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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 1998


                         Commission File Number 0-20050

                       PRINCETON NATIONAL BANCORP, INC.
             (Exact name of registrant as specified in its charter)

           Delaware                                             36-32110283
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

606 South Main Street
Princeton, Illinois                                             61356-2080
(Address of principal executive                                 (Zip Code)
     offices)

       Registrant's telephone number, including area code: (815) 875-4444

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:

                                                           Name of each
                                                            exchange on
      Title of each class                                 which registered
      --------------                                      ----------------
                                                            The Nasdaq
      Common Stock                                         Stock Market


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

          [X] YES                    [ ] NO


      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

      At March 15, 1999, 3,817,781 shares of Common Stock, $5.00 Par Value, were
outstanding, and the aggregate market value of the common stock (based upon the
closing representative bid price of the common stock on March 10, 1998, as
reported by NASDAQ) held by nonaffiliates was approximately $66,811,168.

      Determination of stock ownership by nonaffiliates was made solely for the
purpose of responding to this requirement and the registrant is not bound by
this determination for any other purpose.

      Portions of the following documents are incorporated by reference:

      1999 Notice and Proxy Statement for the Annual Meeting of Stockholders
April 13, 1999 - Part III

--------------------------------------------------------------------------------

<PAGE>


                                     PART I

ITEM 1. BUSINESS

      Princeton National Bancorp, Inc. ("PNB" or the "Corporation") is a
single-bank holding company which operates in one business segment and conducts
a full service commercial banking and trust business through its subsidiary
bank, Citizens First National Bank ("Citizens Bank" or "the Bank"). At December
31, 1998, the Corporation had consolidated total assets of $478,911,000 and
stockholders' equity of $42,606,000.

      PNB was incorporated as a Delaware corporation in 1981 in contemplation of
the acquisition of all of the outstanding common stock of Citizens Bank and
other future acquisitions. Since the formation of the holding company, PNB has
made five acquisitions. In 1986, PNB acquired Genoa State Bank (subsequently
merged into Citizens Bank), located approximately 90 miles from Princeton and
just outside the western suburbs of Chicago. In 1988, PNB acquired First
National Bank of Oglesby when it acquired all of the outstanding stock of USA
Firstrust, Inc. (subsequently merged into Citizens Bank), which gave PNB a
market presence in Oglesby and the Peru/LaSalle area, 27 and 22 miles from
Princeton, respectively. In 1992, PNB acquired all of the outstanding capital
stock of Illinois Valley Bancshares, Inc. ("Illinois Valley"). Through the
acquisition of Illinois Valley, PNB acquired Colonial Bank and Trust Company of
Bureau County, located in Princeton, with a branch in DePue (subsequently merged
into Citizens Bank) and Colonial Bank and Trust Company of LaSalle County,
located in Peru (subsequently converted into a national bank, renamed Citizens
First National Bank of Peru, and subsequently merged into Citizens Bank). In
1994, PNB acquired Heart of Illinois Investment Corp. and its subsidiary, Heart
of Illinois Bank, F.S.B., with branches in Spring Valley, Henry, Plano and
Princeton (subsequently merged into Citizens Bank). In 1996, PNB acquired all of
the deposits, equipment and the facility of the Sandwich branch of Superior
Bank, FSB (subsequently merged into Citizens Bank), located approximately 50
miles to the northeast of Princeton.

      PNB operates the Bank as a community bank -- with offices located for
convenience with professional, highly motivated, progressive employees who know
the Bank's customers and are able to provide individualized, quality service. As
part of its community banking approach, PNB requires officers of the Bank to
actively participate in community organizations. In addition, within certain
credit and rate of return parameters, PNB attempts to ensure that the Bank meets
the lending needs of the communities in which offices are located, and that the
Bank invests in local and municipal securities.

      Corporate policy, strategy, and goals are established by the Board of
Directors of PNB. Pursuant to PNB's holding company philosophy, operational and
administrative policies for the Bank are also established at the holding company
level. Within this framework, the Bank focuses on providing personalized
services and quality products to its customers to meet the needs of the
communities in which offices are located. In 1998, the majority of the directors
of PNB also served as the directors of Citizens Bank. This assists PNB in
directly implementing its policies at Citizens Bank.

ACQUISITION AND EXPANSION STRATEGY

      PNB seeks to diversify both its market area and asset base and increase
profitability through acquisitions and expansion. PNB's goal, as reflected by
its acquisition policy, is to expand through the acquisition of established
financial service organizations, primarily commercial banks to the extent
suitable


<PAGE>



candidates may be identified and by expanding into potential high growth areas.
In integrating acquisitions, PNB focuses on, among other actions, implementing
the policies established at Citizens Bank, improving asset quality and the net
interest margin and encouraging community involvement.

      Generally, PNB seeks to acquire banks or other financial institutions with
assets of $15 million to $60 million, located on the fringe of metropolitan or
potential high growth areas and within 100 miles of Princeton. In addition to
price and terms, the other factors considered by PNB in determining the
desirability of an acquisition candidate are the general financial condition,
earnings potential and quality of the management of the institution. There is no
assurance that any further acquisitions will be made.

      PNB will also consider establishing branch facilities as a means of
expanding its presence into new market areas. PNB opened new branch facilities
in the Peru/LaSalle/Oglesby area in 1994, in Minooka in 1994, in Hampshire in
1995, and will be opening a new branch facility in Henry during 1999.

CITIZENS FIRST NATIONAL BANK

      Citizens Bank was organized in 1865 as a national bank under the National
Bank Act. Currently in its one hundred and thirty-fourth year, Citizens Bank has
fourteen offices in ten different communities in north central Illinois:
Princeton, DePue, Genoa, Hampshire, Henry, Minooka, Oglesby, Peru, Sandwich and
Spring Valley.

      Citizens Bank serves individuals, businesses and governmental bodies in
Bureau, LaSalle, Marshall, Grundy, Kane, Kendall, DeKalb and contiguous
counties. Citizens Bank operates a full-service community commercial bank and
trust business that offers a broad range of financial services to customers.
Their services consist primarily of commercial, real estate and agricultural
lending, consumer deposit and financial services, and trust and farm management
services.

COMMERCIAL, REAL ESTATE AND AGRICULTURAL LENDING

      Citizens Bank's commercial loan department provides secured and unsecured
loans, including real estate loans, to companies and individuals for business
purposes and to governmental units within the Bank's market area. As of December
31, 1998, Citizens Bank had commercial loans of $44.1 million (16.6% of the
Bank's total loan portfolio) and commercial real estate loans of $42.0 million
(15.8% of the Bank's total loan portfolio). Citizens Bank does not have a
concentration of commercial loans in any single industry or business.

      Citizens Bank is one of the largest agricultural lenders in the State of
Illinois with all of its outstanding agricultural and agricultural real estate
loans primarily related to ventures within 30 miles of branch locations. As of
December 31, 1998, Citizens Bank had agricultural loans of $37.5 million and
agricultural real estate loans of $33.5 million, which represent approximately
14.1% and 12.6%, respectively, of the Bank's total loan portfolio. Agricultural
loans, many of which are secured by crops, machinery and real estate, are
provided to finance capital improvements and farm operations as well as
acquisitions of livestock and machinery. The agricultural loan department, which
has the equivalent of four lending officers, works closely with all agricultural
customers, including companies and individual farmers, and assists in the
preparation of budgets and cash flow projections for the ensuing crop year.
These budgets and cash flow projections are monitored closely during the year.
In addition, Citizens Bank works closely with governmental agencies, including
the Farm


<PAGE>



Service Agency, to assist agricultural customers in obtaining credit enhancement
products such as loan guaranties.

      In accordance with its loan policy, Citizens Bank maintains a diversified
loan portfolio. One of Citizens Bank's goals is to further diversify its loan
portfolio. Further diversification will be accomplished through loans made by
the Bank and through loans acquired as a result of PNB's acquisition strategy.
As part of its loan policy and community banking approach, Citizens Bank does
not actively buy loans from or participate its non- consumer loans to other
lending institutions, particularly institutions outside its market area. In
connection with its credit relationships, Citizens Bank encourages commercial
and agricultural borrowers to maintain deposit accounts at the Bank.

PERSONAL FINANCIAL SERVICES

      The principal consumer services offered by Citizens Bank are demand,
savings and time deposit accounts, home mortgage loans, installment loans,
credit card loans, and brokerage services.

      One of the strengths of Citizens Bank is the stability of its retail
deposit base. This is due primarily to the Bank's service oriented competitive
strategy and the economically diverse population of the counties encompassing
the fourteen banking offices. These locations provide convenience for customers
and visibility for Citizens Bank. A variety of marketing strategies are used to
attract and retain stable depositors, the most important of which is the officer
call program. All officers of the Bank call on customers and potential customers
of the Bank to maintain and develop deposit relationships. In 1998, 2,875 calls
were completed with customers and non-customers.

      Citizens Bank is active in consumer and mortgage lending with
approximately $66.2 million in home mortgage loans (24.9% of the Bank's total
loan portfolio) and $36.0 million in consumer installment loans (13.6% of the
Bank's total loan portfolio) as of December 31, 1998. To better serve its retail
customers, Citizens Bank is active in the secondary residential mortgage market.
As a matter of policy, Citizens Bank does not hold long-term, fixed rate loans.
However, servicing of those loans is maintained, with approximately $56,267,000
of unpaid balances being serviced as of December 31, 1998. Customers receive a
higher level of quality service with this arrangement.

      Citizens Bank maintains fourteen automated teller machines. The Bank is a
member of Magic Line which encompasses all of the major nationwide networks such
as CIRRUS, PLUS, and STAR. To enhance customer service and convenience, Citizens
Bank introduced its new ATM & Check Card in the second quarter of 1998. The
check card can be used anywhere that accepts VISA and has been a tremendous
benefit to our customers.

      Citizens Bank continues to implement intensive sales training, which
includes team coaching, goals and measurements, and rewards and recognition. In
1998, the Bank maintained the prior year's level of product referrals, product
sales, and total incentives paid to the employees.

<PAGE>

TRUST DEPARTMENT AND FARM MANAGEMENT SERVICES

      Gross revenue from Trust and Farm Management services in 1998 totaled
approximately $1,119,000, an increase of $52,000 (or 4.9%), compared to
$1,067,000 in 1997. Trust income alone amounted to $853,000 in 1998 compared to
$817,000 in 1997, while farm management fees were $266,000 in 1998 as compared
to $250,000 in 1997.

      Total trust assets as of December 31, 1998 were $153,758,000, representing
a decrease of approximately $13,500,000 (or 8.1%) over the total at December 31,
1997. This decrease is due primarily to the closing of a large corporate
account. The increase in fee income resulted from a combination of new business
development, increased market value fees due to higher equity values, and
increases in equity investment as a percentage of total Trust assets. The Trust
Department currently has 683 total accounts and has 16,346 acres of farm land
under management.

COMPETITION

      PNB is committed to community banking and to providing quality products
and services at competitive loan rates and deposit pricing in order to remain
competitive in its north central Illinois market. Citizens Bank competes with
both small, locally owned banks as well as regional financial institutions which
have numerous offices. The Bank competes with these organizations, as well as
with savings and loan associations, credit unions, mortgage companies, insurance
companies and other local financial institutions, for deposits, loans and other
business. The principal methods of competition include loan and deposit pricing,
the types and quality of services provided, and advertising and marketing
programs.

SUPERVISION AND REGULATION

      Bank holding companies and banks are extensively regulated under federal
and state law. The following information describes certain statutes and
regulations affecting PNB and the Bank, and such discussion is qualified in its
entirety by reference to such statutes and regulations. Any change in applicable
law or regulations may have a material effect on the business of PNB and the
Bank.

      PNB is registered as a "bank holding company" with the Federal Reserve
System (the "FRB"), and is subject to supervision by the FRB under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). PNB is required to file
with the FRB periodic reports and such additional information as the FRB may
require pursuant to the BHC Act. The FRB examines PNB, and may examine the Bank.

      The BHC Act requires prior FRB approval for, among other things, the
acquisition by a bank holding company of direct or indirect ownership or control
of more than 5% of the voting shares or substantially all the assets of any
bank, or for a merger or consolidation of a bank holding company with another
bank holding company. With certain exceptions, the BHC Act prohibits a bank
holding company from acquiring direct or indirect ownership or control of voting
shares of any company which is not a bank or bank holding company and from
engaging directly or indirectly in any activity other than banking or managing
or controlling banks or performing services for its authorized subsidiaries. A
bank holding company may, however, engage in or acquire an interest in a company
that engages in activities which the FRB has determined by regulation or order
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto.


<PAGE>


      PNB is a legal entity separate and distinct from the Bank. The major
source of PNB's revenue is dividends PNB receives from the Bank. The right of
PNB to participate as a stockholder in any distribution of assets of the Bank
upon its liquidation or reorganization or otherwise is subject to the prior
claims of creditors of the Bank. The Bank is subject to claims by creditors for
long-term and short-term debt obligations, including substantial obligations for
federal funds purchased and securities sold under repurchase agreements, as well
as deposit liabilities.

      The Bank may declare dividends out of undivided profits, except that until
the surplus fund of the Bank is equal to its common capital, no dividend can be
declared until one-tenth of the Bank's net income for the applicable period has
been carried to the surplus fund. The Bank, however, cannot declare or pay a
dividend, if after making the dividend, the Bank would be undercapitalized. In
addition, prior approval of the Office of the Comptroller of the Currency (the
"OCC") is required if dividends declared by the Bank in any calendar year will
exceed its net income for that year combined with its retained net income for
the preceding two years. As of December 31, 1998, national banking regulations
and capital guidelines will permit the Bank to distribute approximately $557,000
plus any 1999 net income of the Bank as dividends without prior approval from
the national banking regulators. Future payments of dividends by the Bank will
be dependent on individual regulatory capital requirements and levels of
profitability. The ability of the Bank to pay dividends may be further
restricted as a result of regulatory policies and guidelines relating to
dividend payments and capital adequacy.

      Federal laws limit certain transactions between the Bank and its
affiliates, including PNB. Such transactions include loans or extensions of
credit by the Bank to PNB, the purchase of assets or securities of PNB, the
acceptance of PNB's securities as collateral for any loans, and the issuance of
a guaranty, acceptance or letter of credit on behalf of PNB. Transactions of
this kind are limited to 10%, in the aggregate, of the Bank's capital and
surplus, and are also subject to certain collateral requirements. These
transactions, as well as other transactions between the Bank and PNB, must also
be on terms substantially the same as, or at least as favorable as, those
prevailing at the time for comparable transactions with nonaffiliated companies
or, in the absence of comparable transactions, on terms, or under circumstances,
including credit standards, that would be offered to, or would apply to,
nonaffiliated companies.

