 | (62   | )    |   | -0-   |  
|Actuarial (gain) loss                 |  |                                 | 69    |      |   | 147   |  
|Benefits paid                         |  |                                 | (73   | )    |   | (76   | )
|Amendments                            |  |                                 | -0-   |      |   | (640  | )
|                                      |  |                                 |       |      |   |       |  
|Funded status at end of
year          |  | $                               | 1,100 |      | $ | 1,096 |  
|                                      |  |                                 |       |      |   |       |  

26

---

The
components of the 2008, 2007, and 2006 net periodic post-retirement benefit
cost are shown below:

|                                           |  |      |     |      |   |      |  |   |     | 
|------------------------------------------ |  | ---- | --- | ---- | - | ---- |  | - | --- | 
|                                           |  | 2008 |     | 2007 |   | 2006 | 
|                                          
|Service cost                               |  | $    | 20  |      | $ | 37   |  | $ | 61  | 
|Interest cost                              |  |      | 66  |      |   | 92   |  |   | 66  | 
|Amortization of transition
 obligation     |  |      | -0- |      |   | 16   |  |   | -0- | 
|Amortization of prior
 service cost        |  |      | (62 | )    |   | -0-  |  |   | 16  | 
|Amortization of net loss                   |  |      | 69  |      |   | 58   |  |   | 31  | 
|                                           |  |      |     |      |   |      |  |   |     | 
|Net periodic
 post-retirement benefit cost |  | $    | 93  |      | $ | 203  |  | $ | 174 | 
|                                           |  |      |     |      |   |      |  |   |     | 

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

|                                                                                     |  |                                 |     |      |   |      |  
|------------------------------------------------------------------------------------ |  | ------------------------------- | --- | ---- | - | ---- | -
|                                                                                     |  | Post Retirement Health Benefits |    
|                                                                                     |  | 2008                            |     | 2007 |  
|                                                                                    
|Net gain (loss)                                                                      |  | $                               | -0- |      | $ | (197 | )
|Prior service cost
 recognized                                                       |  |                                 | -0- |      |   | 640  |  
|Prior service credit
 established                                                    |  |                                 | -0- |      |   | -0-  |  
|Amortization of transition
 obligation                                               |  |                                 | 16  |      |   | 16   |  
|                                                                                     |  |                                 |     |      |   |      |  
|Total recognized in other
 comprehensive income                                      |  |                                 | 16  |      |   | 459  |  
|                                                                                     |  |                                 |     |      |   |      |  
|Total recognized in net periodic benefit cost and
other comprehensive
 income (loss) |  | $                               | (77 | )    | $ | 256  |  
|                                                                                     |  |                                 |     |      |   |      |  

The
estimated net loss, prior service cost and transition obligation for the
defined benefit plan that will be amortized from accumulated other
comprehensive income (loss) into net periodic benefit cost over the next fiscal
year is a net loss of $6.

Amounts
recognized in the balance sheets:

|            |  |                                 |       |      |   |       | 
|----------- |  | ------------------------------- | ----- | ---- | - | ----- | 
|            |  | Post Retirement Health Benefits |      
|            |  | 2008                            |       | 2007 |  
|           
|Liabilities |  | $                               | 1,100 |      | $ | 1,096 | 

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

|                                   |  |                                 |     |      |   |       |  
|---------------------------------- |  | ------------------------------- | --- | ---- | - | ----- | -
|                                   |  | Post Retirement Health Benefits |    
|                                   |  | 2008                            |     | 2007 |  
|                                  
|Net loss                           |  | $                               | -0- |      | $ | 1,017 |  
|Unrecognized prior service
 credit |  |                                 | -0- |      |   | (558  | )
|Transition obligation              |  |                                 | 16  |      |   | -0-   |  
|                                   |  |                                 |     |      |   |       |  
|                                   |  | $                               | 16  |      | $ | 459   |  
|                                   |  |                                 |     |      |   |       |  

The
accumulated benefit obligation for all defined benefit plans was $1,100 and
$1,096 at December 31, 2008 and 2007, respectively.

Significant
assumptions include:

|                                                                    |  |                                 |     |      |  |     |  
|------------------------------------------------------------------- |  | ------------------------------- | --- | ---- |  | --- | -
|                                                                    |  | Post Retirement Health Benefits |    
|                                                                    |  | 2008                            |     | 2007 | 
|                                                                   
|Weighted average
 assumptions used to determine benefit obligation: |  |                                 | 6.0 | %    |  | 6.0 | %
|Discount rate                                                       |  |                                 | n/a |      |  | n/a |  
|Rate of compensation
increase                                       |  |                                 |     |      |  |     |  
|                                                                    |  |                                 |     |      |  |     |  
|Weighted average assumptions used to determine
benefit cost:        |  |                                 | 6.0 | %    |  | 6.0 | %
|Discount rate                                                       |  |                                 | n/a |      |  | n/a |  
|Expected return on plan
assets                                      |  |                                 | n/a |      |  | n/a |  
|Rate of compensation
increase                                       |  |                                 |     |      |  |     |  

For
measurement purposes, a 7.0% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2008 and 2007, respectively. The
rate was assumed to decrease gradually to 5.0% by the year 2013 and remain at
that level thereafter.

27

---

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

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

|                                                        |  |                               |  |                               |  |  | 
|------------------------------------------------------- |  | ----------------------------- |  | ----------------------------- |  |  | 
|                                                        |  | 1-Percentage-
 Point Increase |  | 1-Percentage-
 Point Decrease | 
|Effect on total of service and interest cost
components |  | $     8                       |  | $   (7)                       | 
|Effect on post-retirement benefit
obligation            |  | 78                            |  | (70)                          | 

The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid as of December 31, 2008:

|          |  |                                   |   |     |  | 
|--------- |  | --------------------------------- | - | --- |  | 
|          |  | Post Retirement 
 Health Benefits |  
|          |  |                                   |  
|2009      |  |                                   | $ | 44  |  | 
|2010      |  |                                   |   | 54  |  | 
|2011      |  |                                   |   | 63  |  | 
|2012      |  |                                   |   | 52  |  | 
|2013      |  |                                   |   | 60  |  | 
|2014-2018 |  |                                   |   | 425 |  | 

Split Dollar Life Insurance

The
Financial Accounting Standards Board Emerging Issues Task Force (EITF) issued
EITF No. 06-4 Accounting for Deferred Compensation and Post Retirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements, which
requires the Corporation to recognize a liability and compensation expense for
endorsement split-dollar life insurance arrangements that provide a benefit to
an employee that extends to post retirement periods. The benefit to the
employees is the payment of the premiums by the Corporation. The Corporation
adopted EITF 06-4 as of January 1, 2008, through a cumulative effect adjustment
as a liability and a decrease to retained earnings of $580. In 2008, an expense
was recorded as the remaining benefit is earned with a corresponding addition
to the post retirement benefit obligation. The amount of the expense for 2008
was $36. For the period from retirement to the estimated date of death for the
participants, this liability is reversed into income.

16. Fair Value of Financial Instruments

Effective
January 1, 2008, the Corporation adopted Statement of Financial Accounting
Standards No. 157 (FAS 157), Fair Value Measurements. FAS 157 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. FAS 157 has been applied prospectively as of the
beginning of the period.

FAS
157 defines the fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. FAS 157 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.

In
accordance with FAS 157, the Corporation groups its financial assets and
financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value. These levels are:

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

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

Available-for-Sale
Securities - The fair
value of available-for-sale securities are determined by various valuation
methodologies. Where quoted market prices are available in an active market,
securities are classified within Level 1. The Corporation has no securities
classified within Level 1. If quoted market prices are not available, then fair
values are estimated by using pricing models or quoted prices of securities
with similar characteristics. Level 2 securities include U.S. government
agencies, state and municipal, and collateralized mortgage obligation
securities. In certain cases where Level 1 or Level 2 inputs are not available,
securities are classified within Level 3 of the hierarchy. The Corporation has
no securities classified within Level 3.

The
following table presents the Corporations assets that are measured at fair
value on a recurring basis and the level within the FAS 157 hierarchy in which
the fair value measurements fall as of December 31, 2008 (in thousands):

|                               |  |            |         |                                                                   |  |                                                 |     |                                              |  |  |   |         |  |  |  |   |     |  | 
|------------------------------ |  | ---------- | ------- | ----------------------------------------------------------------- |  | ----------------------------------------------- | --- | -------------------------------------------- |  |  | - | ------- |  |  |  | - | --- |  | 
|                               |  |            |         | Fair Value Measurements Using                                     |  |                                                 |    
|                               |  |            |         |                                                                   |  |                                                 |    
|                               |  | Fair Value |         | Quoted Prices in
 Active Markets for
 Identical Assets
 (Level 1) |  | Significant Other
 Observable Inputs
 (Level 2) |     | Significant
 Unobservable
 Inputs
 (Level 3) | 
|                               |  |            |         |                                                                   |  |                                                 |     |                                              | 
|Available-for-sale
 securities |  | $          | 236,883 |                                                                   |  | $                                               | -0- |                                              |  |  | $ | 236,883 |  |  |  | $ | -0- |  | 

28

---

Impaired
Loans -Loans for which it is probable that the
Corporation will not collect all principal and interest due according to
contractual terms are measured for impairment in accordance with the provisions
of Financial Accounting Standard No. 114 (FAS 114), Accounting by Creditors
for Impairment of a Loan. Allowable methods for estimating fair value include
using the fair value of the collateral for collateral dependent loans or, where
a loan is determined not to be collateral dependent, using the discounted cash
flow method.

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

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

Impaired
loans are classified within Level 3 of the hierarchy.

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

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

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, 2008 and 2007, were as follows:

|                                                             |  |                 |           |             |   |                 |  |             |           |  |   |           | 
|------------------------------------------------------------ |  | --------------- | --------- | ----------- | - | --------------- |  | ----------- | --------- |  | - | --------- | 
|                                                             |  | 2008            |           | 2007        |  
|                                                             |  |                 |           |             |  
|                                                             |  | Carrying
 Value |           | Fair
 Value |   | Carrying
 Value |  | Fair
 Value |          
|                                                             |  |                 |           |             |   |                 |  |             |          
|                                                            
|Financial Assets:                                            |  |                 |           |             |   |                 |  |             |           |  |   |           | 
|Cash and due from banks                                      |  | $               | 17,487    |             | $ | 17,487          |  | $           | 25,801    |  | $ | 25,801    | 
|Interest-bearing deposits in financial
 institutions         |  |                 | 2,774     |             |   | 2,774           |  |             | 1,803     |  |   | 1,803     | 
|Investment securities                                        |  |                 | 251,115   |             |   | 251,344         |  |             | 228,575   |  |   | 228,796   | 
|Loans, net, including loans held-for-sale                    |  |                 | 787,928   |             |   | 793,411         |  |             | 720,327   |  |   | 720,715   | 
|Accrued interest receivable                                  |  |                 | 9,693     |             |   | 9,693           |  |             | 10,876    |  |   | 10,876    | 
|                                                             |  |                 |           |             |   |                 |  |             |           |  |   |           | 
|Total Financial Assets                                       |  | $               | 1,068,997 |             | $ | 1,074,709       |  | $           | 987,382   |  | $ | 987,991   | 
|                                                             |  |                 |           |             |   |                 |  |             |           |  |   |           | 
|                                                            
|Financial Liabilities:                                       |  |                 |           |             |   |                 |  |             |           |  |   |           | 
|Non-interest-bearing demand deposits                         |  | $               | 110,559   |             | $ | 110,559         |  | $           | 102,452   |  | $ | 102,452   | 
|Interest-bearing deposits                                    |  |                 | 851,573   |             |   | 862,165         |  |             | 788,955   |  |   | 794,200   | 
|Borrowings                                                   |  |                 | 118,016   |             |   | 127,816         |  |             | 109,089   |  |   | 107,517   | 
|Accrued interest payable                                     |  |                 | 4,472     |             |   | 4,472           |  |             | 5,141     |  |   | 5,141     | 
|                                                             |  |                 |           |             |   |                 |  |             |           |  |   |           | 
|Total Financial Liabilities                                  |  | $               | 1,084,620 |             | $ | 1,105,012       |  | $           | 1,005,637 |  | $ | 1,009,310 | 
|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

29

---

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

difference between current levels of interest rates and the committed
rates. The fair values of letters of credit and lines of credit are based on
fees currently charged for similar agreements or on the estimated cost to
terminate or otherwise settle the obligations with the counterparties at the
reporting date.

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

The
Corporations remaining assets and liabilities, which are not considered
financial instruments, have not been valued differently than has been customary
with historical cost accounting. No disclosure of the relationship value of the
Corporations core deposit base is required by FAS 107.

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.

17. 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, 2008, the subsidiary bank had $10,702
available for dividends. Additionally, according to the guidelines, at January
1, 2009, the subsidiary bank had $7,141 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.

18. 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.

The current
economic environment presents financial institutions with unprecedented
circumstances and challenges which in some cases have resulted in large
declines in the fair values of investments and other assets, constraints on
liquidity and significant credit quality problems, including severe volatility
in the valuation of real estate and other collateral supporting loans. The
financial statements have been prepared using values and information currently
available to the Corporation.

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

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

The
subsidiary banks exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional amount
of those instruments. The subsidiary bank uses the same credit policies in
making commitments and conditional obligations as they do for on-balance-sheet
instruments. At December 31, 2008, commitments to extend credit and standby
letters of credit were approximately $155,603 and $5,886, respectively. At
December 31, 2007, commitments to extend credit and standby letters of credit
were approximately $143,506 and $7,690, 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, 2008
and 2007, 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.

19. FDIC Assessment

Effective
November 17, 2006, the FDIC implemented a one-time credit of $4.7 billion to
eligible institutions. The purpose of the credit was 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 was an eligible institution and received notice from
the FDIC that its share of the credit was $647. This amount was not reflected
in the accompanying financial statements as it represented contingent future
credits against future insurance assessment payments. In 2008 and 2007, FDIC
premium credits received totaled $266 and $381, respectively, against the
premium expense, leaving a remaining credit of $0, as of December 31, 2008, to
offset future premium expense.