      It is the policy of the FRB that PNB is expected to act as a source of
financial strength to the Bank and to commit resources to support the Bank. The
FRB takes the position that in implementing this policy, it may require PNB to
provide such support when PNB otherwise would not consider itself able to do so.

      The various federal bank regulators, including the FRB and the OCC, have
adopted risk-based capital requirements for assessing bank holding company and
bank capital adequacy. These standards establish minimum capital standards in
relation to assets and off-balance sheet exposures, as adjusted for credit
risks. Capital is classified into two tiers. For bank holding companies, Tier 1
or "core" capital consists of common shareholders' equity, perpetual preferred
stock (subject to certain limitations) and minority interests in the equity
accounts of consolidated subsidiaries, and is reduced by goodwill and certain
other intangible assets ("Tier 1 Capital"). Tier 2 capital consists of (subject
to certain conditions and limitations) the allowance for possible credit losses,
perpetual preferred stock, "hybrid capital instruments," perpetual debt and
mandatory convertible debt securities, and term subordinated debt and
intermediate-term preferred stock ("Tier 2 Capital"). Total capital is the sum
of Tier 1 Capital and Tier 2 Capital (limited to 100% of Tier 1 Capital).
Components of Tier 1 and Tier 2 capital for national banks are similar, but not
identical, to those for holding companies.

      Under the risk-adjusted capital standards, a minimum ratio of total
capital to risk-weighted assets of 8% is required and, Tier l Capital to
risk-weighted assets of 4% are required. The FRB and OCC also have adopted a


<PAGE>



minimum leverage ratio of Tier 1 Capital to total assets of 3% for banks rated
"1" under the Uniform Financial Institutions Rating System or bank holding
companies rated "1" under the rating system of bank holding companies. All other
banks and bank holding companies must maintain a leverage ratio of 4%. In
addition, all banks and bank holding companies are expected to have capital
commensurate with the level and nature all risks to which they are exposed.

      At December 31, 1998, PNB had a total capital risk-based assets ratio of
13.68%, a Tier 1 capital to risk-based assets ratio of 13.05%, and a leverage
ratio of 8.35%. At December 31, 1998, the Bank had a total capital to risk-based
assets ratio of 13.68%, a Tier 1 capital to risk-based assets ratio of 13.05%,
and a leverage ratio of 8.35%.

      The FDIC has a risk-based assessment system for the deposit insurance
provided to depositors at depository institutions whereby assessments to each
institution are calculated upon the probability that the insurance fund will
incur a loss with respect to the institution, the likely amount of such loss,
and the revenue needs of the insurance fund. The system utilizes nine separate
assessment classifications based on an entity's capital level and supervisory
evaluation. Risk classifications of all insured institutions are made by the
FDIC for each quarterly assessment period. The Bank's deposits are predominantly
insured through the Bank Insurance Fund (the "BIF") and certain deposits held by
the Bank are insured through the Savings Association Insurance Fund (the
"SAIF"). The BIF and SAIF are both administered by the FDIC.

      The BIF semi-annual assessment rate currently ranges from 0 to 27 cents
per $1,000 of domestic deposits. The FDIC may increase or decrease the
assessment rate schedule on a semiannual basis. An increase in the rate assessed
on the Bank subsidiary could have an adverse effect on the earnings of PNB and
the Bank, depending on the amount of the increase.

      Deposits insured by SAIF are currently assessed semi-annually at the BIF
rate of zero to 27 cents per $1,000 of domestic deposits. The SAIF assessment
rate may increase or decrease as is necessary to maintain the designated SAIF
reserve ratio of 1.25% of SAIF insured deposits.

      All FDIC-insured depository institutions must pay a quarterly assessment
to provide funds for the payment of interest on bonds issued by the Financing
Corporation, a federal corporation chartered under the authority of the Federal
Housing Finance Board. The bonds (commonly referred to as FICO bonds) were
issued to capitalize the Federal Savings and Loan Insurance Corporation. Until
December 31, 1999 or when the last savings and loan association ceases to exist,
whichever occurs first, the assessment on BIF insured deposits will be 20% of
the assessment on SAIF insured deposits. Thereafter, the same assessment will be
charged on all deposits.




<PAGE>



      Since September 29, 1995, federal law has permitted adequately capitalized
and adequately managed bank holding companies to acquire banks across state
lines, without regard to whether the transaction is prohibited by state law. Any
state law relating to the minimum age of target banks (not to exceed five years)
or limits on the amount of deposits that may be controlled by a single bank or
bank holding company applies. The FRB is not permitted to approve any
acquisition if, after the acquisition, the bank holding company would control
more than 10% of the deposits of insured depository institutions nationwide or
30% or more of the deposits in the state where the target bank is located. The
FRB could approve an acquisition, notwithstanding the 30% limit, if the state
waives the limit either by state regulation or order of the appropriate state
official.

      Beginning on June 1, 1997, banks were permitted to merge with one another
across state lines and thereby create a main bank with branches in separate
states. Any state could, however, by adoption of a non-discriminatory law elect
to opt-out of this provision. Only Texas opted out of the interstate merger
provision. After establishing branches in a state through an interstate merger
transaction, a bank can establish and acquire additional branches at any
location in the state where any bank involved in the merger could have
established or acquired branches under applicable federal or state law.

      PNB does not have any current plans to acquire any banking organization
located outside the state of Illinois.

EMPLOYEES

      PNB presently has no employees. However, certain of the employees and
executive officers of Citizens Bank provide their services to PNB. A monthly fee
for these services is paid by PNB to Citizens Bank. This fee is computed
annually and is based upon an average of the number of hours worked during the
year. As of December 31, 1998, Citizens Bank employed 193 full-time and 36
part-time employees. The Bank offers a variety of employee benefits. Citizens
Bank employees are not represented by a union or a collective bargaining
agreement. The management of PNB considers its employee relations to be
excellent.

      PNB believes one of its strengths is its ability to attract and retain
experienced and well-trained personnel who have a knowledge of the market areas
in which it operates. Management believes that PNB generally has an easier time
attracting and retaining quality employees than other banks in north central
Illinois primarily because its size and management style affords greater
opportunities to employees and allows direct participation and development of
management and banking skills.

      In order to implement PNB's community banking philosophy and to promote
themselves as community oriented organizations, the Bank has a formal officer
call program. Each officer of the Bank calls on existing or potential customers
and is expected to become actively involved in leadership positions in community


<PAGE>



organizations. As of December 31, 1998, employees of the Bank participated in
approximately 160 community organizations, serving over 16,000 hours of
community service in 1998.

ITEM 2.  PROPERTIES

      PNB's headquarters and Citizens Bank's principal offices are located at
606 South Main Street, Princeton, Illinois. Also located at this address is an
annex completed in 1991 that contains, among others, the trust and farm
management departments. The two buildings at this location are owned by Citizens
Bank and contain approximately 36,000 square feet of space, all of which is
occupied by PNB and Citizens Bank. Citizens Bank also has two drive-up
facilities in Princeton and branch offices in DePue, Genoa, Hampshire, Henry,
Minooka, Oglesby, Peru, Sandwich and Spring Valley. Citizens Bank is the owner
of each of these facilities. None of the facilities owned by the Bank are
subject to a mortgage. For additional information regarding these properties,
see footnote 5 of Item 8 of this report.

ITEM 3.  LEGAL PROCEEDINGS

      The Bank is subject to legal proceedings and claims that arise in the
ordinary course of business. Although management of the Corporation cannot
predict the ultimate outcome of such matters, it believes that the ultimate
resolution of these matters will not have a material adverse effect on the
Corporation or the Bank, or the Corporation's consolidated financial statements.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

SUPPLEMENTAL ITEM - EXECUTIVE OFFICERS

         Tony J. Sorcic, Age 45             President & Chief Executive Officer
         James B. Miller, Age 43            Executive Vice-President

      Mr. Sorcic has been President and Chief Executive Officer of PNB since
January, 1997, and first became a director of PNB in 1986. He joined Citizens
Bank in 1981 as Assistant Vice-President of Operations, became Executive
Vice-President in 1986, and was named President in 1995.

      Mr. Miller joined Citizens Bank in 1979 as an agricultural loan officer
and has been the Executive Vice- President of PNB since 1996. He currently is
the Executive Vice-President and Senior Loan Manager of Citizens Bank.

<PAGE>



                                     PART II


ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

      Since May 15, 1992, PNB's Common Stock has been listed on The NASDAQ Stock
Market under the symbol PNBC.

      The table below indicates the high and low bid prices, and the dividends
declared per share for the Common Stock during the periods indicated. The prices
shown reflect interdealer prices and include retail markups, markdowns or
commissions and may not necessarily represent actual transactions.


                                                                    Cash
                                       Prices                     Dividends
                                   High        Low                Declared
                                ---------  -----------         -------------

1997
----------------------
First Quarter                   $ 13.33     $ 11.67               $ .07
Second Quarter                    13.00       12.00                 .07
Third Quarter                     16.50       12.33                 .07
Fourth Quarter                    17.67       15.67                 .08


1998
----------------------
First Quarter                   $ 20.50     $ 15.25               $ .08
Second Quarter                    22.50       17.50                 .08
Third Quarter                     21.00       16.50                 .08
Fourth Quarter                    17.75       16.00                 .08



      On February 26, 1999, PNB had 573 holders of record of its Common Stock.

      The holders of the Common Stock are entitled to receive such dividends as
are declared by the Board of Directors of PNB, which considers payment of
dividends quarterly. The ability of PNB to pay dividends is dependent upon its
receipt of dividends from the Bank. In determining cash dividends, the Board of
Directors considers the earnings, capital requirements, debt servicing
requirements, financial ratio guidelines established by the Board, the financial
condition of PNB, and other relevant factors. The Bank's ability to pay
dividends to PNB is subject to regulatory restrictions. See "Supervision and
Regulation."



<PAGE>



      PNB has paid regular cash dividends on the Common Stock since it commenced
operations in 1982. PNB currently anticipates that cash dividends comparable to
those that have been paid in the past will continue to be paid in the future.
There can be no assurance, however, that any such dividends will be paid by PNB
or that such dividends will not be reduced or eliminated in the future. The
timing and amount of dividends will depend upon the earnings, capital
requirements and financial condition of PNB and the Bank as well as the general
economic conditions and other relevant factors affecting PNB and the Bank. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."






<PAGE>


ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
        (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                    FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------------------------------------------------------------------------------------
                                                      1998          1997          1996           1995            1994
-----------------------------------------------------------------------------------------------------------------------
<S>                                                <C>           <C>           <C>            <C>             <C>
SUMMARY OF INCOME
   Interest income                                 $  32,651     $  31,312     $  29,114      $  27,645       $  25,765
   Interest expense                                   16,504        15,541        14,596         14,518          12,851
   Net interest income                                16,147        15,771        14,518         13,127          12,914
   Provision (credit) for possible loan losses           337           590            41           (101)           (286)
   Non-interest income                                 3,843         3,365         2,860          2,553           2,574
   Non-interest expense                               13,974        12,662        12,864         16,247          11,035
   Income (loss) before federal income tax             5,679         5,884         4,473           (466)          4,739
   Federal income tax (benefit)                        1,420         1,525         1,046           (824)            981
   Net income                                          4,259         4,359         3,427            358           3,758

Per Share Data (a)
   Basic net income                                $    1.08     $    1.07     $    0.84      $    0.09       $    0.93
   Diluted net income                                   1.08          1.07          0.84           0.09            0.93
   Book value (at end of period)                       11.13         10.62          9.84           9.23            8.52
   Cash dividends declared                              0.31          0.28          0.25           0.24            0.22
   Dividend payout ratio                                29.1%         26.2%         30.2%         272.9%           23.8%

Selected Balances (at end of period)
   Total assets                                    $ 478,911     $ 449,660     $ 420,407      $ 402,393       $ 400,531
   Earning assets                                    435,789       412,974       379,278        364,177         364,726
   Investments                                       130,926       122,034       117,028        127,094         154,957
   Gross loans                                       265,655       272,400       258,118        232,693         204,672
   Allowance for possible loan losses                  1,800         1,830         1,630          2,034           2,100
   Deposits                                          407,838       385,940       358,701        346,285         352,987
   Long-term debt                                      1,200         3,750         4,350          4,700           5,300
   Stockholders' equity                               42,606        42,668        40,197         37,646          34,636

Selected Financial Ratios
   Net income to average
      stockholders' equity                              9.94%        10.56%         8.91%          1.01%          10.77%
   Net income to average assets                         0.95          1.02          0.84           0.09            0.94
   Average stockholders' equity
      to average assets                                 9.54          9.66          9.48           9.03            8.74
   Average earning assets
      to average assets                                92.36         91.64         91.37          91.90           92.24
   Non-performing loans to total
      loans at end of period
      (net of unearned interest)                        0.52          0.31          0.45           0.39            0.47
   Tier 1 capital to average adjusted assets            8.35          8.78          8.59           8.96            8.87
   Risk based capital to risk
      adjusted assets                                  13.68         13.88         13.88          15.17           16.81
   Net loans charged off (recovered) to
      average loans                                     0.13          0.15          0.18          (0.02)           0.06
   Allowance for possible loan losses
      to total loans at end of period
      (net of unearned interest)                        0.68          0.67          0.63           0.87            1.03
   Average interest-bearing deposits
      to average deposits                              90.13         90.00         90.07          90.32           91.04
   Average non-interest-bearing deposits
      to average deposits                               9.87         10.00          9.93           9.68            8.96
-----------------------------------------------------------------------------------------------------------------------

</TABLE>

(a)   Each period's per share data has been restated to reflect the stock
      dividend (3 for 2) split declared in 1998.

<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
         (dollar amounts in thousands except per 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, 1998, 1997, and 1996. 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
(dollar amounts in thousands unless otherwise indicated).

OVERVIEW

     Assets at year-end reached a record level of $478,911 versus $449,660 at
the prior year-end. Strong sales efforts by the staff and the market's demand of
the subsidiary bank's products contributed to the asset growth.

     Equity of $42,606 is comparable to the 1997 level. Efforts were made to
hold the dollar amount of capital steady for the year to improve financial
leverage. This was accomplished through a dividend increase and the stock
repurchase program.

     Net income for the year was $4,259, slightly lower than the $4,359 for
1997. Net interest income and non-interest income increased and were offset by
increasing operating expenses. Higher employee costs and legal fees contributed
to the higher operating expenses.

     The table below summarizes the changes in the Corporation's assets, equity,
and net income during the period 1996 through 1998.


<TABLE>
<CAPTION>
                     ASSETS AT        PERCENT         EQUITY AT        PERCENT           NET           PERCENT
                     YEAR-END         CHANGE          YEAR-END         CHANGE          INCOME          CHANGE
                     --------         ------          --------         ------          ------          ------
<S>  <C>             <C>                <C>          <C>                 <C>           <C>             <C>
     1998            $478,911           6.51%        $42,606             (.15)%        $4,259          (2.29)%
     1997             449,660           6.96          42,668             6.15           4,359          27.20
     1996             420,407           4.48          40,197             6.78           3,427         857.26

</TABLE>

ANALYSIS OF RESULTS OF OPERATIONS

     NET INTEREST INCOME. Net interest income improved by 2.7% to $17,094 in
1998 resulting from an increase in the volume of interest-earning assets, offset
by falling interest rates and a flattening yield curve throughout 1998 reducing
the net yield on interest-earning assets and the average cost of
interest-bearing liabilities. The net yield on interest-earning assets decreased
to 8.10% from 8.22% in 1997. The average rate on interest-bearing liabilities
increased to 4.53% from 4.51%. The resulting net yield on average
interest-earning assets on a fully taxable equivalent basis decreased to 4.12%
from 4.25% in 1997.




<PAGE>


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

<TABLE>
<CAPTION>
                                         ------------------------------------------------------------------------------------------
                                                    1998                             1997                             1996
                                         ------------------------------------------------------------------------------------------
                                         AVERAGE              YIELD/    AVERAGE                   YIELD/ AVERAGE              YIELD/
                                         BALANCE  INTEREST     COST     BALANCE    INTEREST       COST   BALANCE    INTEREST   COST
                                         --------------------------     ------------------------------   --------------------------
<S>                                     <C>         <C>        <C>      <C>         <C>           <C>    <C>        <C>        <C>
AVERAGE INTEREST-EARNING ASSETS
Interest-bearing deposits               $  6,401    $  335     5.23%    $  4,911    $   267       5.44%  $    412   $    23    5.58%
Taxable investment securities             92,643     5,494     5.93       82,200      4,976       6.05     92,313     5,135    5.56
Tax-exempt investment securities (a)      34,340     2,620     7.63       30,824      2,458       7.97     30,049     2,473    8.23
Federal funds sold                         7,380       388     5.26        5,465        297       5.43      2,654       140    5.28
Net loans (a) (b)                        274,272    24,761     9.03      267,918     24,185       9.03    245,324    22,211    9.05
                                         -------    ------               -------     ------               -------    ------
      Total interest-earning assets      415,036    33,598     8.10      391,318     32,183       8.22    370,752    29,982    8.09
                                         -------    ------               -------     ------               -------    ------
Average non-interest-earning assets       34,343                          35,696                           35,035
                                          ------                          ------                           ------
      Total average assets              $449,379                        $427,014                         $405,787
                                        ========                        ========                         ========

AVERAGE INTEREST-BEARING LIABILITIES
Interest-bearing demand                 $ 86,874     2,492     2.87     $ 84,424      2,420       2.87   $ 76,736     2,016    2.63
Savings                                   53,630     1,536     2.86       54,543      1,631       2.99     53,101     1,587    2.99
Time                                     201,598    11,269     5.59      192,250     10,665       5.55    186,054    10,170    5.47
Interest-bearing demand notes
   issued to the U. S. Treasury            1,015        55     5.42        1,117         64       5.73      1,059        52    4.91
Federal funds purchased and
   securities repurchase agreements       19,974     1,038     5.20        8,262        408       4.94      6,975       350    5.02
Long-term borrowings                       1,397       114     8.16        4,120        353       8.57      4,998       421    8.42
                                         -------    ------               -------     ------               -------    ------
      Total interest-bearing
         liabilities                     364,488    16,504     4.53      344,716     15,541       4.51    328,923    14,596    4.44
                                         -------    ------               -------     ------               -------    ------
Net yield on average
   interest-earning assets                         $17,094     4.12%                $16,642       4.25%             $15,386    4.15%
                                                   =======     ====                 =======       ====              =======    ====
Average non-interest-bearing liabilities  41,999                          41,039                           38,412

Average stockholders' equity              42,892                          41,259                           38,452
                                          ------                          ------                           ------
      Total average liabilities and
         stockholders' equity           $449,379                        $427,014                         $405,787
                                        ========                        ========                         ========

</TABLE>

(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 fully taxable basis.

(b)   Includes $329 attributable to interest from non-accrual loans.


   In 1997, the net yield on interest-earning assets increased to 8.22% from
8.09% in 1996. However, the average rate on interest-bearing liabilities also
increased from 4.44% in 1996, to 4.51% in 1997. The resulting net yield on
interest-earning assets on a fully taxable equivalent basis increased from 4.15%
in 1996, to 4.25% in 1997. This 10 basis point increase resulted from the
increase in loans outstanding and an improvement in the yield on the investment
portfolio. Both had a positive impact on net income.


<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollar amounts in thousands except per share data)

   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.


<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31
                                          ------------------------------------------------------------------------------------------
                                                    1998 COMPARED TO 1997                        1997 COMPARED TO 1996
                                          VOLUME (a)       RATE (a)         NET         VOLUME (a)      RATE (a)        NET
                                          -----------    -----------    -----------    -----------    -----------    -----------
<S>                                       <C>            <C>            <C>            <C>            <C>            <C>
INTEREST FROM INTEREST-EARNING ASSETS
  Interest-bearing time deposits          $        79    $       (11)   $        68    $       251    $        (7)   $       244
  Taxable investment securities                   624           (106)           518           (587)           428           (159)
  Tax-exempt investment securities (b)            274           (112)           162             63            (78)           (15)
  Federal funds sold                              102            (11)            91            151              6            157
  Net loans (c)                                   576              0            576          2,034            (60)         1,974
                                          -----------    -----------    -----------    -----------    -----------    -----------
    Total income from interest-
      earning assets                            1,655           (240)         1,415          1,912            289          2,201
                                          -----------    -----------    -----------    -----------    -----------    -----------

EXPENSE OF INTEREST-BEARING LIABILITIES
  Interest-bearing demand deposits                 72              0             72            211            193            404
  Savings deposits                                (26)           (69)           (95)            44              0             44
  Time deposits                                   523             81            604            343            152            495
  Interest-bearing demand notes issued
    to the U.S. Treasury                           (6)            (3)            (9)             3              9             12
  Federal funds purchased and securities
    repurchase agreements                         593             37            630             64             (6)            58
  Long-term borrowings                           (228)           (11)          (239)           (75)             7            (68)
                                          -----------    -----------    -----------    -----------    -----------    -----------
      Total expense from interest-
         bearing liabilities                      928             35            963            590            355            945
                                          -----------    -----------    -----------    -----------    -----------    -----------
      Net difference                      $       727    $      (275)   $       452    $     1,322    $       (66)   $     1,256
                                          ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>


[WIDE TABLE CONTINUED FROM ABOVE]


<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31
                                         -----------------------------------------
                                                    1996 COMPARED TO 1995
                                          VOLUME (a)      RATE (a)         NET
                                         -----------    -----------    -----------
<S>                                      <C>            <C>            <C>
INTEREST FROM INTEREST-EARNING ASSETS
  Interest-bearing time deposits         $         1    $        (1)   $         0
  Taxable investment securities               (1,221)           416           (805)
  Tax-exempt investment securities (b)           454           (158)           296
  Federal funds sold                              36             (8)            28
  Net loans (c)                                2,546           (501)         2,045
                                         -----------    -----------    -----------
    Total income from interest-
      earning assets                           1,816           (252)         1,564
                                         -----------    -----------    -----------

EXPENSE OF INTEREST-BEARING LIABILITIES
  Interest-bearing demand deposits               (73)          (221)          (294)
  Savings deposits                               105            (15)            90
  Time deposits                                  304            (40)           264
  Interest-bearing demand notes issued
    to the U.S. Treasury                          (7)            (9)           (16)
  Federal funds purchased and securities
    repurchase agreements                        101            (34)            67
  Long-term borrowings                            (6)           (27)           (33)
                                         -----------    -----------    -----------
      Total expense from interest-
         bearing liabilities                     424           (346)            78
                                         -----------    -----------    -----------
      Net difference                     $     1,392    $        94    $     1,486
                                         ===========    ===========    ===========


</TABLE>

(a)  The change in interest due to both rate and volume has been allocated
     equally.

(b)  Interest income on non-taxable investment securities includes the effects
     of taxable equivalent adjustments using a tax rate of 34% in adjusting
     interest on tax-exempt securities to a fully taxable basis.

(c)  Includes loan fee income of $986 in 1998, $787 in 1997, and $823 in 1996.
     Interest income on loans includes the effect of tax equivalent adjustments
     for non-taxable loans using a tax rate of 34% in adjusting interest on
     tax-exempt loans to a fully taxable basis. Includes non-accrual loans, with
     year-end balances of $1,390 in 1998, $810 in 1997, and $1,157 in 1996.


     NON-INTEREST INCOME. In 1998, non-interest income increased by $478 to
$3,843, up 14.2% from 1997's total of $3,365. Likewise, non-interest income as a
percentage of average assets increased from .79% to .86% over the same period.
With the exception of securities transactions, which decreased only $1 from a
year ago, all categories showed increases in 1998 when compared to 1997. The
biggest increase was seen in loan servicing fees which increased by $197 (or
111.3%) due to heavy refinancing activity in the real estate market. Service
charges on deposit accounts also showed a healthy increase of $130 (or 9.5%) due
to an increase in the number of deposit accounts at the subsidiary bank. 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.

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31
                                                     -------------------------------------------
                                                      1998              1997             1996
<S>                                                  <C>               <C>              <C>
     Trust income                                    $  853            $ 817            $  735
     Farm management fees                               266              250               199
     Service charges on deposit accounts              1,498            1,368             1,176
     Other service charges                              515              445               427
     Securities transactions, net                        96               97               (24)
     Other operating income                             241              211               144
     Loan servicing fees and other charges              374              177               203
                                                     ------           ------            ------
     Total non-interest income                       $3,843           $3,365            $2,860
                                                     ======           ======            ======
     Non-interest income
         to average total assets                        .86%             .79%              .70%

</TABLE>

     In 1997, the Corporation continued to experience strong growth in
non-interest income, with all categories of non-interest income except for loan
servicing fees increasing when compared to 1996. Total non-interest income was
up $505, or 17.7%, over 1996 performance. Service charges on deposit accounts
increased by $192 (16.3%), the result of overdraft charges and the growth in
fee-based checking account programs. Trust and farm management fees were both up
significantly from 1996, as more customers utilized these specialized services.
During 1997, the Corporation also realized $97 in net gains on securities
transactions, compared to a net loss of $24 in 1996.


<PAGE>


     NON-INTEREST EXPENSE. Non-interest expenses increased in 1998 by $1,312 (or
10.4%) to $13,974 from $12,662 in 1997. Salaries and employee benefits increased
by $613 (or 8.9%), a result of an increase in the number of full-time equivalent
employees in 1998, which has been required as the subsidiary bank continues to
grow. Trust litigation expenses also increased from $73 in 1997 to $256 in 1998,
due to an increase in fees paid surrounding the litigation process of the Trust
matter (see note 14 in the Notes to Consolidated Financial Statements). FDIC/OCC
assessments were up 28.5% from a year ago, this due to the fact that the
Corporation received a refund in the first quarter of 1997. Other operating
expenses also increased by 20.4% during 1998, the result of several smaller
accounts such as postage, advertising, supplies, etc. showing marginal
increases. Data processing expenses decreased by $68 (or 10.0%), partially a
result of the subsidiary bank changing to in-house item processing. The
following table provides non-interest expense, and non-interest expense to
average total assets for the periods indicated.


<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31
                                                                ------------------------------------------
                                                                  1998             1997              1996
<S>                                                             <C>              <C>               <C>
     Salaries and employee benefits                             $ 7,479          $ 6,866           $ 6,422
     Occupancy                                                    1,007              964               955
     Equipment                                                      822              858               851
     FDIC/OCC assessments                                           185              144               580
     Goodwill and intangible assets amortization                    467              464               356
     Data processing                                                609              677               595
     Trust litigation expenses                                      256               73               382
                                                                -------          -------           -------
     Other operating expense                                      3,149            2,616             2,723
                                                                =======          =======           =======
     Total non-interest expense                                 $13,974          $12,662           $12,864
     Non-interest expense
         to average total assets                                   3.11%            2.97%             3.17%

</TABLE>

     Non-interest expense decreased by $202 (or 1.6%) in 1997 to $12,662 from
$12,864 in 1996. Salaries and benefits were up $444 (6.9%) from 1996, with a
full year of salaries and benefits for the Sandwich staff representing most of
the increase. Goodwill and intangible assets amortization also increased in
1997, up $108 (or 30.3%), the direct result of a full year's goodwill
amortization related to the Sandwich acquisition. FDIC/OCC assessments were down
$436 (or 75.2%) from 1996, when the Corporation paid a one-time SAIF assessment
of $336.

     NET INCOME. Net income for 1998 was $4,259 (or $1.08 per diluted share), a
decrease of 2.3% from $4,359 (or $1.07 per diluted share) in 1997. The decrease
is attributable to a narrowing of the net interest margin as well as an increase
in operating expenses, which more than offset an increase in non-interest
income. Net income for 1997 increased by $932 (or 27.2%) from $3,427 in 1996.
This increase was attributable to continued improvement in the net interest
margin, increased other operating income, and a decrease in other operating
expenses.