On February
27, 2009, the FDIC announced it had adopted an interim rule to impose a 20
basis point emergency special assessment on June 30, 2009 which will be
collected on September 30, 2009. The interim rule also provides that an
additional emergency assessment of up to 10 basis points may be imposed if the

30

---

reserve ratio of the Deposit Insurance Fund is estimated to fall to a
level that the Board believes would adversely affect public confidence or to a
level which shall be close to zero or negative at the end of a calendar
quarter. The 20 basis point assessment is based on the institutions assessment
base which is total deposits. If the June 30, 2009 assessment base is
consistent with December 31, 2008, the assessment would approximate $1,874.

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

On January
23, 2009, the Corporation received $25,083 of equity capital by issuing to the
United States Department of Treasury 25,083 shares of the Corporations 5.00%
Series B Non-Voting Cumulative Preferred Stock, par value $0.01 per share with
a liquidation preference of $1,000 per share and a ten-year warrant to purchase
up to 155,025 shares of the Corporations common stock, par value $0.01 per
share, at an exercise price of $24.27 per share. The proceeds received were
allocated to the preferred stock and additional paid-in capital based on their
relative fair values. The resulting discount on the preferred stock is
amortized against retained earnings and will be reflected in the Corporations
consolidated statement of income as Dividends on preferred shares, resulting
in additional dilution to the Corporations earnings per share. The warrants
would be immediately exercisable, in whole or in part, over a term of 10 years.
The warrants will be included in the Corporations diluted average common
shares outstanding (subject to anti-dilution). Both the preferred securities
and warrants were accounted for as additions to the Corporations regulatory
Tier 1 and total capital.

The Series
B Preferred stock is not mandatorily redeemable and will pay cumulative
dividends at a rate of 5% per year for the first five years and 9% per year
thereafter. Any redemption requires Federal Reserve approval. The Series B
Preferred stock will rank on equal priority with the Corporations existing
Series A Non-Cumulative Perpetual Convertible Preferred stock.

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

21. 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 |        
|                                                           |  | 2008        |         | 2007 |  
|Assets                                                     |  |             |         |      |   |         |  
|Cash                                                       |  | $           | 663     |      | $ | 240     |  
|Interest-bearing
 deposits in subsidiary bank              |  |             | 180     |      |   | 75      |  
|Other assets                                               |  |             | 1,423   |      |   | 1,651   |  
|Investment
 in subsidiary bank                             |  |             | 112,156 |      |   | 106,345 |  
|                                                           |  |             |         |      |   |         |  
|Total assets                                               |  |             | 114,422 |      |   | 108,311 |  
|                                                           |  |             |         |      |   |         |  
|Liabilities                                                |  |             |         |      |   |         |  
|Borrowings                                                 |  | $           | 41,050  |      | $ | 39,550  |  
|Other
 liabilities                                         |  |             | 901     |      |   | 154     |  
|                                                           |  |             |         |      |   |         |  
|Total liabilities                                          |  |             | 41,951  |      |   | 39,704  |  
|                                                           |  |             |         |      |   |         |  
|Stockholders Equity                                       |  |             |         |      |   |         |  
|Common stock                                               |  |             | 22,391  |      |   | 22,391  |  
|Surplus                                                    |  |             | 18,420  |      |   | 18,275  |  
|Retained
 earnings                                         |  |             | 54,329  |      |   | 51,279  |  
|Accumulated
 other comprehensive income (loss), net of tax |  |             | 1,402   |      |   | 344     |  
|Less: Cost
 of treasury shares                             |  |             | (24,071 | )    |   | (23,682 | )
|                                                           |  |             |         |      |   |         |  
|Total stockholders equity                                 |  |             | 72,471  |      |   | 68,607  |  
|                                                           |  |             |         |      |   |         |  
|Total liabilities and stockholders
equity                 |  | $           | 114,422 |      | $ | 108,311 |  
|                                                           |  |             |         |      |   |         |  

31

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

Condensed Statements of Income

|                                                                                  |  |                                 |       |      |   |       |   |   |       |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ----- | ---- | - | ----- | - | - | ----- | -
|                                                                                  |  | For the Years Ended December 31 |      
|                                                                                  |  | 2008                            |       | 2007 |   | 2006  |  
|Income                                                                            |  |                                 |       |      |   |       |   |   |       |  
|Dividends
 received from subsidiary bank                                          |  | $                               | 5,600 |      | $ | 4,300 |   | $ | 4,200 |  
|Interest
 income                                                                  |  |                                 | 5     |      |   | 7     |   |   | 24    |  
|Other income                                                                      |  |                                 | 43    |      |   | 24    |   |   | 37    |  
|                                                                                  |  |                                 |       |      |   |       |   |   |       |  
|Total income                                                                      |  |                                 | 5,648 |      |   | 4,331 |   |   | 4,261 |  
|                                                                                  |  |                                 |       |      |   |       |   |   |       |  
|Expenses                                                                          |  |                                 |       |      |   |       |   |   |       |  
|Interest
 expense                                                                 |  |                                 | 2,100 |      |   | 2,209 |   |   | 1,887 |  
|Amortization
 and depreciation                                                    |  |                                 | 7     |      |   | 7     |   |   | 7     |  
|Other
 expenses                                                                   |  |                                 | 253   |      |   | 264   |   |   | 212   |  
|                                                                                  |  |                                 |       |      |   |       |   |   |       |  
|Total expenses                                                                    |  |                                 | 2,360 |      |   | 2,480 |   |   | 2,106 |  
|                                                                                  |  |                                 |       |      |   |       |   |   |       |  
|Income before income taxes and equity in
 undistributed income of subsidiary bank |  |                                 | 3,288 |      |   | 1,851 |   |   | 2,155 |  
|Applicable
 income tax benefit                                                    |  |                                 | (892  | )    |   | (924  | ) |   | (772  | )
|                                                                                  |  |                                 |       |      |   |       |   |   |       |  
|Income before equity in undistributed
 income of subsidiary bank                  |  |                                 | 4,180 |      |   | 2,775 |   |   | 2,927 |  
|Equity in
 undistributed income of subsidiary bank                                |  |                                 | 3,146 |      |   | 3,995 |   |   | 3,561 |  
|                                                                                  |  |                                 |       |      |   |       |   |   |       |  
|Net income                                                                        |  | $                               | 7,326 |      | $ | 6,770 |   | $ | 6,488 |  
|                                                                                  |  |                                 |       |      |   |       |   |   |       |  

Condensed Statements of Cash Flows

|                                                                                   |  |                                 |        |      |   |         |   |   |        |  
|---------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------- | - | - | ------ | -
|                                                                                   |  | For the Years Ended December 31 |       
|                                                                                   |  | 2008                            |        | 2007 |   | 2006    |  
|Operating activities:                                                              |  |                                 |        |      |   |         |   |   |        |  
|Net income                                                                         |  | $                               | 7,326  |      | $ | 6,770   |   | $ | 6,488  |  
|Adjustments to reconcile net income to net
 cash provided by operating activities: |  |                                 |        |      |   |         |   |   |        |  
|Equity in undistributed income of
 subsidiary bank                                 |  |                                 | (3,146 | )    |   | (3,995  | ) |   | (3,561 | )
|Amortization of other intangible assets                                            |  |                                 | 7      |      |   | 7       |   |   | 7      |  
|(Increase) decrease in other assets                                                |  |                                 | (1,882 | )    |   | 5,148   |   |   | (2,416 | )
|(Decrease) increase in other liabilities                                           |  |                                 | 747    |      |   | (208    | ) |   | (1,006 | )
|                                                                                   |  |                                 |        |      |   |         |   |   |        |  
|Net cash (used) provided by operating
activities                                   |  |                                 | 3,052  |      |   | 7,722   |   |   | (488   | )
|                                                                                   |  |                                 |        |      |   |         |   |   |        |  
|                                                                                   |  |                                 |        |      |   |         |   |   |        |  
|Investing Activities:                                                              |  |                                 |        |      |   |         |   |   |        |  
|Payments related to acquisitions, net of
 cash and cash equivalents acquired       |  |                                 | -0-    |      |   | (10,182 | ) |   | -0-    |  
|                                                                                   |  |                                 |        |      |   |         |   |   |        |  
|Net cash used in investing activities                                              |  |                                 | -0-    |      |   | (10,182 | ) |   | -0-    |  
|                                                                                   |  |                                 |        |      |   |         |   |   |        |  
|                                                                                   |  |                                 |        |      |   |         |   |   |        |  
|Financing activities:                                                              |  |                                 |        |      |   |         |   |   |        |  
|Net increase in borrowings                                                         |  |                                 | 1,500  |      |   | 6,050   |   |   | 1,800  |  
|Sale of treasury stock                                                             |  |                                 | 124    |      |   | 175     |   |   | 70     |  
|Purchase of treasury stock                                                         |  |                                 | (553   | )    |   | (1,459  | ) |   | (2,024 | )
|Exercise of stock options and issuance of
 treasury stock                          |  |                                 | 101    |      |   | 12      |   |   | 1,697  |  
|Dividends paid                                                                     |  |                                 | (3,696 | )    |   | (3,597  | ) |   | (3,542 | )
|                                                                                   |  |                                 |        |      |   |         |   |   |        |  
|Net cash (used) provided by financing
activities                                   |  |                                 | (2,524 | )    |   | 1,181   |   |   | (1,999 | )
|                                                                                   |  |                                 |        |      |   |         |   |   |        |  
|(Decrease) increase in cash and cash
 equivalents                                  |  |                                 | 528    |      |   | (1,279  | ) |   | (2,487 | )
|Cash and cash equivalents at beginning of
 year                                    |  |                                 | 315    |      |   | 1,594   |   |   | 4,081  |  
|                                                                                   |  |                                 |        |      |   |         |   |   |        |  
|Cash and cash equivalents at end of year                                           |  | $                               | 843    |      | $ | 315     |   | $ | 1,594  |  
|                                                                                   |  |                                 |        |      |   |         |   |   |        |  

32

---

Notes

33

---

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,
2008, 2007, and 2006. 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

Although
earnings slipped in the fourth quarter, the $8.746 million reported for the
subsidiary bank was a record, surpassing the previous record set in 2000 and
besting last years net income by 5.4%. Additionally, net income of $7.326
million for PNBC represents the third highest total in the history of the
Corporation.

Although,
fourth quarter earnings were negatively impacted by an increased provision for
loan losses, as well as the removal of interest income for loans transferred to
non-accrual status, the Corporations core earnings remain solid. The following
represents PNBC net income, diluted earnings per share, and provision for loan
loss expense for each quarter of 2008:

|            |  |            |   |                             |  |           |  |   |      |  |  |  |   |       |  | 
|----------- |  | ---------- | - | --------------------------- |  | --------- |  | - | ---- |  |  |  | - | ----- |  | 
|            |  | Net Income |   | Diluted
 Earnings per Share |  | Provision | 
|            |  |            |   |                             |  |           | 
|1st Quarter |  |            | $ | 2,090                       |  |           |  | $ | 0.63 |  |  |  | $ | 368   |  | 
|2nd Quarter |  |            |   | 2,020                       |  |           |  |   | 0.61 |  |  |  |   | 450   |  | 
|3rd Quarter |  |            |   | 2,187                       |  |           |  |   | 0.66 |  |  |  |   | 550   |  | 
|4th Quarter |  |            |   | 1,029                       |  |           |  |   | 0.31 |  |  |  |   | 1,600 |  | 

It
should be noted there was $385 in interest income reversed in the fourth
quarter of 2008, in addition to the $1,600 recorded in provision for loan loss
expense. With an average amount of activity in these two areas, the Corporation
would have recorded earnings of approximately $0.60 per share in the fourth
quarter, which is consistent with the other three quarters in 2008.

One
of the biggest reasons for this years improvement continues to be the increase
in the net interest margin, which improved from 3.20% in 2007, to 3.44% in
2008. This was due to strong pricing control of the Banks deposit products
along with a favorable change in asset mix as the loan-to-asset ratio increased
to 68.0% at December 31, 2008, compared to 66.9% a year ago.

Non-interest
expenses in total were less than budget again in 2008 and, as a percentage of
average assets, decreased to 2.81% in 2008 from 2.85% in 2007. This continues a
trend over the past few years and is the lowest level the Corporation has seen
since the 2.78% recorded in 1989! Non-interest income grew by 2.6% over the
past twelve months and remains an integral part of the Corporations success.

On
the balance sheet side, the Corporation experienced asset growth of $82.4
million (or 7.6%), ending the year at $1.163 billion in total assets. Loan
growth was very steady during 2008 growing by $68.2 million (or 9.4%), while
deposits grew by $70.7 million (or 7.9%).

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 stockholder return, as measured by return on average equity
and earnings per share. During 2008, the Corporation repurchased 20,000 shares
of its common stock at a total cost of $553. Since 1997, the Corporation has
repurchased 1,364,271 shares of common stock through repurchase programs.
Additionally, the Corporation paid dividends of $1.12 per share in 2008,
representing a total of $3,696; increases of $.04 per share (or 3.7%) and $99
(or 2.8%), from 2007, respectively. Total stockholders equity increased by
$3.9 million (or 5.6%) to $72,471 at December 31, 2008, compared to $68,607 at
December 31, 2007.

|     |  |                     |           |                 |  |                     |   |                 |   |             |  |                 |  |      |   |   |       |  |  |        |  
|---- |  | ------------------- | --------- | --------------- |  | ------------------- | - | --------------- | - | ----------- |  | --------------- |  | ---- | - | - | ----- |  |  | ------ | -
|     |  | Assets at
 Year-End |           | Percent
 Change |  | Equity at
 Year-End |   | Percent
 Change |   | Net
 Income |  | Percent
 Change | 
|     |  |                     |           |                 |  |                     |   |                 |   |             |  |                 | 
|2008 |  | $                   | 1,163,130 |                 |  | 7.63                | % |                 | $ | 72,471      |  |                 |  | 5.63 | % | $ | 7,326 |  |  | 8.21   | %
|2007 |  |                     | 1,080,702 |                 |  | 4.72                |   |                 |   | 68,607      |  |                 |  | 4.98 |   | $ | 6,770 |  |  | 4.35   |  
|2006 |  |                     | 1,031,959 |                 |  | 9.17                |   |                 |   | 65,355      |  |                 |  | 3.50 |   |   | 6,488 |  |  | (14.34 | )

Critical Accounting Policies and Use of Significant Estimates

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

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

We
estimate the appropriate level of allowance for loan losses by separately
evaluating impaired and nonimpaired loans. A specific allowance is assigned to
an impaired loan when expected cash flows or collateral do not justify the
carrying amount of the loan. The methodology used to assign an allowance to a
nonimpaired loan is more subjective. Generally, the allowance assigned to
nonimpaired loans is determined by applying historical loss

34

---

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

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

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

Additionally,
the Corporation reviews its uncertain tax positions annually under FASB
Interpretation 48, Accounting for Uncertainty in Income Taxes. An uncertain tax
position is recognized as a benefit only if it is more likely than not that
the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount actually recognized is the largest amount
of tax benefit that is greater than 50% likely to be recognized on examination.
For tax positions not meeting the more likely than not test, no tax benefit
is recorded. A significant amount of judgment is applied to determine both
whether the tax position meets the more likely than not test as well as to
determine the largest amount of tax benefit that is greater than 50% likely to
be recognized. Differences between the position taken by management and that of
taxing authorities could result in a reduction of a tax benefit or increase to
tax liability, which could adversely affect future income tax expense.

Impairment
of Goodwill and Intangible Assets - Core deposit and customer relationships,
which are intangible assets with a finite life, are recorded on our balance
sheets. These intangible assets were capitalized as a result of past
acquisitions and are being amortized over their estimated useful lives of up to
15 years. Core deposit intangible assets, with finite lives will be tested for
impairment when changes in events or circumstances indicate that its carrying
amount may not be recoverable. Core deposit intangible assets were tested for
impairment during 2008 and 2007, as part of the goodwill impairment test and no
impairment was deemed necessary.

As
a result of our acquisition activity, goodwill, an intangible asset with an
indefinite life, was reflected on our balance sheet in prior periods. Goodwill
is evaluated for impairment annually, unless there are factors present that
indicate a potential impairment, in which case, the goodwill impairment test is
performed more frequently than annually.

Mortgaging
Service Rights (MSRs) - MSR fair values are very sensitive to movements in
interest rates as expected future net servicing income depends on the projected
outstanding principal balances of the underlying loans, which can be greatly
reduced by prepayments. Prepayments usually increase when mortgage interest
rates decline and decrease when mortgage interest rates rise.

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

FASB
Statement No. 157, Fair Value Measurements,
establishes a framework for measuring the fair value of financial instrument
that considers the attributes specific to particular assets or liabilities and
establishes a three-level hierarchy for determining fair value based on the
transparency of inputs to each valuation as of the fair value measurement date.
The three levels are defined as follows:

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

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

Analysis of Results of Operations

Net
Income.Net income for
2008 increased by $556 (or 8.2%) to $7,326 (or $2.22 per basic and $2.21 per
diluted earnings per share), from $6,770 (or $2.04 basic earnings per share and
$2.03 diluted earnings per share) in 2007. This increase is due to an improved
net interest margin, which generated an additional $4.5 million in net interest
income when compared to the prior year. This more than offset the increase in
provision for loan losses of $2.3 million. 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.

35

---

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

Net
income for 2007 increased $282 (or 4.3%) to $6,770 (or $2.04 basic earnings per
share and $2.03 diluted earnings per share), from $6,488 (or $1.93 basic
earnings per share and $1.91 diluted earnings per share) in 2006. This increase
is due to growth in the Corporations balance sheet. Average interest-earning
assets increased by $65.7 million during 2007 compared to 2006, generating an
additional $1.2 million in net interest income.

Net Interest Income.The Corporation
experienced a $4.4 million improvement in net interest income, on a
taxable-equivalent basis, during 2008, increasing to $33,739 from $29,361 in
2007, representing an improvement of 14.9%. This positive change was made
possible through growth in the balance sheet and an increased focus on reducing
the Corporations cost of funds in todays lower interest environment. Average
interest-earning assets during 2008 increased to $980.8 million from $918.2 in
2007, representing growth of $62.6 million (or 6.8%). The asset mix of the
balance sheet continued to shift more to loans, as the average balance of net
loans increased $67.8 million (or 10.1%), while the average balance of total
investments fell $4.2 million (or 1.8%). However, on the liability side,
although average interest-bearing liabilities increased by $62.3 million (7.2%)
to $924.8 million, the interest expense paid for those liabilities decreased
from $34,505 in 2007 to $27,301 in 2008, a reduction of $7.2 million (or
20.9%). This was due to controlled pricing and the efficient use of other borrowings.
Accordingly, the net yield on interest-earning assets, increased from 3.20% in
2007 to 3.44% in 2008. Again this year, the net yield on interest-earning
assets improved each of the first three quarters: from 3.39% in the first
quarter, to 3.49% in the second quarter, to 3.50% in the third quarter. The net
yield in the fourth quarter of 3.38% was negatively impacted by the reversal of
interest for loans that were placed in non-accrual, and would have been 3.53%
without such reversals.

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 |          
|                                                           |  |                                  |          
|                                                           |  | 2008                             |           | 2007     |   | 2006         | 
|                                                           |  | Average
 Balance                 |           | Interest |   | Yield/
 Cost |  | Average
 Balance |      | Interest |   | Yield/
 Cost |  | Average
 Balance |        | Interest |  | Yield/
 Cost |  
|                                                           |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |         |  |   |        |  |  |      |  
|Average Interest-Earning Assets                            |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |         |  |   |        |  |  |      |  
|                                                          
|Interest-bearing deposits                                  |  | $                                | 2,785     |          | $ | 55           |  |                  | 1.97 | %        | $ | 2,456        |  | $                | 122    |          |  | 4.97         | % | $ | 2,232   |  | $ | 114    |  |  | 5.11 | %
|Taxable investment securities                              |  |                                  | 143,108   |          |   | 6,834        |  |                  | 4.78 |          |   | 152,220      |  |                  | 6,822  |          |  | 4.48         |   |   | 154,576 |  |   | 6,370  |  |  | 4.12 |  
|Tax-exempt investment securities (a)                       |  |                                  | 94,926    |          |   | 6,284        |  |                  | 6.62 |          |   | 89,989       |  |                  | 6,518  |          |  | 7.24         |   |   | 100,519 |  |   | 7,001  |  |  | 6.96 |  
|Federal funds sold                                         |  |                                  | 5,316     |          |   | 71           |  |                  | 1.34 |          |   | 6,706        |  |                  | 332    |          |  | 4.95         |   |   | 9,777   |  |   | 499    |  |  | 5.10 |  
|Net loans (a) (b)                                          |  |                                  | 734,672   |          |   | 47,796       |  |                  | 6.51 |          |   | 666,853      |  |                  | 50,072 |          |  | 7.51         |   |   | 585,382 |  |   | 42,025 |  |  | 7.18 |  
|                                                           |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |         |  |   |        |  |  |      |  
|Total interest-earning assets                              |  |                                  | 980,807   |          |   | 61,040       |  |                  | 6.22 |          |   | 918,224      |  |                  | 63,866 |          |  | 6.96         |   |   | 852,486 |  |   | 56,009 |  |  | 6.57 |  
|                                                           |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |         |  |   |        |  |  |      |  
|Average non-interest-earning assets                        |  |                                  | 126,526   |          |   |              |  |                  |      |          |   | 118,000      |  |                  |        |          |  |              |   |   | 108,278 |  |   |        |  |  |      |  
|                                                           |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |         |  |   |        |  |  |      |  
|Total average assets                                       |  | $                                | 1,107,333 |          |   |              |  |                  |      |          | $ | 1,036,224    |  |                  |        |          |  |              |   | $ | 960,764 |  |   |        |  |  |      |  
|                                                           |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |         |  |   |        |  |  |      |  
|                                                           |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |         |  |   |        |  |  |      |  
|Average Interest-Bearing Liabilities                       |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |         |  |   |        |  |  |      |  
|                                                          
|Interest-bearing demand deposits                           |  | $                                | 253,982   |          |   | 3,647        |  |                  | 1.44 | %        | $ | 238,568      |  |                  | 6,567  |          |  | 2.75         | % | $ | 216,540 |  |   | 4,877  |  |  | 2.25 | %
|Savings deposits                                           |  |                                  | 61,815    |          |   | 67           |  |                  | 0.11 |          |   | 63,357       |  |                  | 249    |          |  | 0.39         |   |   | 70,726  |  |   | 326    |  |  | 0.46 |  
|Time deposits                                              |  |                                  | 506,663   |          |   | 20,068       |  |                  | 3.96 |          |   | 481,725      |  |                  | 23,509 |          |  | 4.88         |   |   | 431,153 |  |   | 18,640 |  |  | 4.32 |  
|Interest-bearing demand notes issued to the U.S. Treasury  |  |                                  | 1,099     |          |   | 15           |  |                  | 1.36 |          |   | 1,035        |  |                  | 49     |          |  | 4.73         |   |   | 848     |  |   | 39     |  |  | 4.56 |  
|Federal funds purchased and customer repurchase agreements |  |                                  | 41,584    |          |   | 757          |  |                  | 1.82 |          |   | 34,622       |  |                  | 1,556  |          |  | 4.49         |   |   | 32,416  |  |   | 1,486  |  |  | 4.58 |  
|Advances from Federal Home Loan Bank                       |  |                                  | 19,362    |          |   | 647          |  |                  | 3.34 |          |   | 6,976        |  |                  | 366    |          |  | 5.25         |   |   | 7,673   |  |   | 375    |  |  | 4.89 |  
|Trust preferred securities                                 |  |                                  | 25,000    |          |   | 1,420        |  |                  | 5.68 |          |   | 25,000       |  |                  | 1,420  |          |  | 5.68         |   |   | 25,000  |  |   | 1,410  |  |  | 5.64 |  
|Note payable                                               |  |                                  | 15,296    |          |   | 680          |  |                  | 4.45 |          |   | 11,224       |  |                  | 789    |          |  | 7.03         |   |   | 6,613   |  |   | 477    |  |  | 7.22 |  
|                                                           |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |         |  |   |        |  |  |      |  
|Total interest-bearing liabilities                         |  |                                  | 924,801   |          |   | 27,301       |  |                  | 2.95 |          |   | 862,507      |  |                  | 34,505 |          |  | 4.00         |   |   | 790,969 |  |   | 27,630 |  |  | 3.49 |  
|                                                           |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |         |  |   |        |  |  |      |  
|Net yield on average interest-earning assets               |  |                                  |           |          | $ | 33,739       |  |                  | 3.44 | %        |   |              |  | $                | 29,361 |          |  | 3.20         | % |   |         |  | $ | 28,379 |  |  | 3.33 | %
|                                                           |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |         |  |   |        |  |  |      |  
|Average non-interest-bearing liabilities                   |  |                                  | 113,348   |          |   |              |  |                  |      |          |   | 108,093      |  |                  |        |          |  |              |   |   | 105,382 |  |   |        |  |  |      |  
|                                                           |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |         |  |   |        |  |  |      |  
|Average stockholders equity                               |  |                                  | 69,184    |          |   |              |  |                  |      |          |   | 65,624       |  |                  |        |          |  |              |   |   | 64,414  |  |   |        |  |  |      |  
|                                                           |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |         |  |   |        |  |  |      |  
|Total average liabilities and stockholders
equity         |  | $                                | 1,107,333 |          |   |              |  |                  |      |          | $ | 1,036,224    |  |                  |        |          |  |              |   | $ | 960,764 |  |   |        |  |  |      |  
|                                                           |  |                                  |           |          |   |              |  |                  |      |          |   |              |  |                  |        |          |  |              |   |   |         |  |   |        |  |  |      |  

|    |                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 $2,218 in
 2008, $2,307 in 2007 and $2,483 in 2006.
|    |                                                                                                                                                                                                                                                                                                                                                                        
|(b) | Includes
 $32 in 2008, $165 in 2007 and $78 in 2006 attributable to interest from
 non-accrual loans.                                                                                                                                                                                                                                                                  

36

---

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

|                                          |  |      |        |      |   |        |  |   |        | 
|----------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                                          |  | 2008 |        | 2007 |   | 2006   | 
|                                         
|Net interest income as stated             |  | $    | 31,521 |      | $ | 27,054 |  | $ | 25,896 | 
|Taxable-equivalent adjustment-investments |  |      | 2,137  |      |   | 2,216  |  |   | 2,381  | 
|Taxable-equivalent adjustment-loans       |  |      | 81     |      |   | 91     |  |   | 102    | 
|                                          |  |      |        |      |   |        |  |   |        | 
|Taxable-equivalent net interest income    |  | $    | 33,739 |      | $ | 29,361 |  | $ | 28,379 | 
|                                          |  |      |        |      |   |        |  |   |        | 

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:

|                                                        |  |      |   |      |      |      |  |      |   | 
|------------------------------------------------------- |  | ---- | - | ---- | ---- | ---- |  | ---- | - | 
|                                                        |  | 2008 |   | 2007 |      | 2006 | 
|                                                       
|Net yield on interest-earning assets                    |  | 3.21 | % |      | 2.95 | %    |  | 3.04 | % | 
|Taxable equivalent adjustment-investments               |  | 0.22 |   |      | 0.24 |      |  | 0.28 |   | 
|Taxable equivalent adjustment-loans                     |  | 0.01 |   |      | 0.01 |      |  | 0.01 |   | 
|                                                        |  |      |   |      |      |      |  |      |   | 
|Taxable equivalent net yield on interest-earning assets |  | 3.44 | % |      | 3.20 | %    |  | 3.33 | % | 
|                                                        |  |      |   |      |      |      |  |      |   | 

During
2007, net interest income, on a taxable-equivalent basis, increased to $29,361
from $28,379 in 2006, representing an improvement of $1.0 million (or 3.5%).
This enhancement was attributable to an increase in average interest-earning
assets during 2007 to $918.2 million from $852.5 in 2006, growth of $65.7
million (or 7.7%). The asset mix of the balance sheet shifted significantly in
2007 as maturities from the investment portfolio were used to help fund the
exceptional loan growth during the year. The average balance of net loans
increased $81.5 million (or 13.9%), while the average balance of total
investments fell $12.9 million (or 5.1%). Accordingly, the average interest
rate earned on these assets also increased to 6.96% in 2007 from 6.57% in 2006.
The net yield on interest-earning assets, however, decreased from 3.33% in 2006
to 3.20% in 2007, as the compression of the net yield on average
interest-earning assets that began in 2005 continued into early 2007. It is
important to note, however, that the net yield on interest-earning assets improved
each quarter in 2007: from 3.11% in the first quarter, to 3.15% in the second
quarter, to 3.23% in the third quarter, and 3.29% in the fourth quarter. This
improvement in the net yield on interest-earning assets was a major reason for
the overall net income improvement each quarter in 2007 as noted in the
Quarterly Results of Operations table contained in this report.