ANALYSIS OF FINANCIAL CONDITION

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


<TABLE>
<CAPTION>
                                                                           DECEMBER 31
                               --------------------------------------------------------------------------------------------------
                                       1998                 1997               1996                1995                 1994
                                           % OF                  % of               % of                 % of               % of
                                 AMOUNT    TOTAL       Amount    Total    Amount    Total     Amount     Total     Amount   Total
                               -----------------      ----------------   ----------------     ----------------    ---------------

<S>                             <C>         <C>       <C>         <C>    <C>         <C>      <C>         <C>     <C>        <C>
     Agricultural               $37,520     14.1%     $38,991     14.3%  $36,030     14.0%    $33,106     14.2%   $30,977    15.1%
     Commercial                  44,147     16.6       41,241     15.1    38,410     14.8      34,687     14.9     35,863    17.5
     Real Estate
         1-4 family residences   66,243     24.9       75,607     27.8    72,460     28.1      63,824     27.4     59,470    29.1
         Agricultural            33,491     12.6       30,434     11.2    28,374     11.0      23,148     10.0     20,808    10.2
         Construction             6,299      2.4        6,030      2.2     4,160      1.6       3,116      1.3        853     0.4
         Commercial              42,005     15.8       42,617     15.7    41,170     16.0      37,378     16.1     31,272    15.3
                               --------              --------           --------             --------            --------
         Real Estate Total      148,038     55.7      154,688     56.9   146,164     56.7     127,466     54.8    112,403    55.0

     Installment                 35,950     13.6       37,480     13.7    37,514     14.5      37,434     16.1     25,429    12.4
                               --------              --------           --------             --------            --------
     Total loans               $265,655    100.0%    $272,400    100.0% $258,118    100.0%   $232,693    100.0%  $204,672   100.0%
                               ========              ========           ========             ========            ========

     Total assets              $478,911              $449,660           $420,407             $402,393            $400,531

     Loans to total assets                  55.5%                 60.6%              61.4%                57.8%              51.1%


</TABLE>


<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollar amounts in thousands except per share data)


     Total loans decreased $6.7 million or 2.5% in 1998 as compared to an
increase of $14.3 million or 5.5% in 1997. Significant declines in interest
rates resulted in a substantial volume of residential real estate loans
refinancing, some of which are with the subsidiary bank, which the subsidiary
bank then may sell in the secondary market while retaining servicing. This
volume offset increased business in other categories.

     The agricultural loan portfolio decreased $1.5 million or 3.8% in 1998 from
1997. The agricultural portfolio declined seasonally due to customers' sale of
grain. From 1996 to 1997, the portfolio increased $3.0 million in volume. Grain
farmers experienced a generally favorable year in 1998 through a combination of
above average yields and government assistance in the form of Loan Deficiency
Payments (LDPs) and general subsidy. Livestock producers experienced a very
difficult year. Burdensome supplies of pork, reduced kill capacity, and reduced
export demand temporarily drove the price of pork to the lowest level in nearly
50 years.

     Commercial loans increased $2.9 million or 7.1% in 1998. This compares to
an increase of $2.8 million or 7.4% in 1997. While business activity remains
strong in markets served by the Corporation, a large share of the commercial
loan demand has been for the acquisition or construction of longer term assets,
such as real estate loans. Competition for high quality commercial and
agricultural customers remains strong.

     Real estate loan balances declined in 1998, a $6.7 million or 4.3% decrease
over 1997. Residential real estate loans dropped as consumers took advantage of
the subsidiary bank's fixed rate products which may be sold in the secondary
markets. Activity levels were at record levels for both new loan customers and
refinancing of existing loans. These loans comprise 24.9% of the total
portfolio. Agricultural real estate loans increased $3.1 million or 10%. This
real estate segment of our market continues to be extremely competitive.

     Direct and indirect installment loans (loans to consumers) reflect a slight
decline in volume in the portfolio in 1998 and 1997. The Corporation implemented
new products and marketing programs during the past few years to increase
penetration into its market areas. Long term, these products and programs are
expected to provide increased diversification of risk and enhanced
profitability. Increased focus on underwriting quality and awareness of general
consumer debt levels has tempered growth in this area of the subsidiary bank's
portfolio over the past three years.

     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,
quality of borrower's management. Risks associated with real estate loans
include concentrations of loans in a loan type, such as commercial or
agricultural, and fluctuating land values. Installment loans also have risks
associated with concentrations of loans in a single type of loan. Installment
loans additionally carry the risk of a borrower's unemployment as a result of
deteriorating economic conditions.

     The Corporation's strategy with respect to addressing and managing these
types of risks, whether loan demand is weak or strong, is for the subsidiary
bank to follow its conservative loan policies and underwriting practices, which
include (i) granting loans on a sound and collectible basis, (ii) investing
funds profitably for the benefit of the stockholders and the protection of
depositors, (iii) serving the 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 Officers' Loan Committees, (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.

     NON-PERFORMING LOANS AND OTHER REAL ESTATE OWNED. Non-performing loans
amounted to .52% of total loans at year-end 1998 compared to .30% at year-end
1997. The overall low level of non-performing loans is a reflection of the
subsidiary bank's lending staff, credit policies, and management's emphasis on
asset quality. Potential 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. Reflecting the Corporation's sound credit policies, the
allowance for possible loan losses was 128.0% and 218.6% of nonperforming loans
at year-end 1998 and 1997, respectively. The Corporation does not have any
significant concentration of commercial real estate loans or commitments in
areas which are experiencing deteriorating economic conditions. Total other real
estate owned as of December 31, 1998 was $217. The Corporation had $50 in other
real estate owned as of December 31, 1997. The following table provides
information on the Corporation's non-performing loans since 1994.


<TABLE>
<CAPTION>
                                                                             DECEMBER 31
                                                ------------------------------------------------------------------
                                                 1998           1997           1996            1995          1994
<S>                                             <C>            <C>            <C>             <C>           <C>
     Non-accrual                                $1,390         $ 810          $1,157          $ 808         $ 573
     90 days past due and accruing                  16            27               0            109            13
     Restructured                                    0             0               0              0           384
                                                ------         -----          ------          -----         -----
         Total non-performing loans             $1,406         $ 837          $1,157          $ 917         $ 970
                                                ======         =====          ======          =====         =====

     Non-performing loans to total loans
         (net of unearned interest)                .52%          .31%            .45%           .39%          .47%

</TABLE>

     As of December 31, 1998 and 1997, loans which the Corporation's management
had serious doubts as to the ability of borrowers to comply with loan repayment
terms that were not carried as non-performing loans totaled approximately $279
(or .10% of the total loan portfolio), compared to $396 (or .14% of the total
loan portfolio), respectively.


<PAGE>


   ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance shown in the following
table represents the allowance available to absorb losses within the entire
portfolio:

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31
                                          --------------------------------------------------------------
                                             1998         1997         1996        1995          1994
                                          ---------    ---------    ---------    ---------     ---------
<S>                                       <C>          <C>          <C>          <C>           <C>
Amount of loans outstanding at end of
   period (net of unearned interest)      $ 265,474    $ 272,111    $ 257,931    $ 232,471     $ 204,154
Average amount of loans outstanding for
  the period (net of unearned interest)   $ 274,076    $ 265,756    $ 244,027    $ 218,091     $ 199,911
Allowance for possible loan
  losses at beginning of period           $   1,830    $   1,630    $   2,034    $   2,100     $   2,218
Allowance of bank acquired                        0            0            0            0           280
Charge-offs:
  Agricultural                                   84            0            0            0            23
  Commercial                                    279          171          140            6            55
  Real estate-mortgage                           26            1            4            0            22
  Installment                                   629          834        1,221          557           268
                                          ---------    ---------    ---------    ---------     ---------
      Total charge-offs                       1,018        1,006        1,365          563           368
                                          ---------    ---------    ---------    ---------     ---------
Recoveries:
  Agricultural                                  243           66          351          321            79
  Commercial                                     28           65           31           23            11
  Real estate-mortgage                            1            0            4           10             5
  Installment                                   379          485          534          244           161
                                          ---------    ---------    ---------    ---------     ---------
      Total recoveries                          651          616          920          598           256
                                          ---------    ---------    ---------    ---------     ---------
Net loans charged off  (recovered)              367          390          445          (35)          112
Provision (credit) for possible
  loan losses                                   337          590           41         (101)         (286)
                                          ---------    ---------    ---------    ---------     ---------
Allowance for possible loan
   losses at end of period                $   1,800    $   1,830    $   1,630    $   2,034     $   2,100
                                          =========    =========    =========    =========     =========
Net loans charged off
  (recovered) to average loans                  .13%         .15%         .18%        (.02)%         .06%
Allowance for possible loan
  losses to non-performing loans             128.02%      218.64%      140.88%      221.81%       216.49%
Allowance for possible loan
  losses to total loans at end of
  period (net of unearned interest)             .68%         .67%         .63%         .87%         1.03%

</TABLE>


     The allowance for possible loan losses 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 loss is
monitored monthly during the ongoing, systematic review of the loan portfolio by
the loan review staff of the audit department of the subsidiary bank. The
results of these reviews are reported to the Board of Directors of the
subsidiary bank on a monthly basis and to the Board of Directors of the
Corporation on a quarterly basis. Monitoring and addressing problem loan
situations are primarily the responsibility of the subsidiary bank's management
and its Board of Directors.

     More specifically, the Corporation calculates the appropriate level of the
allowance for possible loan losses on a monthly basis using historical
charge-offs for each loan type, substandard loans, and anticipated losses with
respect to specific loans. The amount in the allowance is based on the amount of
outstanding loans for each loan type multiplied by the ratio of actual
charge-offs to total loans for each loan type for the preceding five years, plus
the amount of anticipated losses with respect to specific loans, plus a
percentage of loans classified substandard or delinquent for each loan type. 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
possible loan losses is adequate, such agencies do review the procedures and
policies followed by management of the subsidiary bank in establishing the
allowance.

     Reflecting the Corporation's emphasis on asset quality, net charge-offs
were .13% of average total loans in 1998, and the allowance for possible loan
losses at year-end 1998 was $1.8 million, .68% of total loans, net of unearned
interest, and 128% of non-performing loans. Management considers the allowance
for possible loan losses adequate to meet potential losses as of December 31,
1998.

     During 1998, the subsidiary bank had gross charge-offs of $629 in
installment loans versus $834 during 1997 and $1,221 in 1996. Recoveries were
$379 in 1998, $485 in 1997, and $534 in 1996. While charge-offs in installment
loans were reduced, the amount exceeds the subsidiary bank's historic average.
Continued adherence to more stringent underwriting guidelines is expected to
reduce charge-offs even further in the future.


<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollar amounts in thousands except per share data)


   INVESTMENT SECURITIES. The objectives of the investment portfolio are to
provide the Corporation 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
                                                   --------------------------
                                                     1998              1997

     U.S. Treasury Notes                           $ 16,203         $ 34,770
     U.S. Government Agencies                        32,052           29,369
     State and municipal                             36,075           32,633
     Collateralized mortgage obligations             35,657           20,605
     Other securities                                10,939            4,657
                                                   --------         --------
         Total                                     $130,926         $122,034
                                                   ========         ========


     Total investment securities increased by $ 8.9 million (or 7.3%) to $130.9
million, at December 31, 1998, compared to $122.0 at December 31, 1997. The
major reason for the increase is due to an increase in deposits. Decreases
totaling $18.6 million occurred in the U. S. Treasury category while increases
totaling $2.7 and $15.0 million, respectively, occurred in the U. S. Government
Agencies and Collateralized Mortgage Obligations categories. The shift from U.
S. Treasuries to the U. S. Government Agency and Collateralized Mortgage
Obligations will provide a higher total return and enhance the performance of
the overall securities portfolio. Other Securities increased $6.3 million. This
increase was due to Commercial Paper purchased to offset large short-term
certificates of deposit.

     DEPOSITS. Total deposits increased by $21.9 million (or 5.7%). This
increase was lower than the 7.6% in 1997, but represents the second highest
increase in the past four years. Continued sales efforts have contributed to
this growth over the past two years.

     Time deposits recorded the largest increase, ending at $212.1 million, a
4.0% increase over 1997. Interest-bearing demand deposits increased 7.6%, from
$87.4 million to $94.0 million. The smallest percentage increase, which was
4.2%, was in savings deposits.

     Over the last two years, the subsidiary bank has experienced growth of
14.8% in demand accounts compared to 11.7% in time and savings. This continues
to represent the Corporation's efforts to grow through core deposit
relationships.

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


<TABLE>
<CAPTION>
                                                    FOR THE YEAR ENDING DECEMBER 31
                                  ----------------------------------------------------------------
                                           1998                    1997                  1996
                                   BALANCE      RATE       Balance       Rate     Balance     Rate
                                   -------      ----       -------       ----     -------     ----

<S>                               <C>           <C>      <C>             <C>    <C>          <C>
      Non-interest-bearing demand $ 47,355       N/A     $ 42,333         N/A   $ 41,258      N/A
      Interest-bearing demand       93,982      2.87%       87,364       2.87%     78,883    2.63%
      Savings                       54,378      2.86%       52,193       2.99%     55,077    2.99%
      Time deposits                212,123      5.59%      204,050       5.55%    183,483    5.47%
                                  --------                --------               --------
          Total                   $407,838      3.95%     $385,940       3.99%   $358,701    3.84%
                                  ========                ========               ========

</TABLE>


   The following table summarizes time deposits in amounts of $100 or more by
time remaining until maturity as of December 31, 1998. These time deposits are
made by individuals, corporations, and public entities.

      Three months or less                      $27,290
      Over three months through six months       13,210
      Over six months through one year            6,167
      Over one year                               3,911
                                                -------
        Total                                   $50,578
                                                =======


<PAGE>


     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, 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 $100,000,
and repurchase agreements issued to commercial customers) and liquid assets, and
accessibility to the money and capital markets. The Corporation's subsidiary
bank has access to short-term funds through its 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 (those maturing within one year plus
twelve months' projected payments on mortgage-backed securities and
collateralized mortgage obligations) to volatile liabilities (50% of non-public
entity certificates of deposit over $100,000, repurchase agreements issued to
public entities, and deposits of public entities) was 127.8% at December 31,
1998 and 104.1% at December 31, 1997, respectively. Core deposits, defined as
demand deposits, interest-bearing checking accounts, total savings, and
certificates of deposit less than $100,000, were 84.8% of total deposits at
December 31, 1998 and 85.2% of total deposits at December 31, 1997. Money market
accounts of approximately $37.2 million at December 31, 1998 are classified by
the Corporation as core deposits.