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 |                      
|                                                             |                        |                      
|                                                             |                        | 2008 compared to 2007 |   | 2007 compared to 2006 |   | 2006 compared to 2005 |  
|                                                             |                        | Volume(a)             |   | Rate(a)               |   | Net                   |   | Volume(a) |   | Rate(a) |        | Net |  | Volume(a) |       | Rate(a) |  | Net |      
|                                                             |                        |                       |   |                       |   |                       |   |           |   |         |        |     |  |           |       |         |  |     |      
|                                                             |                        |                       |   |                       |   |                       |   |           |   |         |        |     |  |           |       |         |  |     |       |   |   |       |   |  |   |       |  |  |   |        |   |   |        | 
|Interest from interest-earning assets                        |                        |                       |   |                       |   |                       |   |           |   |         |        |     |  |           |       |         |  |     |       |   |   |       |   |  |   |       |  |  |   |        |   |   |        | 
|                                                            
|Interest-bearing time deposits                               |                        |                       | $ | 11                    |   |                       | $ | (78       | ) | $       | (67    | )   |  | $         | 11    |         |  | $   | (3    | ) | $ | 8     |   |  | $ | 8     |  |  | $ | 39     |   | $ | 47     | 
|Taxable investment securities                                |                        |                       |   | (422                  | ) |                       |   | 434       |   |         | 12     |     |  |           | (101  | )       |  |     | 553   |   |   | 452   |   |  |   | 800   |  |  |   | 949    |   |   | 1,749  | 
|Tax-exempt investment securities (b)                         |                        |                       |   | 342                   |   |                       |   | (576      | ) |         | (234   | )   |  |           | (748  | )       |  |     | 265   |   |   | (483  | ) |  |   | 1,027 |  |  |   | 179    |   |   | 1,206  | 
|Federal funds sold                                           |                        |                       |   | (44                   | ) |                       |   | (217      | ) |         | (261   | )   |  |           | (154  | )       |  |     | (13   | ) |   | (167  | ) |  |   | 278   |  |  |   | 101    |   |   | 379    | 
|Net loans (c)                                                |                        |                       |   | 4,752                 |   |                       |   | (7,028    | ) |         | (2,276 | )   |  |           | 5,983 |         |  |     | 2,064 |   |   | 8,047 |   |  |   | 7,047 |  |  |   | 3,562  |   |   | 10,609 | 
|                                                             |                        |                       |   |                       |   |                       |   |           |   |         |        |     |  |           |       |         |  |     |       |   |   |       |   |  |   |       |  |  |   |        |   |   |        | 
|Total income from interest- earning assets                   |                        |                       |   | 4,639                 |   |                       |   | (7,465    | ) |         | (2,826 | )   |  |           | 4,991 |         |  |     | 2,866 |   |   | 7,857 |   |  |   | 9,160 |  |  |   | 4,830  |   |   | 13,990 | 
|                                                             |                        |                       |   |                       |   |                       |   |           |   |         |        |     |  |           |       |         |  |     |       |   |   |       |   |  |   |       |  |  |   |        |   |   |        | 
|Expense of interest-bearing liabilities                      |                        |                       |   |                       |   |                       |   |           |   |         |        |     |  |           |       |         |  |     |       |   |   |       |   |  |   |       |  |  |   |        |   |   |        | 
|                                                            
|Interest-bearing demand deposits                             |                        |                       |   | 323                   |   |                       |   | (3,243    | ) |         | (2,920 | )   |  |           | 551   |         |  |     | 1,139 |   |   | 1,690 |   |  |   | 126   |  |  |   | 1,527  |   |   | 1,653  | 
|Savings deposits                                             |                        |                       |   | (4                    | ) |                       |   | (178      | ) |         | (182   | )   |  |           | (31   | )       |  |     | (46   | ) |   | (77   | ) |  |   | 84    |  |  |   | (25    | ) |   | 59     | 
|Time deposits                                                |                        |                       |   | 1,102                 |   |                       |   | (4,543    | ) |         | (3,441 | )   |  |           | 2,327 |         |  |     | 2,542 |   |   | 4,869 |   |  |   | 3,814 |  |  |   | 4,530  |   |   | 8,344  | 
|Interest-bearing demand notes issued to the U.S. Treasury    |                        |                       |   | 2                     |   |                       |   | (36       | ) |         | (34    | )   |  |           | 9     |         |  |     | 1     |   |   | 10    |   |  |   | 3     |  |  |   | 13     |   |   | 16     | 
|Federal funds purchased and securities repurchase
agreements |                        |                       |   | 220                   |   |                       |   | (1,019    | ) |         | (799   | )   |  |           | 100   |         |  |     | (30   | ) |   | 70    |   |  |   | 289   |  |  |   | 441    |   |   | 730    | 
|Advances from Federal Home Loan Bank                         |                        |                       |   | 532                   |   |                       |   | (251      | ) |         | 281    |     |  |           | (35   | )       |  |     | 26    |   |   | (9    | ) |  |   | 48    |  |  |   | (15    | ) |   | 33     | 
|Trust preferred securities                                   |                        |                       |   | -0-                   |   |                       |   | -0-       |   |         | -0-    |     |  |           | -0-   |         |  |     | 10    |   |   | 10    |   |  |   | 733   |  |  |   | 56     |   |   | 789    | 
|Note payable                                                 |                        |                       |   | 234                   |   |                       |   | (343      | ) |         | (109   | )   |  |           | 328   |         |  |     | (16   | ) |   | 312   |   |  |   | 207   |  |  |   | 74     |   |   | 281    | 
|                                                             |                        |                       |   |                       |   |                       |   |           |   |         |        |     |  |           |       |         |  |     |       |   |   |       |   |  |   |       |  |  |   |        |   |   |        | 
|Total expense from interest-bearing
liabilities              |                        |                       |   | 2,409                 |   |                       |   | (9,613    | ) |         | (7,204 | )   |  |           | 3,249 |         |  |     | 3,626 |   |   | 6,875 |   |  |   | 5,304 |  |  |   | 6,601  |   |   | 11,905 | 
|                                                             |                        |                       |   |                       |   |                       |   |           |   |         |        |     |  |           |       |         |  |     |       |   |   |       |   |  |   |       |  |  |   |        |   |   |        | 
|                                                            
|Net difference                                               |                        |                       | $ | 2,230                 |   |                       | $ | 2,148     |   | $       | 4,378  |     |  | $         | 1,742 |         |  | $   | (760  | ) | $ | 982   |   |  | $ | 3,856 |  |  | $ | (1,771 | ) | $ | 2,085  | 
|                                                             |                        |                       |   |                       |   |                       |   |           |   |         |        |     |  |           |       |         |  |     |       |   |   |       |   |  |   |       |  |  |   |        |   |   |        | 

|    |                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
 $2,218 in 2008, $2,307 in 2007 and $2,483 in 2006.                     
|    |                                                                                                                                                                                                                                                                                                                                                                                            
|(c) | Includes
 loan fees of $996 in 2008, $1,287 in 2007, and $782 in 2006. 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 $30,383 in 2008, $7,361 in 2007, and $3,893 in 2006.

37

---

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

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 |       
|                                               |  |                                 |       
|                                               |  | 2008                            |        | 2007 |   | 2006   |  
|                                              
|Trust and farm management fees                 |  | $                               | 1,530  |      | $ | 1,507  |   | $ | 1,467  |  
|Service charges on deposit accounts            |  |                                 | 4,408  |      |   | 4,431  |   |   | 4,235  |  
|Other service charges                          |  |                                 | 2,137  |      |   | 1,966  |   |   | 1,782  |  
|Gain on sales of securities available-for-sale |  |                                 | 405    |      |   | 541    |   |   | 250    |  
|Gain on sale of loans                          |  |                                 | -0-    |      |   | -0-    |   |   | 90     |  
|Brokerage fee income                           |  |                                 | 913    |      |   | 920    |   |   | 736    |  
|Mortgage banking income                        |  |                                 | 1,069  |      |   | 903    |   |   | 755    |  
|Bank-owned life insurance income               |  |                                 | 874    |      |   | 816    |   |   | 770    |  
|Other operating income                         |  |                                 | 257    |      |   | 214    |   |   | 160    |  
|                                               |  |                                 |        |      |   |        |   |   |        |  
|Total non-interest income                      |  | $                               | 11,593 |      | $ | 11,298 |   | $ | 10,245 |  
|                                               |  |                                 |        |      |   |        |   |   |        |  
|Non-interest income to average total assets    |  |                                 | 1.05   | %    |   | 1.09   | % |   | 1.07   | %

Total
non-interest income of $11,298 in 2007 represented an increase of $1,053 (or
10.3%) from the 2006 total of $10,245. The brokerage department and the
mortgage banking department had excellent results in 2007, reporting increases
of $184 (or 25.0%) and $148 (or 19.6%), respectively. The Corporation recorded
$541 in net gains from the sale of investment securities in 2007, compared to
$250 in 2006, an increase of $291 (or 116.4%). The service charge categories
continued to grow as well, as service charges on deposits increased $196 (or 4.6%)
while other service charges increased $184 (or 10.3%), primarily from an
increase in the number of accounts.

Non-interest Expense.Total
non-interest
expense increased to $31,123 in 2008 from $29,565 in 2007 (an increase of
$1,558 or 5.3%). The majority of the increase resulted in the category of
salaries and employee benefits, which increased $818 or 4.8% (from $16,874 at
December 31, 2007 to $17,692 at December 31, 2008). Additionally, the category
of Federal deposit insurance assessments increased to $845 in 2008 from $338 in
2007 (an increase of $507, or 150.0%) due to expiration of credits (see Note 19
to Consolidated Financial Statements) and the accrual of FDIC premiums. In
addition, the categories of occupancy expense and other operating expense
increased by $183 (or 10.7%) and $199 (or 6.4%), respectively, from 2007 to
2008. As a percentage of average total assets, however, non-interest expense
continued to decrease to 2.81% in 2008, compared to 2.85% in 2007.

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 |       
|                                             |  |                                 |       
|                                             |  | 2008                            |        | 2007 |   | 2006   |  
|                                            
|Salaries and employee benefits               |  | $                               | 17,692 |      | $ | 16,874 |   | $ | 15,884 |  
|Occupancy                                    |  |                                 | 1,890  |      |   | 1,707  |   |   | 1,458  |  
|Equipment expense                            |  |                                 | 2,996  |      |   | 3,158  |   |   | 2,933  |  
|Federal insurance assessments                |  |                                 | 845    |      |   | 338    |   |   | 313    |  
|Intangible assets amortization               |  |                                 | 714    |      |   | 704    |   |   | 651    |  
|Data processing                              |  |                                 | 1,151  |      |   | 1,101  |   |   | 1,032  |  
|Advertising                                  |  |                                 | 742    |      |   | 722    |   |   | 841    |  
|Postage                                      |  |                                 | 547    |      |   | 542    |   |   | 539    |  
|Property taxes                               |  |                                 | 669    |      |   | 686    |   |   | 527    |  
|Supplies                                     |  |                                 | 347    |      |   | 448    |   |   | 427    |  
|Other real estate owned expense              |  |                                 | 203    |      |   | 157    |   |   | 149    |  
|Other operating expense                      |  |                                 | 3,327  |      |   | 3,128  |   |   | 3,581  |  
|                                             |  |                                 |        |      |   |        |   |   |        |  
|Total non-interest expense                   |  | $                               | 31,123 |      | $ | 29,565 |   | $ | 28,335 |  
|                                             |  |                                 |        |      |   |        |   |   |        |  
|Non-interest expense to average total assets |  |                                 | 2.81   | %    |   | 2.85   | % |   | 2.95   | %

Total
non-interest expense increased to $29,565 in 2007 from $28,335 in 2006 (an
increase of $1,230 or 4.3%). The majority of the increase resulted in the
category of salaries and employee benefits, which increased $990 or 6.2% (from
$15,884 at December 31, 2006 to $16,874 at December 31, 2007). This increase
was due to a higher number of employees, particularly from the addition of the
Plainfield office, as well as salary expense for an entire year in Aurora as
opposed to only eight months in 2006. In addition, the categories of occupancy
expense and equipment expense increased by $249 (or 17.1%) and $225 (or 7.7%),
respectively, from 2006 to 2007. As a percentage of average total assets,
however, non-interest expense continued to decrease to 2.85% in 2007, compared
to 2.95% in 2006 and 2.97% in 2005.