     A net increase of $21.4 million in cash and cash equivalents was
experienced by the Corporation in 1998. Financing activities provided net cash
of $24.6 million. Increases of $21.9 million in net deposits and $9.9 million in
short-term borrowings were offset by $3.5 million used to buy back stock of the
Corporation and a decrease of $2.5 million in long-term borrowings. Funds used
by investing activities of $4.4 million partially offset the funds provided by
financing activities. Major components of the investing activities were net cash
of $1.7 million used for securities transactions and $2.7 million used for the
purchase of premises and equipment. Cash and cash equivalents of $54.6 million
at December 31, 1998 are deemed adequate to meet short-term liquidity needs.

     The Corporation experienced a net increase in cash and cash equivalents of
$12.0 million in 1997. Net cash provided by operating activities of $7.3 million
provided a degree of liquidity. Financing activities provided net cash of $24.2
million. A net increase of $27.2 million in deposits, the result of successful
programs offered on certificates of deposit and the introduction of the Money
Market Gold product, were the major components of the financing activities.
Increases in the operating and financing activities were offset by net cash used
for investing activities of $19.4 million. Net loan growth of $17.1 million in
1997 was the major component of this decrease, with net cash used of $2.1
million by securities transactions ($6.6 million in proceeds from sales of
securities and $47.5 million from maturities of securities, less $56.2 million
in purchases of securities) representing the balance of net cash used for
investing activities.

     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, along with its low debt level and common stock available for issuance,
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 instrument 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 that of changes
in interest rates on liabilities, or when the mix and volume of earning assets
and interest-bearing liabilities change. The interest rate sensitivity gap
represents the dollar amount of 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 Asset/Liability
Management Committee is responsible for monitoring the subsidiary bank's 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 quarterly basis,
on the assets and liabilities of the subsidiary bank. This analysis applies an
immediate shift in interest rates of +200 basis points and -200 basis points to
the assets and liabilities to determine the impact on the net interest income
and net income of the subsidiary bank, when compared to a flat rate scenario.
The subsidiary bank strives to maintain the net interest income variance within
a range of +10% to -10% and net income variance within a range of +5% to -5%.
Applying these analyses at December 31, 1998 resulted in no material change to
net interest income or net income of the Corporation.

     The Asset/Liability Management Committee monitors the effect of changes in
yield and rates paid on a monthly basis. The Committee considers the subsidiary
bank's current and anticipated positions during the next twelve months and the
effect of rising and falling interest rate scenarios on net income. The
Committee considers various contingency plans if the results of this analysis
with regard to the following key ratios indicate a deviation from the
asset/liability management policy: loans to assets, net loans to core funds, net
loans to total deposits, equity capital to total assets, rate sensitive assets
to rate sensitive liabilities, GAP, temporary investments to total assets, and
temporary investments to volatile liabilities. The contingency plans considered
by the Committee include generating funds through internal and external sources,
adjusting maturities within the investment portfolio, repricing of assets,
purchasing or selling loans, secondary mortgage activity, and liability rate
adjustment. The Committee reports the results of their meetings to the
subsidiary bank's Board of Directors on a monthly basis.


<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollar amounts in thousands except per share data)



<TABLE>
<CAPTION>
                                                                             DECEMBER 31, 1998
                                                    ----------------------------------------------------------------
                                                     0-3 MO.      4-12 MO.       1-5 YRS.    OVER 5 YRS.    TOTAL
                                                    ---------     ---------     ---------     ---------    ---------
<S>                                                 <C>           <C>           <C>           <C>          <C>
Interest-earning assets:
     Taxable investment securities                  $  13,567     $  21,267     $  21,251     $  38,766    $  94,851
     Tax-exempt investment securities                     735         1,766        11,042        22,532       36,075
     Fed funds sold                                    23,000             0             0             0       23,000
     Loans                                             92,419        48,864       111,825        16,134      269,242
                                                    ---------     ---------     ---------     ---------    ---------
         Total rate sensitive assets ("RSA")        $ 129,721     $  71,897     $ 144,118     $  77,432    $ 423,168
                                                    =========     =========     =========     =========    =========
Interest-bearing liabilities:
     Interest-bearing demand deposits               $  93,982     $       0     $       0     $       0    $  93,982
     Savings deposits                                  54,378             0             0             0       54,378
     Time deposits                                     66,732       100,385        44,759           247      212,123
     Short-term debt                                   13,985             0         5,961         3,150       23,096
     Long-term debt                                     1,200             0             0             0        1,200
                                                    ---------     ---------     ---------     ---------    ---------
         Total rate sensitive liabilities ("RSL")   $ 230,277     $ 100,385     $  50,720     $   3,397    $ 384,779
                                                    =========     =========     =========     =========    =========
Interest rate sensitivity GAP (RSA less RSL)        $(100,556)    $ (28,488)    $  93,398     $  74,035    $       0
Cumulative GAP                                      $(100,556)    $(129,044)    $ (35,646)    $  38,389    $       0
RSA/RSL                                                   .56%          .72%         2.84%        22.79%           0
Cumulative RSA/RSL                                        .56%          .61%          .91%         1.10%           0

</TABLE>


     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 $40 million of the interest-bearing
checking account balances (one of 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 182
day time period.

     At December 31, 1998, savings deposits totaled approximately $54.4 million.
If that amount along with the $40 million of interest-bearing checking account
balances, reflected in the 0-3 month time frame, are adjusted to exclude these
amounts (consistent with the consideration mentioned in the paragraph above),
rate sensitive liabilities would be approximately $135.9 million for a negative
GAP of approximately $6.1 million. RSA as a percent of RSL would be 95.5%.
Adjusting the cumulative GAP and GAP ratio for the 4-12 month time frame would
result in a negative cumulative GAP and GAP ratio of $34.6 million, and 85.4%,
respectively.

     YEAR 2000 COMPLIANCE. The Corporation, through its subsidiary bank, has
undertaken an initiative to address the year 2000 issue and has developed a
comprehensive plan to prepare, as appropriate, the Corporation's computer
systems to recognize the date change on January 1, 2000. If not remedied,
potential risks include business interruption, financial loss, reputation loss,
and/or legal liability. An assessment of the readiness of third parties with
whom the Corporation interfaces, such as vendors, counter-parties, customers,
payment systems, and others, is ongoing to mitigate the potential risks the year
2000 poses to the Corporation. The Corporation's objective is to ensure that all
aspects of the year 2000 issue affecting the Corporation, including those
related to the efforts of third parties, will be fully resolved in time. The
Corporation has consistently maintained contingency plans for vital systems and
business processes to protect the Corporation's assets against unplanned events
that would prevent normal operations. The millennium changeover presents unique
risks, some of which would not be effectively addressed by existing plans. The
Corporation has examined these risks and developed additional plans to mitigate
the effect of potential impacts and ensure continuity of operation throughout
the year 2000 and beyond. The use of the existing contingency planning
infrastructure will ensure optimum coverage and reusability of existing
arrangements and responsibility assignments.

     A year 2000 committee, comprised of representatives from all areas of the
subsidiary bank, has overall responsibility for ensuring that both the technical
and the business risks imposed by the year 2000 issue are addressed. This
committee regularly monitors the progress toward year 2000 compliance and
provides periodic reporting to the subsidiary bank's Executive Officers'
Committee and Board of Directors.

     The process for year 2000 compliance is following four major steps:
inventory, impact assessment, validation, and implementation. The Corporation
had substantially completed the implementation of the Corporation's critical
systems by the end of 1998. It is anticipated that the implementation of all
systems will be achieved by June 30, 1999. The Corporation expects that the
principal costs will be those associated with the replacement of non-compliant
computer equipment, which was fully depreciated and scheduled for replacement.
These costs, which will be capitalized and amortized over the equipment's useful
lives, will be met from existing resources. As a result, management of the
Corporation does not anticipate significant cost savings to occur after the year
2000 issue is satisfactorily remedied.

     In total, the Corporation expects the cost of solving the year 2000 issue,
and the regular replacement of equipment, to be approximately $1.3 million,
consisting of the following:

     Estimated capital costs of technology upgrades      $1.2 million
     Estimated testing costs                               .1 million
                                                         ------------
     Total estimated spending                            $1.3 million


     As of December 31, 1998, the subsidiary bank has successfully met all
critical time frames established by federal regulatory agencies. At this point,
management does not believe there will be a material impact on the Corporation's
results of operations, liquidity, or capital resources.


<PAGE>



     EFFECTS OF INFLATION. The consolidated financial statements and related
consolidated financial data presented herein have been prepared in accordance
with generally accepted accounting principles and practices within the banking
industry which require the measurement of financial position and operating
results in terms of historical dollars without considering 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 investment securities at December 31, 1998, and the
tax equivalent yields of such securities.

<TABLE>
<CAPTION>
                                DUE WITHIN       DUE AFTER ONE BUT   DUE AFTER FIVE BUT    DUE AFTER TEN            OTHER
                                 ONE YEAR        WITHIN FIVE YEARS    WITHIN TEN YEARS         YEARS          (NO STATED MATURITY)
                           -----------------    ------------------   ------------------   -----------------   -------------------
                            AMOUNT      YIELD    AMOUNT      YIELD   AMOUNT       YIELD   AMOUNT      YIELD     AMOUNT     YIELD
<S>                        <C>          <C>     <C>          <C>     <C>           <C>    <C>           <C>    <C>            <C>
U.S. Treasury              $14,139      6.05%   $ 2,064      5.80%   $     0        --    $     0        --    $     0        --
U.S. Government
    Agencies                 7,944      5.83     20,279      6.15        902      8.63%     2,927      7.05%         0        --
State and municipal          2,511      5.19     11,212      5.25      3,165      4.70     19,187      4.87          0        --
Collateralized
    mortgage obligations         0        --        347      6.11     19,471      6.97     15,839      7.28          0        --
Other securities             8,888      5.75          0        --          0        --          0        --          0        --
Other
    (no stated maturity)         0        --          0        --          0        --          0        --      2,051        --
                           -------              -------              -------              -------              -------
           Total           $33,482      5.85%   $33,902      5.83%   $23,538      6.73%   $37,953      6.04%   $ 2,051        --
                           =======              =======              =======              =======              =======

</TABLE>

   LOAN MATURITIES. The following table sets forth scheduled loan repayments on
agricultural, commercial, and real estate construction loans at December 31,
1998. See note 4 in the Notes to Consolidated Financial Statements.

<TABLE>
<CAPTION>
                            DUE WITHIN     DUE AFTER ONE BUT      DUE AFTER
                             ONE YEAR      WITHIN FIVE YEARS      FIVE YEARS          TOTAL
                           -----------     -----------------     -----------        -----------
<S>                        <C>                <C>                <C>                <C>
Agricultural               $    33,514        $     3,597        $       409        $    37,520
Commercial                      35,870              7,032              1,245             44,147
Real Estate-Construction         6,299                  0                  0              6,299
                           -----------        -----------        -----------        -----------
        Total              $    75,683        $    10,629        $     1,654        $    87,966
                           ===========        ===========        ===========        ===========

</TABLE>


     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 31,1998.

                                FIXED RATE       VARIABLE RATE        TOTAL
                                ----------       -------------        -----
Due after one year               $10,514           $1,769           $12,283

     ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES. The subsidiary bank has
allocated the allowance for possible 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:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31
                          --------------------------------------------------------------------------------------------
                               1998               1997              1996                1995               1994
                                   PERCENT            Percent            Percent            Percent            Percent
                                   OF LOANS           of loans           of loans           of loans           of loans
                                   IN EACH            in each            in each            in each            in each
                                   CATEGORY           category           category           category           category
                         ALLOWANCE TO TOTAL Allowance to total Allowance to total Allowance to total Allowance to total
                          AMOUNT    LOANS     amount   loans     amount    loans   amount    loans    amount    loans
                          ------    -----    ------    -----    ------    -----    ------    -----    ------    -----
<S>                       <C>        <C>     <C>        <C>     <C>        <C>     <C>        <C>     <C>        <C>
Agricultural              $  311     14.1%   $  342     14.3%   $  325     14.0%   $  632     14.2%   $  650     15.1%
Commercial                   454     16.6       453     15.1       422     14.8       470     14.9       500     17.5
Real estate-mortgage175              55.7       156     56.9       151     56.7       227     54.8       267     55.0
Installment                  628     13.6       623     13.7       608     14.5       305     16.1       213     12.4
Unallocated                  232      N/A       256      N/A       124      N/A       400      N/A       470      N/A
                          ------    -----    ------    -----    ------    -----    ------    -----    ------    -----
     Total                $1,800    100.0%   $1,830    100.0%   $1,630    100.0%   $2,034    100.0%   $2,100    100.0%
                          ======    =====    ======    =====    ======    =====    ======    =====    ======    =====
</TABLE>


<PAGE>

ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


      The information required by Item 305 of Regulation S-K is contained in
Item 7 (Management's Discussion and Analysis of Financial Condition and Results
of Operations) of this Report on Form 10-K under the heading "Asset Liability
Management" on pages 20 and 21, which information is incorporated herein by
reference.

      Additionally, as mentioned in the section referred to above, the
Corporation performs an interest rate risk analysis on a quarterly basis
applying an immediate shift in interest rates of +200 basis points and -200
basis points to determine the impact on net interest income and net income. As
of December 31, 1998, if interest rates were to increase 200 basis points, net
interest income would decrease approximately $123,000 (or 0.8%) and net income
would decrease approximately $91,000 (or 2.1%). However, if interest rates were
to decrease 200 basis points, net interest income would increase approximately
$123,000 (or 0.8%) and net income would increase approximately $91,000 (or
2.1%).

      The Corporation considers the effects of said increase or decrease in
interest rates to be immaterial.



<PAGE>

ITEM 8. CONSOLIDATED BALANCE SHEETS
        (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                               DECEMBER 31
                                                                            1998        1997
-----------------------------------------------------------------------------------------------
ASSETS
<S>                                                                      <C>          <C>
Cash and due from banks (note 2)                                         $  31,133    $  21,268
Federal funds sold                                                          23,000       11,900
Investment securities (note 3):
   Available-for-sale, at fair value                                       109,530      107,042
   Held-to-maturity, at amortized cost                                      21,396       14,992

Loans held for sale, at lower of cost or market                              5,363        1,576
Loans (note 4):
   Gross loans                                                             265,655      272,400
   Less: Unearned interest                                                    (181)        (289)
         Allowance for possible loan losses                                 (1,800)      (1,830)
                                                                         ---------    ---------
      Net loans                                                            263,674      270,281

Interest receivable                                                          5,604        5,808
Premises and equipment (note 5)                                             10,627        8,752
Goodwill and intangible assets, net of accumulated
   amortization of $2,103 and $1,636,
   at December 31, 1998 and 1997                                             5,023        5,272
Other assets                                                                 3,561        2,769
                                                                         ---------    ---------
      TOTAL ASSETS                                                       $ 478,911    $ 449,660
                                                                         =========    =========

-----------------------------------------------------------------------------------------------
LIABILITIES
Deposits (note 6):
   Demand                                                                $  47,355    $  42,333
   Interest-bearing demand                                                  93,982       87,364
   Savings                                                                  54,378       52,193
   Time                                                                    212,123      204,050
                                                                         ---------    ---------
      Total deposits                                                       407,838      385,940

Borrowings (note 7)                                                         24,296       16,987
Other liabilities                                                            4,171        4,065
                                                                         ---------    ---------
      TOTAL LIABILITIES                                                    436,305      406,992
                                                                         ---------    ---------

STOCKHOLDERS' EQUITY
Common stock: $5 par value, 7,000,000 shares authorized at
   December 31, 1998 and 1997; 4,139,841 shares issued at
   December 31, 1998 and 4,139,918 shares issued at December 31, 1997       20,699       20,700
Surplus                                                                      6,305        6,235
Retained earnings                                                           19,588       16,569
Accumulated other comprehensive income, net of tax                             862          560
Less: Cost of 312,061 and 123,605 treasury shares at December 31, 1998
   and 1997, respectively                                                   (4,848)      (1,396)
                                                                         ---------    ---------
      TOTAL STOCKHOLDERS' EQUITY                                            42,606       42,668
                                                                         ---------    ---------
Commitments &  contingencies
      TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                         $ 478,911    $ 449,660
                                                                         =========    =========

-----------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                FOR THE YEARS ENDED DECEMBER 31
                                                               1998            1997         1996
--------------------------------------------------------------------------------------------------
<S>                                                        <C>           <C>           <C>
INTEREST INCOME:
    Interest and fees on loans                             $    24,705   $    24,150   $    22,184
    Interest and dividends on investment securities:
        Taxable                                                  5,494         4,976         5,135
        Tax-exempt                                               1,729         1,622         1,632
    Interest on federal funds sold                                 388           297           140
    Interest on interest-bearing deposits in
           other banks                                             335           267            23
                                                           -----------   -----------   -----------
          Total interest income                                 32,651        31,312        29,114
                                                           -----------   -----------   -----------
INTEREST EXPENSE:
    Interest on deposits (note 6)                               15,297        14,716        13,773
    Interest on borrowings                                       1,207           825           823
                                                           -----------   -----------   -----------
          Total interest expense                                16,504        15,541        14,596
                                                           -----------   -----------   -----------
NET INTEREST INCOME                                             16,147        15,771        14,518
Provision for possible loan losses (note 4)                        337           590            41
                                                           -----------   -----------   -----------

NET INTEREST INCOME AFTER PROVISION
    FOR POSSIBLE LOAN LOSSES                                    15,810        15,181        14,477
                                                           -----------   -----------   -----------

OTHER INCOME:
    Trust & farm management fees                                 1,119         1,067           934
    Service charges on deposit accounts                          1,498         1,368         1,176
    Other service fees                                             515           445           427
    Gain (loss) on securities transactions, net (note 3)            96            97           (24)
    Loan servicing fees and other charges                          374           177           203
    Other operating income                                         241           211           144
                                                           -----------   -----------   -----------
          Total other income                                     3,843         3,365         2,860
                                                           -----------   -----------   -----------

OTHER EXPENSES:
    Salaries and employee benefits                               7,479         6,866         6,422
    Occupancy                                                    1,007           964           955
    Equipment expense                                              822           858           851
    FDIC/OCC assessments                                           185           144           580
    Goodwill and intangible assets amortization                    467           464           356
    Data processing                                                609           677           595
    Trust litigation expenses (note 14)                            256            73           382
    Other operating expense                                      3,149         2,616         2,723
                                                           -----------   -----------   -----------
          Total other expenses                                  13,974        12,662        12,864
                                                           -----------   -----------   -----------


INCOME BEFORE INCOME TAXES                                       5,679         5,884         4,473
Income tax expense (note 8)                                      1,420         1,525         1,046
                                                           -----------   -----------   -----------

NET INCOME                                                 $     4,259   $     4,359   $     3,427
                                                           ===========   ===========   ===========



NET INCOME PER SHARE:
    Basic                                                  $      1.08   $      1.07   $      0.84
    Diluted                                                $      1.08   $      1.07   $      0.84



Basic weighted average shares outstanding                    3,950,771     4,063,820     4,080,767
Diluted weighted average shares outstanding                  3,951,374     4,063,820     4,080,767
--------------------------------------------------------------------------------------------------

</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                FOR THE YEARS ENDED DECEMBER 31
                                                                   1998       1997       1996
----------------------------------------------------------------------------------------------
<S>                                                              <C>        <C>        <C>
NET INCOME                                                       $ 4,259    $ 4,359    $ 3,427
    Other comprehensive income, net of tax

        Unrealized holding gains arising during the period           365        324         41
        Less: Reclassification adjustment for realized (gains)
             losses included in net income                           (63)       (64)        16
                                                                 -------    -------    -------

    Other comprehensive income                                       302        260         57
                                                                 -------    -------    -------

COMPREHENSIVE INCOME                                             $ 4,561    $ 4,619    $ 3,484
                                                                 =======    =======    =======

----------------------------------------------------------------------------------------------

</TABLE>

See accompanying notes to consolidated financial statements.


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                              ACCUMULATED
                                                                                 OTHER
                                                                              COMPREHENSIVE
                                      COMMON                       RETAINED      INCOME,        TREASURY
                                       STOCK         SURPLUS       EARNINGS   NET OF TAX EFFECT   STOCK         TOTAL
                                      -------        -------       --------   -----------------  -------       -------
<S>                                   <C>            <C>           <C>            <C>            <C>           <C>
Balance, January 1, 1996              $13,800        $ 6,148       $ 17,857       $   243        $  (402)      $37,646

   1998 Stock dividend (3 for 2 split,
      note 17), retroactively applied   6,900                        (6,900)                                         0
                                      -------        -------       --------       -------        -------       -------
Adjusted balance, January 1, 1996     $20,700        $ 6,148       $ 10,957       $   243        $  (402)      $37,646

   Net income                                                         3,427                                      3,427
   Sale of 8,490 shares
      of treasury stock                                   45                                          56           101
   Cash dividends
      ($.25 per share)                                               (1,034)                                    (1,034)
   Other comprehensive income,
      net of $30 tax effect                                                            57                           57
                                      -------        -------       --------       -------        -------       -------
Balance, December 31, 1996            $20,700        $ 6,193       $ 13,350       $   300        $  (346)      $40,197

   Net income                                                         4,359                                      4,359
   Sale of 5,364 shares
      of treasury stock                                   42                                          34            76
   Purchase of 75,000 shares
      of treasury stock                                                                           (1,084)       (1,084)
   Cash dividends
      ($.28 per share)                                               (1,140)                                    (1,140)
   Other comprehensive income,
      net of $133 tax effect                                                          260                          260
                                      -------        -------       --------       -------        -------       -------
Balance, December 31, 1997            $20,700        $ 6,235       $ 16,569       $   560        $(1,396)      $42,668

   Net income                                                         4,259                                      4,259
   Sale of 6,700 shares
      of treasury stock                                   72                                          44           116
   Purchase of 195,156 shares
      of treasury stock                                                                           (3,496)       (3,496)
   Cash dividends
      ($.31 per share)                                               (1,241)                                    (1,241)
   Effect of fractional shares retired
      (77 shares) related to 1998
      stock dividend                       (1)            (2)             1                                         (2)
   Other comprehensive income,
      net of $156 tax effect                                                          302                          302
                                      -------        -------       --------       -------        -------       -------
BALANCE, DECEMBER 31, 1998            $20,699        $ 6,305       $ 19,588       $   862        $(4,848)      $42,606
                                      =======        =======       ========       =======        =======       =======

</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                            FOR THE YEARS ENDED DECEMBER 31
                                                                             1998        1997        1996
-----------------------------------------------------------------------------------------------------------
<S>                                                                        <C>         <C>         <C>
OPERATING ACTIVITIES:
    Net income                                                             $  4,259    $  4,359    $  3,427
    Adjustments to reconcile net income to
        net cash provided by operating activities:
          Depreciation                                                          822         876         908
          Provision for possible loan losses                                    337         590          41
          Deferred income taxes (benefit)                                       191        (208)         18
          Amortization of goodwill and other intangible assets                  467         464         356
          Amortization of premiums on investment securities,
            net of accretion                                                    187          76         340
          (Gain) loss on securities transactions, net                           (96)        (97)         24
          Loans originated for sale                                         (32,742)     (7,431)    (12,155)
          Proceeds from sales of loans originated for sale                   28,955       8,704      10,252
          (Decrease) increase in accrued interest payable                       (12)        420          73
          Decrease (increase) in accrued interest receivable                    204         (83)       (220)
          Increase in other assets                                             (727)       (481)       (763)
          (Decrease) increase in other liabilities                              (39)         98         483
                                                                           --------    --------    --------
              Net cash provided by operating activities                       1,806       7,287       2,784
                                                                           --------    --------    --------
INVESTING ACTIVITIES:
    Proceeds from sales of investment securities available-for-sale           7,440       6,586       2,318
    Proceeds from maturities of investment securities available-for-sale     35,749      46,080      66,593
    Purchase of investment securities available-for-sale                    (45,864)    (55,191)    (59,531)
    Proceeds from maturities of investment securities held-to-maturity       14,611       4,385       1,144
    Purchase of investment securities held-to-maturity                      (21,015)     (6,452)       (736)
    Proceeds from sales of other real estate owned                               79         200          11
    Net decrease (increase) in loans                                          6,270     (14,570)    (25,905)
    Purchase of premises and equipment                                       (2,697)       (481)       (959)
    Payment related to acquisitions, net of cash and
        cash equivalents acquired                                                 0           0      (2,947)
                                                                           --------    --------    --------

              Net cash used by investing activities                          (5,427)    (19,443)    (20,012)
                                                                           --------    --------    --------
FINANCING ACTIVITIES:
    Net increase in deposits                                                 21,898      27,239      12,416
    Proceeds from borrowings                                                 13,347       1,200       1,000
    Repayments of borrowings                                                 (6,038)     (2,100)      1,444
    Dividends paid                                                           (1,241)     (1,140)     (1,034)
    Purchase of treasury stock                                               (3,496)     (1,084)          0
    Sale of treasury stock                                                      116          76         101
                                                                           --------    --------    --------
              Net cash provided by financing activities                      24,586      24,191      13,927
                                                                           --------    --------    --------

Increase (decrease) in cash and cash equivalents                             20,965      12,035      (3,301)
Cash and cash equivalents at beginning of year                               33,168      21,133      24,434
                                                                           --------    --------    --------
Cash and cash equivalents at end of year                                   $ 54,133    $ 33,168    $ 21,133
                                                                           ========    ========    ========


Cash paid during the year for:
    Interest                                                               $ 16,516    $ 15,121    $ 14,525
    Income taxes                                                           $  1,454    $  1,600    $    944
Supplemental disclosure of non-cash investing activities:
    Loans transferred to other real estate owned                           $    375    $    158    $    109
-----------------------------------------------------------------------------------------------------------

</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands except per share data)

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and conform with general practices
within the banking industry. A description of the significant accounting
policies follows:

BASIS OF CONSOLIDATION - The consolidated financial statements of Princeton
National Bancorp, Inc. ("Corporation") include the accounts of the Corporation
and its wholly-owned subsidiary, Citizens First National Bank ("subsidiary
bank"). Significant intercompany accounts and transactions have been eliminated
in consolidation.

USE OF ESTIMATES - In order to prepare the Corporation's financial statements in
conformity with generally accepted accounting principles, management is required
to make certain estimates that affect the amounts reported in the financial
statements and accompanying notes. These estimates may differ from actual
results.

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).
LOANS - Loans are stated at the principal amount outstanding, net of unearned
interest and allowance for possible 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.
     It is the subsidiary bank's policy to discontinue the accrual of interest
on any loan when, in the opinion of management, there is reasonable doubt as to
the collectibility of interest or principal. Interest on these loans is credited
to 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 that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Certain groups of small-balance homogenous loans, which are
collectively evaluated for impairment and are generally represented by consumer
and residential mortgage loans or loans which are measured at the lower of cost
or market, 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 present value
of expected future cash flows discounted at the historical effective interest
rate, except that all collateral-dependent loans are measured for impairment
based on the fair value of the collateral.
     Non-refundable loan fees and direct costs of loan originations are deferred
at the time a loan is originated. Net deferred loan fees or costs are recognized
as yield adjustments over the contractual life of the loan using the interest
method.

ALLOWANCE FOR POSSIBLE LOAN LOSSES - The allowance for possible loan losses is
increased by provisions charged to operating expense and decreased by
charge-offs, net of recoveries, and is available to absorb losses on loans.
     The allowance is based on factors that include overall composition of 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 potential loan losses.
     In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the subsidiary bank's allowance for
possible loan losses. Such agencies may require the subsidiary bank to recognize
additions to the allowance for possible 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
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. A gain or loss on the sale is recorded which reflects the difference
between the cash received and the loan value. Loan servicing fees are recognized
over the lives of the related loans. 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.
     At December 31, 1998 and 1997, the fair value of the originated mortgage
servicing rights was $414 and $197, respectively, and is amortized in future
periods in proportion to, and over the period of, estimated net servicing income
similar to the interest method using an accelerated amortization method. The
amortization of capitalized mortgage servicing rights is reflected in the
statements of income as a reduction to loan servicing fees and other charges.

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.

COST IN EXCESS OF FAIR VALUE OF NET ASSETS - The cost in excess of the
fair value (goodwill) of net assets acquired is being amortized over a
fifteen-year period using the straight-line method. Long lived assets, including
premises and goodwill, are evaluated for impairment using the guidance provided
by Statement of Financial Accounting Standard 121 (FAS 121) "Accounting for the
Impairment of Long Lived Assets and Long Lived Assets to be Impaired".