Income
taxes. Income tax expense totaled $1,697 in 2008, $1,377 in 2007, and $1,033 in
2006. The effective tax rates were 18.8%, 16.9%, and 13.7% for the respective
years then ended. The higher effective tax rate in 2008 was primarily due to a
decrease in the amount of interest income earned from municipal (tax-exempt)
securities.

38

---

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 |          
|                      |  |             |          
|                      |  | 2008        |           | 2007        |       | 2006   |  | 2005        |           | 2004   |      
|                      |  | Amount      |           | % of
 Total |       | Amount |  | % of
 Total |           | Amount |       | % of
 Total |  | Amount |           | % of
 Total |       | Amount |  | % of
 Total |        
|                      |  |             |           |             |       |        |  |             |           |        |       |             |  |        |           |             |       |        |  |             |        
|Agricultural          |  | $           | 79,536    |             | 10.1  | %      |  | $           | 85,571    |        | 11.8  | %           |  | $      | 83,610    |             | 13.3  | %      |  | $           | 73,884  |  | 12.7  | % |  | $ | 42,063  |  | 10.3  | % | 
|Commercial            |  |             | 225,806   |             | 28.5  |        |  |             | 168,936   |        | 23.4  |             |  |        | 134,402   |             | 21.4  |        |  |             | 114,342 |  | 19.7  |   |  |   | 96,390  |  | 23.5  |   | 
|Real Estate           |  |             |           |             |       |        |  |             |           |        |       |             |  |        |           |             |       |        |  |             |         |  |       |   |  |   |         |  |       |   | 
|1-4 family residences |  |             | 132,056   |             | 16.7  |        |  |             | 127,656   |        | 17.7  |             |  |        | 120,585   |             | 19.1  |        |  |             | 138,959 |  | 23.9  |   |  |   | 76,644  |  | 18.7  |   | 
|Agricultural          |  |             | 64,212    |             | 8.1   |        |  |             | 61,158    |        | 8.5   |             |  |        | 61,511    |             | 9.8   |        |  |             | 56,069  |  | 9.6   |   |  |   | 39,688  |  | 9.7   |   | 
|Construction          |  |             | 31,444    |             | 4.0   |        |  |             | 46,874    |        | 6.5   |             |  |        | 42,991    |             | 6.8   |        |  |             | 37,286  |  | 6.4   |   |  |   | 17,271  |  | 4.2   |   | 
|Commercial            |  |             | 182,658   |             | 23.1  |        |  |             | 160,106   |        | 22.2  |             |  |        | 130,302   |             | 20.7  |        |  |             | 113,110 |  | 19.4  |   |  |   | 105,073 |  | 25.6  |   | 
|                      |  |             |           |             |       |        |  |             |           |        |       |             |  |        |           |             |       |        |  |             |         |  |       |   |  |   |         |  |       |   | 
|Real Estate Total     |  |             | 410,370   |             | 51.9  |        |  |             | 395,794   |        | 54.8  |             |  |        | 355,389   |             | 56.4  |        |  |             | 345,424 |  | 59.3  |   |  |   | 238,676 |  | 58.2  |   | 
|Installment           |  |             | 75,125    |             | 9.5   |        |  |             | 72,346    |        | 10.0  |             |  |        | 56,071    |             | 8.9   |        |  |             | 48,074  |  | 8.3   |   |  |   | 32,915  |  | 8.0   |   | 
|                      |  |             |           |             |       |        |  |             |           |        |       |             |  |        |           |             |       |        |  |             |         |  |       |   |  |   |         |  |       |   | 
|Total loans           |  | $           | 790,837   |             | 100.0 | %      |  | $           | 722,647   |        | 100.0 | %           |  | $      | 629,472   |             | 100.0 | %      |  | $           | 581,724 |  | 100.0 | % |  | $ | 410,044 |  | 100.0 | % | 
|                      |  |             |           |             |       |        |  |             |           |        |       |             |  |        |           |             |       |        |  |             |         |  |       |   |  |   |         |  |       |   | 
|Total assets          |  | $           | 1,163,130 |             |       |        |  | $           | 1,080,702 |        |       |             |  | $      | 1,031,959 |             |       |        |  | $           | 945,263 |  |       |   |  | $ | 655,738 |  |       |   | 
|Loans to total assets |  |             |           |             | 68.0  | %      |  |             |           |        | 66.9  | %           |  |        |           |             | 61.0  | %      |  |             |         |  | 61.6  | % |  |   |         |  | 62.5  | % | 

Total
loans increased $68.2 million (or 9.4%) in 2008 as compared to an increase of
$93.2 million (14.8%) in 2007. There were no acquisitions in 2008, thus all
loan growth was internal. The increase reflects business expansion in markets
served by the subsidiary bank in 2008 as well as expansion of relationship
banking in all markets.

Commercial
loans increased $56.9 million (or 33.7%) in 2008, which compares to an increase
of $34.5 million (or 25.7%) in 2007. 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 decreased $6.0 million (or 7.1%) in 2008, which
compares to an increase of $2.0 million (or 2.3%) in 2006. Short term
agricultural loans are seasonal in nature with paydown from grain sales
occurring near the beginning and end of each year. Rapid growth in the
bio-fuels industry (primarily ethanol) and rising worldwide food demand have
dramatically influenced corn prices since the latter part of 2007. Rising corn
prices have influenced soybean prices as the two commodities compete for
planted acreage. Corn and soybeans are the two primary crops of the
Corporations market area. This has created an environment for significant
profitability in agricultural crop production, which continued in 2008. While
loan repayments are strong, costs of production have also increased maintaining
the demand for operating credit. The highly experienced agricultural staff
continues to effectively manage risk and seek opportunities in this portfolio.
Agricultural loans as a percentage of total loans were 10.1% at year-end 2008,
compared to 11.8% at year-end 2007.

Real
estate loans increased $14.6 million (or 3.7%) in 2008 compared to an increase
of $40.4 million (or 11.3%) in 2007. The growth in real estate loans was
primarily in the commercial area. 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 $113 million in 2008. This was above budgeted volume which
is a notable achievement in a time of reduced real estate sales. The
Corporation has not originated any sub prime mortgages for our own portfolio
or to sell in the secondary market. Construction loans decreased $15.4 million
(or 32.9%) reflecting the significant national decline in building activity due
to present economic conditions.

Consumer
installment loans increased $2.8 million (or 3.8%) in 2008 from 2007. This
follows an increase of $16.3 million (or 29.0%) in 2007. Home equity lending
comprises two thirds of the installment portfolio.

Although
the risk of non-payment for any reason exists with respect to all loans,
certain other more specific risks are associated with each type of loan. The
primary risks associated with commercial loans are quality of the borrowers
management and the impact of national economic factors. 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. With the notable exception of agricultural
lending, the current economic downtrend has increased the risk level in the
subsidiary banks loan portfolio.

The
Corporations strategy with respect to addressing and managing these types of
risks, whether loan demand is weak or strong, is for the subsidiary bank to
follow its 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 that primary and secondary sources of
repayment are adequate in relation to the amount of the loan, (v) administering
loan policies through a Directors Loan Committee and Officer approvals, (vi)
developing and maintaining adequate diversification of the loan portfolio as a
whole and of the loans within each loan category, and (vii) ensuring that each
loan is properly documented and, if appropriate, secured or guaranteed by
government agencies, and that insurance coverage is adequate, especially with
respect to certain agricultural loans because of the risk of poor weather. When
problem situations occur bank staff actively work with borrowers to achieve the
best resolution possible.

39

---

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

Non-performing
Loans and Other Real Estate Owned. Non-performing loans amounted to 4.18% of
total loans at year-end 2008 compared to 1.03% at year-end 2007. The increase
reflects a higher level of stress in the building industry as well as the
general economy. Approximately eighty percent of the increase in 2008 is
attributable to three loan relationships, all of which are development loans in
the Corporations northern and eastern market areas. As sales have dramatically
decreased, developers are facing difficulty in making interest payments,
creating the non-performing status. The Corporation has been proactive in
obtaining updated appraisals for development projects. No specific loss
provisions have been established for these three relationships. 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 15.3% and 43.7% of non-performing loans at
year-end 2008 and 2007, respectively. The decrease in the percentage for 2008
is due to an increase in non-performing loans. These loans are substantially
collateralized. Total other real estate owned as of December 31, 2008 was
$2,487. The Corporation had $833 in other real estate owned as of December 31,
2007. The following table provides information on the Corporations
non-performing loans since 2004:

|                                                               |  |             |        |      |   |       |   |      |       |      |   |       |   |   |      |  
|-------------------------------------------------------------- |  | ----------- | ------ | ---- | - | ----- | - | ---- | ----- | ---- | - | ----- | - | - | ---- | -
|                                                               |  | December 31 |       
|                                                               |  |             |       
|                                                               |  | 2008        |        | 2007 |   | 2006  |   | 2005 |       | 2004 |  
|                                                               | 
|Non-accrual                                                    |  | $           | 30,383 |      | $ | 7,361 |   | $    | 3,893 |      | $ | 3,822 |   | $ | 328  |  
|90 days past due and accruing                                  |  |             | 2,655  |      |   | 73    |   |      | 33    |      |   | 3     |   |   | -0-  |  
|Restructured                                                   |  |             | -0-    |      |   | -0-   |   |      | -0-   |      |   | -0-   |   |   | -0-  |  
|                                                               |  |             |        |      |   |       |   |      |       |      |   |       |   |   |      |  
|Total non-performing loans                                     |  | $           | 33,038 |      | $ | 7,434 |   | $    | 3,926 |      | $ | 3,825 |   | $ | 328  |  
|                                                               |  |             |        |      |   |       |   |      |       |      |   |       |   |   |      |  
|                                                               |  |             |        |      |   |       |   |      |       |      |   |       |   |   |      |  
|Non-performing loans to total loans (net of unearned
interest) |  |             | 4.18   | %    |   | 1.03  | % |      | 0.62  | %    |   | 0.66  | % |   | 0.08 | %

As
of December 31, 2008 and 2007, 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 $551 (or .07%
of the total loan portfolio), and $115 (or .02% of the total loan portfolio),
respectively.

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

|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|----------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                    |  | For the Years Ended December 31 |        
|                                                                                    |  |                                 |        
|                                                                                    |  | 2008                            |         | 2007 |   | 2006    |   | 2005 |         | 2004 |  
|                                                                                   
|Amount of loans outstanding at end of year (net of unearned
interest)               |  | $                               | 790,837 |      | $ | 722,647 |   | $    | 629,472 |      | $ | 581,812 |   | $ | 410,044 |  
|Average amount of loans outstanding for the year (net of unearned
 interest)        |  | $                               | 734,672 |      | $ | 666,853 |   | $    | 585,382 |      | $ | 482,448 |   | $ | 390,755 |  
|Allowance for loan losses at beginning of year                                      |  | $                               | 3,248   |      | $ | 3,053   |   | $    | 3,109   |      | $ | 2,524   |   | $ | 2,250   |  
|Allowance of bank acquired                                                          |  |                                 | -0-     |      |   | -0-     |   |      | -0-     |      |   | 752     |   |   | -0-     |  
|Charge-offs:                                                                        |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Agricultural                                                                        |  |                                 | -0-     |      |   | -0-     |   |      | 162     |      |   | -0-     |   |   | -0-     |  
|Commercial                                                                          |  |                                 | 797     |      |   | 373     |   |      | 227     |      |   | 85      |   |   | 54      |  
|Real estate-mortgage                                                                |  |                                 | 91      |      |   | 22      |   |      | 21      |      |   | 10      |   |   | 3       |  
|Installment                                                                         |  |                                 | 446     |      |   | 269     |   |      | 194     |      |   | 252     |   |   | 301     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total charge-offs                                                                   |  |                                 | 1,334   |      |   | 664     |   |      | 604     |      |   | 347     |   |   | 358     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Recoveries:                                                                         |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|                                                                                   
|Agricultural                                                                        |  |                                 | -0-     |      |   | 1       |   |      | -0-     |      |   | -0-     |   |   | -0-     |  
|Commercial                                                                          |  |                                 | 37      |      |   | 29      |   |      | 90      |      |   | 2       |   |   | 54      |  
|Real estate-mortgage                                                                |  |                                 | -0-     |      |   | 17      |   |      | 5       |      |   | -0-     |   |   | 4       |  
|Installment                                                                         |  |                                 | 145     |      |   | 172     |   |      | 168     |      |   | 178     |   |   | 199     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total recoveries                                                                    |  |                                 | 182     |      |   | 219     |   |      | 263     |      |   | 180     |   |   | 257     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Net loans charged off                                                               |  |                                 | 1,152   |      |   | 445     |   |      | 341     |      |   | 167     |   |   | 101     |  
|Provision for loan losses                                                           |  |                                 | 2,968   |      |   | 640     |   |      | 285     |      |   | -0-     |   |   | 375     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Allowance for loan losses at end of year                                            |  | $                               | 5,064   |      | $ | 3,248   |   | $    | 3,053   |      | $ | 3,109   |   | $ | 2,524   |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Net loans charged off to average loans                                              |  |                                 | 0.16    | %    |   | 0.07    | % |      | 0.06    | %    |   | 0.03    | % |   | 0.03    | %
|                                                                                   
|Allowance for loan losses to non-performing loans                                   |  |                                 | 15.33   | %    |   | 43.69   | % |      | 77.76   | %    |   | 81.28   | % |   | 769.51  | %
|                                                                                   
|Allowance for loan losses to total loans at end of year (net of
 unearned interest) |  |                                 | 0.64    | %    |   | 0.45    | % |      | 0.49    | %    |   | 0.53    | % |   | 0.62    | %

40

---

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, Senior Lending Officers, Chief Financial
Officer, Risk Manager and Chief Executive Officer of the subsidiary bank. The
results of these reviews are reported to the Board of Directors of the
subsidiary bank on a monthly basis. Monitoring and addressing problem loan
situations are primarily the responsibility of the subsidiary banks staff,
management and its Board of Directors.