OTHER REAL ESTATE - Other real estate, which is included in other assets in the
consolidated balance sheets, represents assets to which the Corporation's
subsidiary bank has acquired legal title in satisfaction of indebtedness. Such
real estate is recorded at cost or its fair market value at the date of
acquisition, less estimated selling costs, whichever is lower. Any deficiency is
recorded through the allowance. Subsequent declines in value, based on changes
in market conditions, are recorded in expense as incurred. Gains or losses on
the disposition of other real estate are recorded in expense 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 enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. 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.

NET INCOME PER SHARE - Basic income per share is computed by dividing net income
by the weighted average number of shares outstanding during the year, which were
3,950,771, 4,063,820, and 4,080,767 for 1998, 1997, and 1996, respectively. The
12,950 options issued on December 14, 1998 increased the diluted weighted
average shares outstanding to 3,951,374 for 1998. There was no potential common
stock in 1997 or 1996.

CASH FLOWS - For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks and federal funds sold. Generally, federal funds
are sold for one-day periods.

<PAGE>

RECLASSIFICATIONS - Certain amounts in the 1997 and 1996 consolidated financial
statements have been reclassified to conform to their 1998 presentation.

IMPACT OF NEW ACCOUNTING STANDARDS - In June 1997, the FASB issued Statement
130, "Reporting Comprehensive Income". This statement establishes standards for
reporting the components of comprehensive income and requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be included in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income includes
net income as well as certain items that are reported directly within a separate
component of stockholders' equity and bypass net income. The Corporation adopted
the provisions of this statement in 1998, and has applied the statement to all
years presented. These disclosure requirements had no impact on financial
position or results of operations.
     In June 1997, the FASB issued Statement 131, "Disclosures about Segments of
an Enterprise and Related Information". The provisions of this statement require
disclosure of financial and descriptive information about an enterprise's
operating segments in annual and interim financial reports issued to
shareholders. The statement defines an operating segment as a component of an
enterprise that engages in business activities that generate revenue and incur
expense, whose operating results are reviewed by the chief operating decision
maker in the determination of resource allocation and performance, and for which
discrete financial information is available. The Corporation has determined that
it does not have separate operating segments and, therefore, the disclosure
requirements under this statement do not apply to the Corporation.
     In June 1998, the FASB issued Statement 133, "Accounting for Derivatives
and Hedging Transactions" (FAS 133). FAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. FAS 133 will not be effective for the
Corporation until 2000, and is not anticipated to have a material effect on the
financial statements of the Corporation.
     In October 1998, the FASB issued Statement 134, "Accounting for
Mortgage-Backed-Securities Retained after the Securitization of Mortgage Loans
Held-for-Sale by a Mortgage Banking Enterprise" (FAS 134). FAS 134 requires that
after the securitization of mortgage loans held-for-sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold those
investments, as described in FAS 115, "Accounting for Certain Investments in
Debt and Equity Securities". FAS 134 shall be effective for fiscal years
beginning after December 15, 1998 and is not expected to have a material effect
on financial statements of the Corporation.

2.   CASH AND DUE FROM BANKS
     The average compensating balances held at correspondent banks during 1998
and 1997 were $9,066 and $7,869, 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 an average balance of approximately $1,602 in
1997 as a reserve requirement. There was no such requirement in 1998.

3.   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:

<TABLE>
<CAPTION>
                                                                  1998
                                                            GROSS        GROSS        ESTIMATED
                                             AMORTIZED    UNREALIZED   UNREALIZED        FAIR
                                               COST         GAINS        LOSSES          VALUE
                                           -----------   -----------   -----------    -----------
<S>                                        <C>           <C>           <C>            <C>
Available-for-sale:
     United States Treasury                $    16,099   $       104   $         0    $    16,203
     United States Government Agencies          31,771           304           (23)        32,052
     State and municipal                        22,685           929           (47)        23,567
     Collateralized mortgage obligations        35,618           158          (119)        35,657
     Other securities                            2,051             0             0          2,051
                                           -----------   -----------   -----------    -----------
           Total                               108,224         1,495          (189)       109,530
                                           -----------   -----------   -----------    -----------

Held-to-maturity:
     State and municipal                        12,508           238            (3)        12,743
     Other securities                            8,888            12             0          8,900
                                           -----------   -----------   -----------    -----------
           Total                           $   129,620   $     1,745   $      (192)   $   131,173
                                           ===========   ===========   ===========    ===========

                                                                  1997
                                                            Gross        Gross       Estimated
                                             Amortized    Unrealized   Unrealized       Fair
                                               Cost         Gains        Losses         Value
                                           -----------   -----------   -----------    -----------
Available-for-sale:
     United States Treasury                $    34,651   $       120   $        (1)   $    34,770
     United States Government Agencies          29,331            95           (57)        29,369
     State and municipal                        19,371           764             0         20,135
     Collateralized mortgage obligations        20,677            39          (111)        20,605
     Other securities                            2,164             0            (1)         2,163
                                           -----------   -----------   -----------    -----------
           Total                               106,194         1,018          (170)       107,042
                                           -----------   -----------   -----------    -----------

Held-to-maturity:
     State and municipal                        12,498           187           (24)        12,661
     Other securities                            2,494             0             0          2,494
                                           -----------   -----------   -----------    -----------
           Total                           $   121,186   $     1,205   $      (194)   $   122,197
                                           ===========   ===========   ===========    ===========
</TABLE>
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands except per share data)

Maturities of investment securities classified as available-for-sale and
held-to-maturity were as follows at December 31, 1998:

<TABLE>
<CAPTION>
                                                                               ESTIMATED
                                                               AMORTIZED         FAIR
                                                                 COST            VALUE
                                                               --------         --------
<S>                                                            <C>               <C>
Available-for-sale:
     Due in one year or less                                   $ 22,504          $22,643
     Due after one year through five years                       27,221           27,616
     Due after ten years                                         16,917           17,620
                                                               --------         --------
                                                                 66,642           67,879
                                                               --------         --------
     Mortgage-backed securities                                   3,913            3,943
     Collateralized mortgage obligations                         35,618           35,657
     Other (no stated maturity)                                   2,051            2,051
                                                               --------          -------
                                                               $108,224         $109,530
                                                               ========         ========
Held-to-maturity:
     Due in one year or less                                   $ 10,838          $10,862
     Due after one year through five years                        5,826            5,942
     Due after five years through ten years                       3,165            3,280
     Due after ten years                                          1,567            1,559
                                                               --------         --------
                                                               $ 21,396          $21,643
                                                               ========          =======

</TABLE>

     Proceeds from sales of investment securities available-for-sale during
1998,1997, and 1996 were $7,440, $6,586, and $2,318, respectively. Gross gains
of $96 in 1998, $108 in 1997, and $15 in 1996, and gross losses of $0 in 1998,
$11 in 1997, and $39 in 1996, were realized on those sales.
     Certain investment securities are pledged to secure public and trust
deposits, and for other purposes required or permitted by law. The fair value of
these pledged assets at December 31, 1998, 1997, and 1996 was $78,682, $77,273,
and $68,072, respectively.

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

Gross Loans:                                    1998              1997
     Commercial                              $ 44,147          $ 41,241
     Agricultural                              37,520            38,991
     Real estate-construction                   6,299             6,030
     Real estate-mortgage                     141,739           148,658
     Installment                               35,950            37,480
                                             --------          --------
         Total                               $265,655          $272,400
                                             ========          ========

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

                                          1998        1997        1996
     Balance, January 1                 $ 1,830     $ 1,630     $ 2,034
     Provision for possible
         loan losses                        337         590          41
     Recoveries of loans
         previously charged off             651         616         920
     Loans charged off                   (1,018)     (1,006)     (1,365)
                                        -------     -------     -------
     Balance, December 31               $ 1,800     $ 1,830     $ 1,630
                                        =======     =======     =======


     Loans on non-accrual status at December 31, 1998, 1997, and 1996 were
$1,390, $810, and $1,157, respectively. Interest income that would have been
recorded on these loans had they not been placed on non-accrual status, was
approximately $85, $75, and $93, respectively.
     At December 31, 1998, 1997, and 1996, the recorded investment in loans
classified as impaired in accordance with FAS 114 totaled $957, $489, and $624,
respectively, all of which related to impaired loans which do not require a
related allowance for possible loan losses as the carrying value of the loans is
less than the discounted present value of expected future cash flows. For the
years ended December 31, 1998, 1997, and 1996, the average recorded investment
in impaired loans was approximately $537, $596, and $380, respectively. Interest
recognized on impaired loans during the portion of the year that they were
impaired was not considered material.
     The Corporation's subsidiary bank had loans outstanding to directors,
executive officers and their related interests (related parties) of the
Corporation and its subsidiary of approximately, $1,786, $1,639, and $1,735, at
December 31, 1998, 1997, and 1996, respectively. These loans were made in the
ordinary course of business on 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. An analysis of the activity in 1998 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
is as follows:

           Balance                                              Balance
       January 1, 1998      Additions        Payments      December 31, 1998
       ---------------      ---------        --------      -----------------
           $1,639            $1,202           $1,055            $1,786

     The Corporation services loans for others with unpaid principal balances at
December 31, 1998, 1997, and 1996 of approximately $56,267, $42,399, and
$36,649, respectively.

<PAGE>

5.   PREMISES AND EQUIPMENT

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

                                                1998              1997
     Land                                     $ 2,280           $ 2,040
     Buildings                                 10,488            10,184
     Furniture and Equipment                    8,166             6,013
                                              -------           -------
                                               20,934            18,237

     Less accumulated depreciation             10,307             9,485
                                              -------           -------
             Total                            $10,627           $ 8,752
                                              =======           =======

     Depreciation expense charged to operating expense for 1998, 1997, and 1996
was $822, $876, and $908, respectively.

6.   DEPOSITS

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

<TABLE>
<CAPTION>
                                                            1998              1997             1996
<S>                                                        <C>               <C>               <C>
     Amount                                                $50,578           $40,420          $34,712
     Interest expense for the year                           2,207             2,162            2,078

     Total interest expense on deposits was as follows:
                                                             1998              1997             1996
     Interest-bearing demand                               $ 2,492           $ 2,420           $2,016
     Savings                                                 1,536             1,631            1,587
     Time                                                   11,269            10,665           10,170
                                                           -------           -------          -------
             Total                                         $15,297           $14,716          $13,773
                                                           =======           =======          =======
</TABLE>

7.   BORROWINGS
     As of December 31, borrowings consisted of the following:

<TABLE>
<CAPTION>
                                                         1998                               1997
                                                                WEIGHTED                           Weighted
                                                                 AVERAGE                            Average
                                              AMOUNT               RATE          Amount               Rate
                                              -------              ----          -------              ----
<S>                                            <C>                 <C>            <C>                 <C>
     Customer repurchase agreements           $13,768              4.20%          $9,771              4.90%
     Advances from the Federal Home Loan
       Bank of Chicago due:
           September 22, 2000                     399              6.21              443              6.21
           June 18, 2002                          562              6.46              697              6.46
         March 7, 2004                          3,150              5.94                0                --
         February 27, 2008                      2,500              5.37                0                --
         June 19, 2008                          2,500              5.44                0                --
     Interest-bearing demand notes issued
       to the U.S. Treasury                       217              4.11            2,326              5.53
     Notes payable                              1,200              6.75            3,750              8.75
                                              -------              ----          -------              ----
         Total                                $24,296              4.89%         $16,987              5.94%
                                              =======              ====          =======              ====
</TABLE>

     The subsidiary bank has adopted a collateral pledge agreement whereby the
bank has 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). All advances from the FHLB have fixed interest rates.
The advance maturing in June, 2008 has a one-time callable feature in June,
2003. The advance maturing in February, 2008 also has a callable feature,
beginning in February, 2003 and quarterly thereafter. All stock in the FHLB is
also pledged as additional collateral for these advances.
     The Corporation had notes payable totaling $1,200 and $3,750 at December
31, 1998 and 1997, respectively. The note payable at December 31, 1997 was paid
off in 1998. A new demand note was issued on October 7, 1998. This demand note
carries a floating interest rate equal to the lender's prime rate less one
percent (6.75% at December 31, 1998). The note, which is unsecured, had an
original balance of $2,200 and has a maturity of March 31, 1999.

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands except per share data)

8. INCOME TAXES
   Income tax expense (benefit) consisted of the following:

<TABLE>
<CAPTION>
                                                  CURRENT          DEFERRED           TOTAL
                                                  -------          --------           -----
<S>                                               <C>              <C>               <C>
   Year ended December 31, 1998:
      U.S. Federal                                $1,229           $  191            $1,420
   Year ended December 31, 1997:
      U.S. Federal                                $1,733           $ (208)           $1,525
   Year ended December 31, 1996:
      U.S. Federal                                $1,028           $   18            $1,046

</TABLE>

   The Corporation was not liable for state income taxes for 1998, 1997 or 1996.

   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:

<TABLE>
<CAPTION>
                                                         1998              1997             1996
                                                        ------           ------            ------
<S>                                                     <C>              <C>               <C>
   Computed "expected" tax expense                      $1,931           $2,000            $1,521
   Increase (decrease) in income taxes resulting from:
      Tax-exempt income                                   (630)            (582)             (554)
      Non-deductible interest expense                       86               77                68
      Goodwill amortization                                 88               87                75
      Other, net                                           (55)             (57)              (64)
                                                        ------           ------            ------
                                                        $1,420           $1,525            $1,046
                                                        ======           ======            ======
</TABLE>


   The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are presented below:

   Deferred tax assets:                                     1998        1997
                                                           ------      -----
      Deferred directors' fees                             $  125      $ 124
      State NOL carryforwards                                   7        161
      Other, net                                                0         13
                                                           ------      -----
         Total gross deferred tax assets                      132        298
         Less: Valuation allowance                              0        (13)
                                                           ------      -----
         Net deferred tax assets                              132        285
                                                           ------      -----
   Deferred tax liabilities:
      Building and equipment, principally due to
         differences in depreciation                         (216)      (197)
      Provision for possible loan losses                     (301)      (282)
      Accretion                                               (73)       (73)
      Unrealized gain on investment securities
         available-for-sale                                  (444)      (288)
      Purchase accounting adjustments                         (24)       (24)
                                                           ------      -----
         Total gross deferred tax liabilities              (1,058)      (864)
                                                           ------      -----
         Net deferred tax liabilities                      $ (926)     $(579)
                                                           ======      =====

     At December 31, 1998, the Corporation had net operating loss carryforwards
for state income tax purposes of approximately $140 which expire in the years
2008-2010 and are available to offset future state taxable income.
     The valuation allowance for deferred tax assets at December 31, 1998 was
$0. The net change in the total valuation allowance for the year ended December
31, 1998 was a decrease of $13. Management believes that it is more likely than
not that the deferred tax assets, net of the valuation allowance, will be
realized.