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

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

Net
charge-offs were 0.16% of average (total loans) in 2008. The allowance for loan
losses at year-end 2008 was $5.06 million, .64% of total loans, net of unearned
interest, and 15.33% of non-performing loans. The year end 2008 allowance of
..64% of total loans is an increase of 42% from the year end 2007 number of
..45%, reflecting managements assessment of the present economic environment.
Non-performing loans are comprised of credits that management believes will not
result in significant losses to the Corporation. There are $818 specific loan
loss reserves for the non-performing or impaired loans as of December 31, 2008.
Management considers the allowance for loan losses adequate to meet probable
losses as of December 31, 2008.

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 |        
|                                     |  |             |        
|                                     |  | 2008        |         | 2007 |  
|                                    
|U.S. Government Agencies             |  | $           | 92,198  |      | $ | 63,740  | 
|State and Municipal                  |  |             | 103,960 |      |   | 95,134  | 
|Collateralized mortgage
 obligations |  |             | 54,957  |      |   | 69,701  | 
|                                     |  |             |         |      |   |         | 
|Total                                |  | $           | 251,115 |      | $ | 228,575 | 
|                                     |  |             |         |      |   |         | 

Investment
securities totaled $251.1 million on December 31, 2008, an increase of $22.5
million (or 9.9%) from the December 31, 2007 total of $228.6 million. The
increase was primarily due to securities purchased to meet increased pledging
requirements for new deposits and a comparison to a lower than average total
from 2007. Some changes occurred in the investment mix during 2008.
Collateralized Mortgage Obligations (CMOs) decreased by 21.1%, or $14.7
million, and now represent 21.9% of the portfolio, down from 30.5%. Municipal
bond holdings increased by $8.8 million or 9.3%. U.S. Government agencies and
Mortgage-backed securities (MBS) increased $28.5 million or 44.6%, and now
represent 36.7% of the portfolio, up from 27.9%. This can be attributed to the
value created in that sector due to market pricing opportunities. The overall
yield on the total portfolio rose by 21 basis points from 2007 to 5.51%. This
occurred largely from the increase in allocation in mortgage backs and several
swap strategies, where gains were captured and yield increases on reinvestment.
It should also be noted that the investment portfolio does not contain any
sub-prime mortgage securities nor any Fannie Mae or Freddie Mac preferred
stock.

Total
investment securities were $228.6 million on December 31, 2007, a decrease of $35.2
million (or 13.4%) from the December 31, 2006 total of $264.0 million. The
reduction in the portfolio was primarily due to liquidity needs to meet strong
loan demand and a decision to reduce participation in the State of Illinois Ag
Link Deposit program. Some changes occurred in the investment mix during 2007,
as a result of maturities and principal paydowns that were not reinvested.
Collateralized Mortgage Obligations (CMOs) decreased by 25.3%, or $23.6
million, and now represent 30.0% of the portfolio, down from 34.8%. Municipal
bond holdings dropped by $10.8 million or 10.2%. The current yield on the total
portfolio on a year over year basis fell by 7 basis points from 5.37% to 5.30%.
The decrease in the yield of the municipal bond portfolio was the major
contributing factor, with a drop of 16 basis points. This decline was largely a
function of falling interest rates and subsequent calls exercised on higher
coupon securities with imbedded unamortized premiums. Conversely, the current
yield improved on all other investment categories.

Deposits.Total deposits
increased in 2008 by approximately $70.7 million, a 7.9% increase over 2007.
Time deposits represented an increase of $55.0 million, an 11.2 % increase over
the prior year largely due to customers continuing their prior years trend of
investing in term accounts rather than liquid accounts. Interest-bearing demand
accounts increased $5.0 million, a 2.1% increase over 2007. Non-interest
bearing demand accounts showed an increase of $8.1 million (or 7.9%). Regular
savings accounts experienced an increase of approximately $2.7 million (or
4.6%), with funds also moving to time deposits and money market products. The
average rate for overall deposits decreased .84% in 2008 as a result of certificates
of deposits maturing and re-pricing lower, as well as liquid accounts pricing
lower. The concentration in the High Yield Money Market portfolio of $119
million and the Freedom IRA portfolio of $31 million were being offered at
slightly higher rates than the other liquid products. This shift in deposits
continues the trend of customers moving away from the market and into FDIC
insured investments over the last several years. Additionally, a strong
marketing campaign emphasizing the soundness, strength and experience of the
subsidiary bank and the increase in late 2008 of FDIC coverage to $250,000
attracted deposits to the bank. Again this year, the subsidiary bank has
experienced growth in all of the markets served. It is particularly noteworthy,
the subsidiary banks deposits are core deposits and contain no brokered CDs
(other than CDARS relationships).

Over
the last three years, the subsidiary bank has seen overall deposits increase
20.5%. The increase in consumer deposits reflects our continued focus on
investing in offices in high growth areas, and continued focus of officers
calling on customers and potential customers through our officer call program
to develop deposit relationships. This growth also reflects the well trained
staff that looks to assist customers by identifying needs and providing sound
solutions. There continues to be considerable interest in the alternative
delivery mechanisms, such as electronic methods which include ATMs, Internet
Banking with Bill Payment

41

---

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

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.

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 |        
|                            |  |                                 |        
|                            |  | 2008                            |         | 2007 |      | 2006    | 
|                            |  | Balance                         |         | Rate |      | Balance |  | Rate |         | Balance |      | Rate | 
|                            |  |                                 |         |      |      |         |  |      |         |         |      |      | 
|Non-interest bearing demand |  | $                               | 110,559 |      | n/a  |         |  | $    | 102,452 |         | n/a  |      |  | $ | 107,834 |  | n/a  |   | 
|Interest-bearing demand     |  |                                 | 246,714 |      | 1.44 | %       |  |      | 241,749 |         | 2.75 | %    |  |   | 231,953 |  | 2.25 | % | 
|Savings                     |  |                                 | 61,089  |      | 0.11 |         |  |      | 58,401  |         | 0.39 |      |  |   | 66,060  |  | 0.46 |   | 
|Time deposits               |  |                                 | 543,770 |      | 3.96 |         |  |      | 488,805 |         | 4.88 |      |  |   | 476,052 |  | 4.32 |   | 
|                            |  |                                 |         |      |      |         |  |      |         |         |      |      |  |   |         |  |      |   | 
|Total                       |  | $                               | 962,132 |      | 2.61 | %       |  | $    | 891,407 |         | 3.45 | %    |  | $ | 881,899 |  | 2.96 | % | 
|                            |  |                                 |         |      |      |         |  |      |         |         |      |      |  |   |         |  |      |   | 
|                            |  |                                 |         |      |      |         |  |      |         |         |      |      |  |   |         |  |      |   | 

The
following table summarizes time deposits in amounts of $100 or more by time remaining
until maturity as of December 31, 2008. These time deposits are made by
individuals, corporations and public entities:

|                                      |  |   |         | 
|------------------------------------- |  | - | ------- | 
|Three months or less                  |  | $ | 92,614  | 
|Over three months through
 six months |  |   | 46,349  | 
|Over six months through one
 year     |  |   | 71,006  | 
|Over one year                         |  |   | 22,842  | 
|                                      |  |   |         | 
|Total                                 |  | $ | 232,811 | 
|                                      |  |   |         | 

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 32.6% at December 31, 2008 and 45.3% at
December 31, 2007, respectively. Core deposits (demand deposits,
interest-bearing checking accounts, total savings, and certificates of deposit
less than $100) were 83.0 % of total deposits at December 31, 2008 and 90.5% of
total deposits at December 31, 2007. Money market accounts of approximately
$135.5 million at December 31, 2008 are classified by the Corporation as core
deposits.

In
2008, the Corporation experienced a net decrease of $7.3 million in cash and
cash equivalents. The Corporation used $93.1 million for investing activities,
which primarily consisted of a $71.7 million increase in net loans and a $22.6
million increase in investments. Offsetting this usage, financing activities
provided the Corporation with $75.6 million, consisting of an increase in
deposits of $70.7 million and an increase of $8.9 million in borrowings, less
$3.7 million in dividends paid to shareholders, and operating activities which
provided the Corporation with $10.2 million. Cash and cash equivalents of $20.3
million at December 31, 2008, along with established lines of credit, are
deemed more than adequate to meet short-term liquidity needs.

In
2007, the Corporation experienced a net decrease of $11.6 million in cash and
cash equivalents. Investing activities, consisting of a net increase in loans
offset by a decrease in investments, used $50.1 million. Providing the
Corporation with funds to offset the investing activities were financing
activities of $26.7 million (net increase in borrowings) and operating
activities of $11.8 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 total dollar amount of
the difference between rate sensitive assets and rate sensitive liabilities
within a given time period (GAP). A GAP ratio is determined by dividing rate
sensitive assets by rate sensitive liabilities. A ratio of 1.0 indicates a
perfectly matched position, in which case the effect on net interest income due
to interest rate movements would be zero.

The
Corporations strategy with respect to asset-liability management is to
maximize net interest income while limiting the Corporations exposure to risks
associated with volatile interest rates. The subsidiary banks Funds Management
Committee is responsible for monitoring the GAP position. As a general rule,
the subsidiary banks policy is to maintain GAP as a percent of total assets
within a range from +20% to -20% in any given time period. Based on the
simulation of various rising or falling interest rate scenarios in comparison
to one considered to be the most likely interest rate scenario, management seeks
to operate with net interest income within a range of +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

42

---

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.

The
following table shows the estimated changes to net interest income from the
base scenario as of December 31, 2008 and 2007:

|                        |  |                               |        |             |        |      |  |             |        |  |       |   | 
|----------------------- |  | ----------------------------- | ------ | ----------- | ------ | ---- |  | ----------- | ------ |  | ----- | - | 
|Change in               |  | Estimated Net Interest Income |       
|Interest
 Rate          |  | 2008                          |        | % of change |        | 2007 |  | % of change |       
|                        |  |                               |        |             |        |      |  |             |       
|300 basis point rise    |  | $                             | 32,774 |             | -11.56 | %    |  | $           | 35,253 |  | 0.37  | % | 
|200 basis point rise    |  |                               | 33,974 |             | -8.32  |      |  |             | 35,439 |  | 0.90  |   | 
|100 basis point rise    |  |                               | 35,439 |             | -4.37  |      |  |             | 35,723 |  | 1.71  |   | 
|Base scenario           |  |                               | 37,058 |             |       |      |  |             | 35,124 |  |      |   | 
|100 basis point decline |  |                               | 35,528 |             | -4.13  |      |  |             | 34,004 |  | -3.19 |   | 
|200 basis point decline |  |                               | 32,706 |             | -11.74 |      |  |             | 32,937 |  | -6.23 |   | 
|300 basis point decline |  |                               | 30,019 |             | -18.99 |      |  |             | 31,965 |  | -8.99 |   | 

Contractual
Obligations, Commercial Commitments and Off-Balance Sheet Arrangements. As
disclosed in the Notes to Consolidated Financial Statements, the Corporation
has certain obligations and commitments to make future payments under
contracts. At December 31, 2008, the aggregate contracted obligations
(excluding bank deposits) and commercial commitments are as follows:

|                                                          |  |       |         |                   |   |           |  |           |         |              |   |       |  |   |     |    
|--------------------------------------------------------- |  | ----- | ------- | ----------------- | - | --------- |  | --------- | ------- | ------------ | - | ----- |  | - | --- | ---
|                                                          |  | Total |         | Less Than
 1 Year |   | 1-3 Years |  | 3-5 Years |         | Over 5 Years |  
|                                                          |  |       |         |                   |   |           |  |           |         |              |  
|Contractual Obligations:                                  |  |       |         |                   |   |           |  |           |         |              |   |       |  |   |     |    
|Time Deposits                                             |  | $     | 543,770 |                   | $ | 463,332   |  | $         | 72,869  |              | $ | 7,519 |  | $ | 50  |    
|Customer repurchase agreements                            |  |       | 35,532  |                   |   | 35,532    |  |           | -0-     |              |   | -0-   |  | $ | -0- |    
|Interest-bearing demand notes issued to the U.S.
Treasury |  |       | 2,441   |                   |   | 2,441     |  |           | -0-     |              |   | -0-   |  |   | -0- |    
|Advances from the Federal Home Loan Bank                  |  |       | 32,493  |                   |   | 12,500    |  |           | 19,993  |              |   | -0-   |  |   | -0- |    
|Federal funds purchased                                   |  |       | 6,500   |                   |   | 6,500     |  |           | -0-     |              |   | -0-   |  |   | -0- |    
|Trust preferred securities                                |  |       | 25,000  |                   |   | -0-       |  |           | 25,000  |              |   | -0-   |  |   | -0- |    
|Note payable                                              |  |       | 16,050  |                   |   | 16,050    |  |           | -0-     |              |   | -0-   |  |   | -0- |    
|Post-retirement health insurance                          |  |       | 698     |                   |   | 44        |  |           | 117     |              |   | 112   |  |   | 425 | (1)
|                                                          |  |       |         |                   |   |           |  |           |         |              |   |       |  |   |     |    
|Total                                                     |  | $     | 662,484 |                   | $ | 536,399   |  | $         | 117,979 |              | $ | 7,631 |  | $ | 475 |    
|                                                          |  |       |         |                   |   |           |  |           |         |              |   |       |  |   |     |    
|                                                          |  |       |         |                   |   |           |  |           |         |              |   |       |  |   |     |    
|Off-Balance Sheet Arrangements:                           |  |       |         |                   |   |           |  |           |         |              |   |       |  |   |     |    
|Commitments to lend                                       |  | $     | 155,603 |                   | $ | 155,603   |  | $         | -0-     |              | $ | -0-   |  | $ | -0- |    
|Standby letters of credit                                 |  |       | 5,886   |                   |   | 5,886     |  |           | -0-     |              |   | -0-   |  |   | -0- |    
|                                                          |  |       |         |                   |   |           |  |           |         |              |   |       |  |   |     |    
|Total                                                     |  | $     | 161,489 |                   | $ | 161,489   |  | $         | -0-     |              | $ | -0-   |  | $ | -0- |    
|                                                          |  |       |         |                   |   |           |  |           |         |              |   |       |  |   |     |    

(1) For the years 2014
through 2018

See
Note 18 of the Consolidated Financial Statements for additional discussion on
Contractual Obligations, Commercial Commitments and Off-Balance Sheet
Arrangements.

43

---

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

The
following table sets forth the Corporations interest rate repricing gaps for
selected maturity periods at December 31, 2008 (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                                 |  | $                     | 2,774    |          | $ | -0-      |   | $        | -0-      |            | $ | -0-      |   | $          | -0-       |   | $ | 2,774     |  | $ | 2,774     | 
|Taxable investment securities                             |  |                       | 34,582   |          |   | 17,386   |   |          | 14,517   |            |   | 14,128   |   |            | 70,753    |   |   | 151,366   |  |   | 151,366   | 
|Tax-exempt investment securities                          |  |                       | 4,574    |          |   | 3,128    |   |          | 1,503    |            |   | 6,504    |   |            | 88,252    |   |   | 103,961   |  |   | 104,190   | 
|Loans                                                     |  |                       | 408,157  |          |   | 101,384  |   |          | 92,543   |            |   | 132,310  |   |            | 53,533    |   |   | 787,927   |  |   | 793,410   | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |           |   |   |           |  |   |           | 
|Total rate sensitive assets
(RSA)                       |  | $                     | 450,087  |          | $ | 121,898  |   | $        | 108,563  |            | $ | 152,942  |   | $          | 212,538   |   | $ | 1,046,028 |  | $ | 1,051,740 | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |           |   |   |           |  |   |           | 
|Interest-bearing liabilities:                             |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |           |   |   |           |  |   |           | 
|Interest-bearing demand deposits                          |  | $                     | 246,714  |          | $ | -0-      |   | $        | -0-      |            | $ | -0-      |   | $          | -0-       |   | $ | 246,714   |  | $ | 246,714   | 
|Savings deposits                                          |  |                       | 61,089   |          |   | -0-      |   |          | -0-      |            |   | -0-      |   |            | -0-       |   |   | 61,089    |  |   | 61,089    | 
|Time deposits                                             |  |                       | 463,332  |          |   | 60,828   |   |          | 12,041   |            |   | 7,519    |   |            | 50        |   |   | 543,770   |  |   | 554,362   | 
|Customer repurchase agreements                            |  |                       | 35,532   |          |   | -0-      |   |          | -0-      |            |   | -0-      |   |            | -0-       |   |   | 35,532    |  |   | 35,532    | 
|Advances from the Federal Home Loan Bank                  |  |                       | 12,500   |          |   | 19,993   |   |          | -0-      |            |   | -0-      |   |            | -0-       |   |   | 32,493    |  |   | 34,083    | 
|Federal funds purchased                                   |  |                       | 6,500    |          |   | -0-      |   |          | -0-      |            |   | -0-      |   |            | -0-       |   |   | 6,500     |  |   | 6,500     | 
|Interest-bearing demand notes issued to the U.S.
Treasury |  |                       | 2,441    |          |   | -0-      |   |          | -0-      |            |   | -0-      |   |            | -0-       |   |   | 2,441     |  |   | 2,441     | 
|Trust preferred securities                                |  |                       | -0-      |          |   | 25,000   |   |          | -0-      |            |   | -0-      |   |            | -0-       |   |   | 25,000    |  |   | 33,210    | 
|Note payable                                              |  |                       | 16,050   |          |   | -0-      |   |          | -0-      |            |   | -0-      |   |            | -0-       |   |   | 16,050    |  |   | 16,050    | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |           |   |   |           |  |   |           | 
|Total rate sensitive liabilities
(RSL)                  |  | $                     | 844,158  |          | $ | 105,821  |   | $        | 12,041   |            | $ | 7,519    |   | $          | 50        |   | $ | 969,589   |  | $ | 989,981   | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |          |   |            |           |   |   |           |  |   |           | 
|                                                         
|Interest rate sensitivity GAP (RSA less RSL)              |  | $                     | (394,071 | )        | $ | 16,077   |   | $        | 96,522   |            | $ | 145,423  |   | $          | 212,488   |   |   |           |  |   |           | 
|Cumulative GAP                                            |  | $                     | (394,071 | )        | $ | (377,994 | ) | $        | (281,472 | )          | $ | (136,049 | ) | $          | 76,439    |   |   |           |  |   |           | 
|RSA/RSL                                                   |  |                       | 53.32    | %        |   | 115.19   | % |          | 901.61   | %          |   | 2034.07  | % |            | 425076.00 | % |   |           |  |   |           | 
|Cumulative RSA/RSL                                        |  |                       | 53.32    | %        |   | 60.21    | % |          | 70.74    | %          |   | 85.97    | % |            | 107.88    | % |   |           |  |   |           | 

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

Management
of the Corporation considers $55.6 million (one-half) of the interest-bearing
checking account balances and $67.8 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, 2008, savings deposits totaled approximately $61.1 million. If the
$61.1 million in savings deposits, the $55.6 million of interest-bearing
checking account balances and the $67.8 million in money market account
balances reflected in the less than one year time frame are excluded from the
rate sensitivity above (consistent with the consideration mentioned in the
paragraph above), then rate sensitive liabilities would be approximately $659.7
million decreasing the negative gap to approximately $209.6 million. RSA as a
percent of RSL would be 68.2%.

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, 2008,
and the taxable equivalent yields of such securities:

|                                    |  |                       |       |                                       |      |                        |  |                             |        |        |      |       |  |        |         |       |      |   |  |   |     |  |  |   | 
|----------------------------------- |  | --------------------- | ----- | ------------------------------------- | ---- | ---------------------- |  | --------------------------- | ------ | ------ | ---- | ----- |  | ------ | ------- | ----- | ---- | - |  | - | --- |  |  | - | 
|                                    |  | Due
 within
 one year |       | Due
 after one but
 within five years |      | Due
 after
 five years |  | Other
 (no stated maturity) |       
|                                    |  |                       |       |                                       |      |                        |  |                             |       
|                                    |  | Amount                |       | Yield                                 |      | Amount                 |  | Yield                       |        | Amount |      | Yield |  | Amount |         | Yield |     
|                                   
|U.S. Government Agencies            |  | $                     | 420   |                                       | 5.50 | %                      |  | $                           | 5,598  |        | 3.70 | %     |  | $      | 82,861  |       | 5.05 | % |  | $ | -0- |  |  |  | 
|State and Municipal                 |  |                       | 4,597 |                                       | 5.54 |                        |  |                             | 11,060 |        | 5.92 |       |  |        | 89,354  |       | 6.34 |   |  |   | -0- |  |  |  | 
|Collateralized mortgage obligations |  |                       | -0-   |                                       |     |                        |  |                             | 4,295  |        | 4.31 |       |  |        | 50,111  |       | 4.71 |   |  |   | -0- |  |  |  | 
|                                    |  |                       |       |                                       |      |                        |  |                             |        |        |      |       |  |        |         |       |      |   |  |   |     |  |  |   | 
|Total                               |  | $                     | 5,017 |                                       | 5.54 | %                      |  | $                           | 20,953 |        | 5.00 | %     |  | $      | 222,326 |       | 5.49 | % |  | $ | -0- |  |  |  | 
|                                    |  |                       |       |                                       |      |                        |  |                             |        |        |      |       |  |        |         |       |      |   |  |   |     |  |  |   | 

44

---

Loan
Maturities.The following table sets forth scheduled
loan repayments on agricultural, commercial and real estate construction loans
at December 31, 2008:

|                          |  |                      |         |                                      |   |                       |  |             |        |       |   |        |  |   |         | 
|------------------------- |  | -------------------- | ------- | ------------------------------------ | - | --------------------- |  | ----------- | ------ | ----- | - | ------ |  | - | ------- | 
|                          |  | Due within
 one year |         | Due after one but
 within five years |   | Due after
 five years |  | Non-accrual |        | Total |  
|                          |  |                      |         |                                      |   |                       |  |             |        |       |  
|Agricultural              |  | $                    | 70,981  |                                      | $ | 7,952                 |  | $           | 603    |       | $ | -0-    |  | $ | 79,536  | 
|Commercial                |  |                      | 160,699 |                                      |   | 39,043                |  |             | 10,477 |       |   | 15,587 |  |   | 225,806 | 
|Real
 Estate-Construction |  |                      | 27,615  |                                      |   | 3,829                 |  |             | -0-    |       |   | -0-    |  |   | 31,444  | 
|                          |  |                      |         |                                      |   |                       |  |             |        |       |   |        |  |   |         | 
|Total                     |  | $                    | 259,295 |                                      | $ | 50,824                |  | $           | 11,080 |       | $ | 15,587 |  | $ | 336,786 | 
|                          |  |                      |         |                                      |   |                       |  |             |        |       |   |        |  |   |         | 

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, 2008:

|                    |  |            |        |               |   |        |  |   |        | 
|------------------- |  | ---------- | ------ | ------------- | - | ------ |  | - | ------ | 
|                    |  | Fixed rate |        | Variable rate |   | Total  | 
|                    |  |            |        |               |   |        | 
|Due after
 one year |  | $          | 51,207 |               | $ | 10,697 |  | $ | 61,904 | 

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     |      
|                     |  |                 |      
|                     |  | 2008            |       | 2007                                                  |  | 2006             |   | 2005                                             |   | 2004             | 
|                     |  | Allowanceamount |       | 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         |  | $               | 235   |                                                       |  | 10.1             | % |                                                  | $ | 580              |  |                                                  | 11.8  | %                |  | $                                                | 830   |                  |  | 13.3                                             | % |  | $ | 1,011 |  |  | 12.7  | % |  | $ | 656   |  |  | 10.3  | % | 
|Commercial           |  |                 | 2,469 |                                                       |  | 28.5             |   |                                                  |   | 1,188            |  |                                                  | 23.4  |                  |  |                                                  | 1,022 |                  |  | 21.4                                             |   |  |   | 890   |  |  | 19.7  |   |  |   | 770   |  |  | 23.5  |   | 
|Real estate-mortgage |  |                 | 1,284 |                                                       |  | 51.9             |   |                                                  |   | 743              |  |                                                  | 54.8  |                  |  |                                                  | 490   |                  |  | 56.4                                             |   |  |   | 420   |  |  | 59.3  |   |  |   | 193   |  |  | 58.2  |   | 
|Installment          |  |                 | 890   |                                                       |  | 9.5              |   |                                                  |   | 486              |  |                                                  | 10.0  |                  |  |                                                  | 540   |                  |  | 8.9                                              |   |  |   | 484   |  |  | 8.3   |   |  |   | 359   |  |  | 8.0   |   | 
|Unallocated          |  |                 | 186   |                                                       |  | n/a              |   |                                                  |   | 251              |  |                                                  | n/a   |                  |  |                                                  | 171   |                  |  | n/a                                              |   |  |   | 304   |  |  | n/a   |   |  |   | 546   |  |  | n/a   |   | 
|                     |  |                 |       |                                                       |  |                  |   |                                                  |   |                  |  |                                                  |       |                  |  |                                                  |       |                  |  |                                                  |   |  |   |       |  |  |       |   |  |   |       |  |  |       |   | 
|Total                |  | $               | 5,064 |                                                       |  | 100.0            | % |                                                  | $ | 3,248            |  |                                                  | 100.0 | %                |  | $                                                | 3,053 |                  |  | 100.0                                            | % |  | $ | 3,109 |  |  | 100.0 | % |  | $ | 2,524 |  |  | 100.0 | % | 
|                     |  |                 |       |                                                       |  |                  |   |                                                  |   |                  |  |                                                  |       |                  |  |                                                  |       |                  |  |                                                  |   |  |   |       |  |  |       |   |  |   |       |  |  |       |   | 

Recent
Developments -On January 23, 2009, the Corporation
completed the sale of $25.1 million of preferred stock and a warrant to
purchase common stock to the United States Department of the Treasury (the
U.S. Treasury) under U.S. Treasurys Capital Purchase Program under the
Emergency Economic Stabilization Act of 2008 (EESA).

The
Corporation issued and sold (1) 25,083 shares of Fixed Rate Cumulative Perpetual
Preferred Stock Series B, liquidation preference of $1,000 per share (the
Series B Preferred Shares), and (2) a ten-year warrant (the Warrant) to
purchase up to 155,025 shares of the Corporations common stock (Common
Stock) at an exercise price of $24.27 per share, or an aggregate purchase
price of $3.8 million in cash. Cumulative dividends on the Series B Preferred
Shares will accrue on the liquidation preference at a rate of 5% per annum for
the first five years, and at a rate of 9% per annum thereafter.

The
securities purchase agreement, dated January 23, 2009 (the Purchase
Agreement), between the Corporation and the U.S. Treasury, pursuant to which
the Series B Preferred Shares and the Warrant were sold, limits the payment of
dividends on the Common Stock to the current quarterly cash dividend of $0.28
per share, limits the Corporations ability to repurchase its Common Stock, and
subjects the Corporation to certain of the executive compensation limitations
included in the EESA.

As a
condition to the closing of the transaction, each of the Corporations Senior
Executive Officers (as defined in the Purchase Agreement) executed a waiver
voluntarily waiving any claim against the Treasury or the Corporation for any
changes to their compensation or benefits, as required to comply with the
regulation issued by the U.S. Treasury under the TARP Capital Purchase Program.
The Senior Executive Officers also acknowledged that the regulation may require
modification of the compensation, bonus, incentive and other benefit plans,
arrangements and policies and agreements (including so-called golden
parachute agreements) as they relate to the period the U.S. Treasury holds any
equity or debt securities of the Corporation acquired through the Capital
Purchase Program.

In addition
to EESA, on February 17, 2009, the American Recovery and Reinvestment Act of
2009 (ARRA) was enacted. The ARRA contains numerous provisions which modify
EESA and which require additional rule making by various regulatory bodies. The
precise impact of ARRA and the rules promulgated under it will become known in
the coming months.

45

---

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, 2008 |       
|                                                     |  |                              |       
|                                                     |  | 1st Qtr                      |        | 2nd Qtr |   | 3rd Qtr |  | 4th Qtr |       
|                                                    
|Interest income                                      |  | $                            | 15,066 |         | $ | 14,473  |  | $       | 14,812 |  | $ | 14,471 |  
|Interest expense                                     |  |                              | 7,612  |         |   | 6,656   |  |         | 6,640  |  |   | 6,393  |  
|                                                     |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Net interest income                                  |  |                              | 7,454  |         |   | 7,817   |  |         | 8,172  |  |   | 8,078  |  
|Provision for loan losses                            |  |                              | 368    |         |   | 450     |  |         | 550    |  |   | 1,600  |  
|                                                     |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Net interest income after provision for loan losses  |  |                              | 7,086  |         |   | 7,367   |  |         | 7,622  |  |   | 6,478  |  
|Non-interest income                                  |  |                              | 3,153  |         |   | 2,751   |  |         | 2,851  |  |   | 2,838  |  
|Non-interest expense                                 |  |                              | 7,560  |         |   | 7,509   |  |         | 7,628  |  |   | 8,426  |  
|                                                     |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Income before income taxes                           |  |                              | 2,679  |         |   | 2,609   |  |         | 2,845  |  |   | 890    |  
|Income tax expense                                   |  |                              | 589    |         |   | 589     |  |         | 658    |  |   | (139   | )
|                                                     |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Net income                                           |  | $                            | 2,090  |         | $ | 2,020   |  | $       | 2,187  |  | $ | 1,029  |  
|                                                     |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Earnings per share:                                  |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Basic                                                |  | $                            | 0.63   |         | $ | 0.61    |  | $       | 0.66   |  | $ | 0.32   |  
|Diluted                                              |  | $                            | 0.63   |         | $ | 0.61    |  | $       | 0.66   |  | $ | 0.31   |  
|Cash dividends declared per share                    |  | $                            | 0.28   |         | $ | 0.28    |  | $       | 0.28   |  | $ | 0.28   |  
|                                                     |  |                              |        |         |   |         |  |         |        |  |   |        |  
|                                                     |  | Year
Ended December 31, 2007 |       
|                                                     |  |                              |       
|                                                     |  | 1st
Qtr                      |        | 2nd
Qtr |   | 3rd
Qtr |  | 4th
Qtr |       
|                                                    
|Interest
 income                                     |  | $                            | 14,817 |         | $ | 15,234  |  | $       | 15,632 |  | $ | 15,876 |  
|Interest
 expense                                    |  |                              | 8,425  |         |   | 8,647   |  |         | 8,782  |  |   | 8,651  |  
|                                                     |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Net interest
 income                                 |  |                              | 6,392  |         |   | 6,587   |  |         | 6,850  |  |   | 7,225  |  
|Provision
 for loan losses                           |  |                              | 185    |         |   | 115     |  |         | 250    |  |   | 90     |  
|                                                     |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Net interest
 income after provision for loan losses |  |                              | 6,207  |         |   | 6,472   |  |         | 6,600  |  |   | 7,135  |  
|Non-interest
 income                                 |  |                              | 2,645  |         |   | 2,722   |  |         | 2,935  |  |   | 2,996  |  
|Non-interest
 expense                                |  |                              | 7,272  |         |   | 7,394   |  |         | 7,387  |  |   | 7,512  |  
|                                                     |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Income
 before income taxes                          |  |                              | 1,579  |         |   | 1,800   |  |         | 2,148  |  |   | 2,619  |  
|Income tax
 expense                                  |  |                              | 150    |         |   | 247     |  |         | 408    |  |   | 571    |  
|                                                     |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Net income                                           |  | $                            | 1,429  |         | $ | 1,553   |  | $       | 1,740  |  | $ | 2,048  |  
|                                                     |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Earnings per
 share:                                 |  |                              |        |         |   |         |  |         |        |  |   |        |  
|Basic                                                |  | $                            | 0.43   |         | $ | 0.47    |  | $       | 0.53   |  | $ | 0.62   |  
|Diluted                                              |  | $                            | 0.42   |         | $ | 0.46    |  | $       | 0.52   |  | $ | 0.62   |  
|Cash
 dividends declared per share                   |  | $                            | 0.27   |         | $ | 0.27    |  | $       | 0.27   |  | $ | 0.27   |  

46

---

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

|                                                                                    |  |                                 |           |      |   |           |   |      |           |      |   |         |   |   |         |  
|----------------------------------------------------------------------------------- |  | ------------------------------- | --------- | ---- | - | --------- | - | ---- | --------- | ---- | - | ------- | - | - | ------- | -
|                                                                                    |  | For the Years Ended December 31 |          
|                                                                                    |  |                                 |          
|                                                                                    |  | 2008                            |           | 2007 |   | 2006      |   | 2005 |           | 2004 |  
|                                                                                    |  |                                 |           |      |   |           |   |      |           |      |  
|Summary
 of Income                                                                  |  |                                 |           |      |   |           |   |      |           |      |   |         |   |   |         |  
|Interest income                                                                     |  | $                               | 58,822    |      | $ | 61,559    |   | $    | 53,526    |      | $ | 39,971  |   | $ | 29,719  |  
|Interest expense                                                                    |  |                                 | 27,301    |      |   | 34,505    |   |      | 27,630    |      |   | 15,726  |   |   | 9,070   |  
|Net interest income                                                                 |  |                                 | 31,521    |      |   | 27,054    |   |      | 25,896    |      |   | 24,245  |   |   | 20,649  |  
|Provision for loan losses                                                           |  |                                 | 2,968     |      |   | 640       |   |      | 285       |      |   | -0-     |   |   | 375     |  
|Non-interest income                                                                 |  |                                 | 11,593    |      |   | 11,298    |   |      | 10,245    |      |   | 8,840   |   |   | 8,315   |  
|Non-interest expense                                                                |  |                                 | 31,123    |      |   | 29,565    |   |      | 28,335    |      |   | 23,253  |   |   | 19,503  |  
|Income before income taxes                                                          |  |                                 | 9,023     |      |   | 8,147     |   |      | 7,521     |      |   | 9,832   |   |   | 9,086   |  
|Income tax expense                                                                  |  |                                 | 1,697     |      |   | 1,377     |   |      | 1,033     |      |   | 2,258   |   |   | 2,214   |  
|Net income                                                                          |  |                                 | 7,326     |      |   | 6,770     |   |      | 6,488     |      |   | 7,574   |   |   | 6,872   |  
|                                                                                    |  |                                 |           |      |   |           |   |      |           |      |   |         |   |   |         |  
|Per Share
 Data                                                                     |  |                                 |           |      |   |           |   |      |           |      |   |         |   |   |         |  
|Basic earnings per share                                                            |  | $                               | 2.22      |      | $ | 2.04      |   | $    | 1.93      |      | $ | 2.39    |   | $ | 2.22    |  
|Diluted earnings per share                                                          |  |                                 | 2.21      |      |   | 2.03      |   |      | 1.91      |      |   | 2.37    |   |   | 2.21    |  
|Book value (at end of period)                                                       |  |                                 | 21.97     |      |   | 20.74     |   |      | 19.50     |      |   | 18.87   |   |   | 17.13   |  
|Cash dividends declared                                                             |  |                                 | 1.12      |      |   | 1.08      |   |      | 1.05      |      |   | 1.03    |   |   | 0.96    |  
|Dividend payout ratio                                                               |  |                                 | 50.5      | %    |   | 53.1      | % |      | 54.6      | %    |   | 44.0    | % |   | 43.2    | %
|                                                                                    |  |                                 |           |      |   |           |   |      |           |      |   |         |   |   |         |  
|Selected
 Balances (at end of year)                                                 |  |                                 |           |      |   |           |   |      |           |      |   |         |   |   |         |  
|Total assets                                                                        |  | $                               | 1,163,130 |      | $ | 1,080,702 |   | $    | 1,031,959 |      | $ | 945,263 |   | $ | 655,738 |  
|Earning assets                                                                      |  |                                 | 1,017,732 |      |   | 949,534   |   |      | 904,504   |      |   | 852,286 |   |   | 616,089 |  
|Investments                                                                         |  |                                 | 251,115   |      |   | 228,575   |   |      | 267,916   |      |   | 251,486 |   |   | 188,809 |  
|Gross loans                                                                         |  |                                 | 792,992   |      |   | 723,575   |   |      | 633,984   |      |   | 584,311 |   |   | 411,345 |  
|Allowance for loan losses                                                           |  |                                 | 5,064     |      |   | 3,248     |   |      | 3,053     |      |   | 3,109   |   |   | 2,524   |  
|Deposits                                                                            |  |                                 | 962,132   |      |   | 891,407   |   |      | 881,899   |      |   | 798,558 |   |   | 573,561 |  
|Borrowings                                                                          |  |                                 | 118,016   |      |   | 109,089   |   |      | 74,147    |      |   | 72,575  |   |   | 25,535  |  
|Stockholders equity                                                                |  |                                 | 72,471    |      |   | 68,607    |   |      | 65,355    |      |   | 63,144  |   |   | 52,369  |  
|                                                                                    |  |                                 |           |      |   |           |   |      |           |      |   |         |   |   |         |  
|Selected
 Financial Ratios                                                          |  |                                 |           |      |   |           |   |      |           |      |   |         |   |   |         |  
|Net income to average stockholders
equity                                          |  |                                 | 10.59     | %    |   | 10.32     | % |      | 10.07     | %    |   | 13.43   | % |   | 13.46   | %
|Net income to average assets                                                        |  |                                 | 0.66      |      |   | 0.65      |   |      | 0.68      |      |   | 0.97    |   |   | 1.11    |  
|Average stockholders equity to average
assets                                      |  |                                 | 6.25      |      |   | 6.33      |   |      | 6.70      |      |   | 7.21    |   |   | 8.24    |  
|Average earning assets to average assets                                            |  |                                 | 88.57     |      |   | 88.61     |   |      | 88.73     |      |   | 90.21   |   |   | 91.37   |  
|Non-performing loans to total loans at end of year
(net of unearned
 interest)      |  |                                 | 4.18      |      |   | 1.03      |   |      | 0.62      |      |   | 0.66    |   |   | 0.08    |  
|Tier 1 capital to average adjusted assets                                           |  |                                 | 6.22      |      |   | 6.33      |   |      | 6.67      |      |   | 7.83    |   |   | 7.88    |  
|Risk-based capital to risk-adjusted assets                                          |  |                                 | 8.30      |      |   | 8.44      |   |      | 9.18      |      |   | 9.76    |   |   | 11.49   |  
|Net loans charged-off to average loans                                              |  |                                 | 0.16      |      |   | 0.07      |   |      | 0.06      |      |   | 0.03    |   |   | 0.03    |  
|Allowance for loan losses to total loans at end of
year (net of unearned
 interest) |  |                                 | 0.64      |      |   | 0.45      |   |      | 0.49      |      |   | 0.53    |   |   | 0.62    |  
|Average interest-bearing deposits to average
deposits                               |  |                                 | 89.02     |      |   | 89.01     |   |      | 88.27     |      |   | 88.29   |   |   | 88.10   |  
|Average non-interest-bearing deposits to average
deposits                           |  |                                 | 10.98     |      |   | 10.99     |   |      | 11.73     |      |   | 11.71   |   |   | 11.90   |  
|                                                                                   
|                                                                                    |  |                                 |           |      |   |           |   |      |           |      |  

47

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Common Stock Price Performance Graph

The
following Common Stock price performance graph compares the monthly change in
the Corporations cumulative total stockholder returns on its Common Stock,
assuming the Common Stock was purchased on December 31, 2003 and sold on
December 31, 2008, with the cumulative total return of stocks included in the
Russell 3000, the NASDAQ Bank Index and the SNL Midwest Bank Stock Index for
the same period. The amounts shown assume the reinvestment of dividends.

Total Return Performance

(LINE GRAPH)

|                                  |  |               |        |          |  |          |  |          |        |          |  |          |  |  |        |  |  |       | 
|--------------------------------- |  | ------------- | ------ | -------- |  | -------- |  | -------- | ------ | -------- |  | -------- |  |  | ------ |  |  | ----- | 
|                                  |  | Period Ending |       
|                                  |  |               |       
|Index                             |  | 12/31/03      |        | 12/31/04 |  | 12/31/05 |  | 12/31/06 |        | 12/31/07 |  | 12/31/08 | 
|                                  |  |               |        |          |  |          |  |          |        |          |  |          | 
|Princeton
 National Bancorp, Inc. |  |               | 100.00 |          |  | 104.33   |  |          | 124.41 |          |  | 125.70   |  |  | 97.18  |  |  | 92.63 | 
|Russell 3000                      |  |               | 100.00 |          |  | 111.95   |  |          | 118.80 |          |  | 137.47   |  |  | 144.54 |  |  | 90.61 | 
|SNL Midwest
 Bank Index           |  |               | 100.00 |          |  | 112.84   |  |          | 108.73 |          |  | 125.68   |  |  | 97.96  |  |  | 64.44 | 
|NASDAQ Bank                       |  |               | 100.00 |          |  | 110.99   |  |          | 106.18 |          |  | 117.87   |  |  | 91.85  |  |  | 69.88 | 

The
Corporations Common Stock began trading on the NASDAQ Stock Market under the
symbol PNBC on May 8, 1992. On December 31, 2008 and February 27, 2009, the
Record Date, the closing bid prices for the Common Stock as quoted on NASDAQ
Online were $22.14 and $13.03, respectively.

49

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