9.   REGULATORY MATTERS
     The Corporation and its subsidiary bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation and its subsidiary bank must meet specific capital guidelines
that involve quantitative measures of each entity's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Corporation's and its subsidiary bank's capital amounts and
classification 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, 1998 and 1997, the Corporation and its subsidiary bank were
categorized as well capitalized under the regulatory framework.
     The most recent notification, as of February 19,1998, from the federal
banking agencies categorized the Corporation and 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. There are no conditions or events since that
notification that have changed the Corporation's or the subsidiary bank's
category.
     The Corporation's and the subsidiary bank's actual capital amounts and
ratios as of December 31, 1998 and 1997 are as follows:


<PAGE>


<TABLE>
<CAPTION>
                                                                                          TO BE WELL
                                                                                       CAPITALIZED UNDER
                                                                    FOR CAPITAL        PROMPT CORRECTIVE
                                               ACTUAL            ADEQUACY PURPOSES     ACTION PROVISIONS

                                           AMOUNT   RATIO        AMOUNT     RATIO       AMOUNT     RATIO
------------------------------------------------------------------------------------------------------------
<S>                                      <C>          <C>       <C>          <C>       <C>           <C>
As of December 31, 1998:

Total Capital (to risk-weighted assets):
    Princeton National Bancorp, Inc.     $38,894      13.68%    $22,745      8.00%     $28,431       10.00%
    Citizens First National Bank          39,593      13.94      22,721      8.00       28,401       10.00

Tier 1 Capital (to risk-weighted assets):
    Princeton National Bancorp, Inc.     $37,094      13.05%    $11,373      4.00%     $17,059        6.00%
    Citizens First National Bank          37,793      13.31      11,360      4.00       17,040        6.00

Tier 1 Capital (to average adjusted assets):
    Princeton National Bancorp, Inc.     $37,094       8.35%    $17,771      4.00%     $22,213        5.00%
    Citizens First National Bank          37,793       8.51      17,762      4.00       22,202        5.00
------------------------------------------------------------------------------------------------------------


                                                                                           TO BE WELL
                                                                                       CAPITALIZED UNDER
                                                                    FOR CAPITAL        PROMPT CORRECTIVE
                                               ACTUAL            ADEQUACY PURPOSES     ACTION PROVISIONS

                                           AMOUNT   RATIO        AMOUNT     RATIO       AMOUNT     RATIO
------------------------------------------------------------------------------------------------------------
As of December 31, 1997:

Total Capital (to risk-weighted assets):
    Princeton National Bancorp, Inc.     $38,843      13.88%    $22,384      8.00%     $27,980       10.00%
    Citizens First National Bank          40,948      14.66      22,347      8.00       27,934       10.00

Tier 1 Capital (to risk-weighted assets):
    Princeton National Bancorp, Inc.     $37,013      13.23%    $11,192      4.00%     $16,788        6.00%
    Citizens First National Bank          39,118      14.00      11,174      4.00       16,760        6.00

Tier 1 Capital (to average adjusted assets):
    Princeton National Bancorp, Inc.     $37,013       8.78%    $16,863      4.00%     $21,078        5.00%
    Citizens First National Bank          39,118       9.30      16,832      4.00       21,040        5.00
------------------------------------------------------------------------------------------------------------
</TABLE>

10.  EMPLOYEE, OFFICER, AND DIRECTOR BENEFIT PLANS
     The subsidiary bank has a defined contribution investment (401k) plan.
Under this plan, employees may elect to contribute, on a tax-deferred-basis, up
to ten percent of their salary. In addition, the subsidiary bank will match
employees' contributions up to three percent of each employee's salary. The
subsidiary bank's contribution to the defined contribution investment (401k)
plan for 1998, 1997, and 1996 was $136, $124, and $129, respectively.
     The subsidiary bank also has a stock purchase program in which the employee
contributes through payroll deductions. These amounts are pooled and used to
purchase shares of the Corporation's common stock on a quarterly basis at the
market 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 $193 in 1998, $222 in 1997, and $162 in 1996.
     Additionally, in 1998, the Corporation's shareholders approved a
non-qualifying stock option plan for the benefit of employees and directors of
the subsidiary bank. The Corporation applies APB Opinion 25, "Accounting for
Stock Issued to Employees," and related Interpretations in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized for
its stock options plans.
     The fair value of each option grant was estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions: dividend
yield of 1.80%; expected volatility of 29.95%; risk-free interest rate of 4.56%;
expected life of ten years.
     The number of shares of common stock authorized under the stock option plan
is 202,500. The option exercise price must be at least 100% of the fair market
value of the common stock on the date of grant, and the option term cannot
exceed ten years. A summary of the stock option activity and related information
follows:
                                             Year Ended December 31, 1998
                                             ----------------------------
                                                               Average
                                                              Exercise
                                                      Shares    Price
                                                     ------    ------
       Beginning of period                                0        --
       Granted                                       12,950    $17.19
       Exercised                                          0        --
                                                     ------    ------
       End of period                                 12,950    $17.19
       Options exercisable                                0        --
       Fair value of options granted during period    $6.49


     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. There is no
difference between the stated and pro forma earnings per share in 1998.

11.  FAIR VALUE OF FINANCIAL INSTRUMENTS
     Statement of Financial Accounting Standards No. 107 ("FAS 107"),
"Disclosures about Fair Value of Financial Instruments", requires all entities
to disclose the estimated fair value of its 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 not to
engage in trading or sales activities except for loans held-for-resale 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.
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands except per share data)


     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, 1998 and 1997, were as follows:


<TABLE>
<CAPTION>
                                                        1998                               1997
                                              -------------------------         --------------------------
                                              AMORTIZED          FAIR           AMORTIZED           FAIR
                                                COST             VALUE            COST              VALUE
----------------------------------------------------------------------------------------------------------
<S>                                           <C>              <C>               <C>              <C>     
FINANCIAL ASSETS:
     Cash and due from banks                  $31,133          $ 31,133          $21,268          $ 21,268
     Federal funds sold                        23,000            23,000           11,900            11,900
     Investment securities                    129,620           131,173          121,186           122,197
     Loans, net                               269,037           269,349          271,857           271,856
     Accrued interest receivable                5,604             5,604            5,808             5,808
                                             --------          --------         --------          --------
        Total Financial Assets               $458,394          $460,259         $432,019          $433,029
----------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
     Non-interest-bearing
        demand deposits                       $47,355          $ 47,355          $42,333          $ 42,333
     Interest-bearing deposits                360,483           362,159          343,607           345,087
     Borrowings                                24,296            24,296           16,987            16,987
     Accrued interest payable                   2,345             2,345            2,357             2,357
                                             --------          --------         --------          --------
        Total Financial Liabilities          $434,479          $436,155         $405,284          $406,764
----------------------------------------------------------------------------------------------------------
</TABLE>

     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 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.
     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. Because the
Corporation's 1998 cost of funds compares favorably with alternative funding
sources available to the Corporation, the relationship value of these
liabilities is believed by management to be significant. There is no material
difference between the notional amount and the estimated fair value of
off-balance-sheet items which total $64,102 and $62,555 at December 31, 1998 and
December 31, 1997, respectively, and are primarily comprised of unfunded loan
commitments which are generally priced at market at the time of funding.
     Fair value estimates are based on existing on and off-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 substantial trust
department that contributes net fee income annually. The trust 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 tax liabilities, property, plant,
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 many of the estimates.
     Management is concerned 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.

12. UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY
     National banking regulations and capital guidelines limit the amount of
dividends that may be paid by banks. During 1999, these regulations and
guidelines will permit the subsidiary bank of the Corporation to distribute
approximately $557 plus the 1999 income of the bank, without prior approval from
the national banking regulators. Future dividend payments by the subsidiary bank
would be dependent on individual regulatory capital requirements and levels of
profitability. Since the Corporation is a legal entity, separate and distinct
from the subsidiary bank, the dividends of the Corporation are not subject to
such bank regulatory guidelines. At December 31, 1998, the subsidiary bank had
$1,987 available to pay for dividends.

13. COMMITMENTS AND CONTINGENCIES
     The subsidiary bank is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those 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, 1998, commitments to extend credit
and standby letters of credit were approximately $63,378 and $724, respectively.


<PAGE>

     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.
     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.

14.  SUBSIDIARY BANK TRUST DEPARTMENT LITIGATION
     A ruling was received during the third quarter of 1998 on the Corporation's
subsidiary bank's lawsuit, stemming from the 1995 Trust Department issue,
against Cincinnati Insurance Company. The case was heard in the United States
District Court for the Northern District of Illinois, Eastern Division, in
Chicago, Illinois. The judge ruled in favor of the subsidiary bank on all issues
and awarded $4,900 in damages, pre-judgment interest, post-judgment interest,
and reasonable attorneys' fees and costs. Cincinnati Insurance Company has filed
an appeal to the ruling. The subsidiary bank has not recognized any of the
judgment amount as income and continues to expense any legal fees incurred. If
the appeal is denied and judgment upheld, the majority of such expenses would be
reimbursed through the insurance coverage.

15. ACQUISITION
     On June 7, 1996, the Corporation acquired all of the deposits ($24.6
million), equipment, and facility of the Sandwich branch of Superior Bank, FSB
(Sandwich). The acquisition of Sandwich was accounted for under the purchase
method of accounting and accordingly, the assets acquired were adjusted to their
fair market values as of the acquisition date. Goodwill and prepaid acquisition
costs in connection with this acquisition in the amount of $3,002 are being
amortized over fifteen years on a straight-line basis. Additionally, a
three-year covenant not-to-compete was established in the amount of $100, and is
being amortized on a straight-line basis.

16. STOCK DIVIDEND
     In April, 1998, the Corporation announced a 3-for-2 stock split which was
paid on May 15, 1998 to shareholders of record as of April 24, 1998. All amounts
for all periods have been adjusted to reflect this stock split.

17.  POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
     The Corporation offers their retirees the opportunity to continue benefits
in the subsidiary bank's Employee Health Benefit Plan provided the retiree
agrees to pay a portion of their monthly premiums. The Corporation's level of
contribution is based upon an age and service formula and will provide benefits
to active participants until age 65. The components of the 1998, 1997, and 1996
net periodic post-retirement benefit cost are shown below:

                                                 1998       1997       1996

     Service cost                                $ 29      $  27       $ 26
     Interest cost                                 26         25         23
     Net amortization of transition obligation     16         16         16
                                                 ----      -----       ----
     Net periodic post-retirement benefit cost   $ 71      $  68       $ 65
                                                 ====      =====       ====

     As of December 31, 1998, 1997, and 1996, the accumulated post-retirement
benefit obligation totaled $371, $349, and $328, respectively. For measurement
purposes, a 10% annual rate of increase in the cost of covered benefits (health
care cost trend rate) was assumed for 1998, 1997, and 1996 and the rate was
further assumed to decline to 5% after six years. The weighted average discount
rate used in determining the accumulated post-retirement benefit obligation was
7% at December 31, 1998, 1997, and 1996.
     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    1-Percentage
                                                 Point Increase  Point Decrease
     Effect on total of service and interest
        cost components                              $   5          $   (4)
     Effect on post-retirement benefit
        obligation                                      43             (36)

<PAGE>


18.  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

<TABLE>
<CAPTION>
                                                                    DECEMBER 31

                                                                 1998          1997
                                                              -----------------------
<S>                                                           <C>            <C>
     ASSETS
     Cash                                                      $   14         $   14
     Interest-bearing deposits in subsidiary bank                 295            530
     Other assets                                                 552            516
     Investment in subsidiary bank                             43,005         44,435
                                                              -------        -------
              TOTAL ASSETS                                    $43,866        $45,495
                                                              =======        =======

     LIABILITIES
     Borrowings                                                $1,200         $3,750
     Other liabilities                                             60           (923)
                                                              -------        -------
              TOTAL LIABILITIES                                 1,260          2,827
                                                              -------        -------
     STOCKHOLDERS' EQUITY
     Common stock                                              20,699         20,700
     Surplus                                                    6,305          6,235
     Retained earnings                                         19,588         16,569
     Accumulated other comprehensive income,
        net of tax                                                862            560
     Less: Cost of treasury shares                             (4,848)        (1,396)
                                                              -------        -------
              TOTAL STOCKHOLDERS' EQUITY                       42,606         42,668
                                                              -------        -------
              TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY      $43,866        $45,495
                                                              =======        =======

</TABLE>


                         CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                        FOR THE YEARS ENDED DECEMBER 31
                                                                        -------------------------------
                                                                      1998           1997           1996
<S>                                                                  <C>            <C>            <C>
     INCOME
     Dividends received from subsidiary bank                         $6,200         $2,400         $2,350
     Interest income                                                     18             62            145
     Gain on sale of investment securities                                0              2              1
     Other income                                                        36              1              0
                                                                     ------         ------         ------
              TOTAL INCOME                                            6,254          2,465          2,496
                                                                     ------         ------         ------
     EXPENSES
     Interest expense                                                   114            353            421
     Amortization of goodwill and other intangible assets                63             63             63
     Loss on purchase of investment securities                            0              0             26
     Other expenses                                                     161            118            137
                                                                     ------         ------         ------
              TOTAL EXPENSES                                            338            534            647
                                                                     ------         ------         ------
     Income before income taxes and equity
        in undistributed income of subsidiary bank                    5,916          1,931          1,849
                                                                     ------         ------         ------
     Applicable income taxes (benefit)                                  (75)          (138)          (149)
                                                                     ------         ------         ------

     Income before equity in undistributed income
        of subsidiary bank                                            5,991          2,069          1,998
     Equity in undistributed income (loss) of subsidiary bank        (1,732)         2,290          1,429
                                                                     ------         ------         ------
              NET INCOME                                             $4,259         $4,359         $3,427
                                                                     ======         ======         ======

</TABLE>


<PAGE>


               CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                       FOR THE YEARS ENDED DECEMBER 31
                                                       -------------------------------
                                                         1998       1997       1996
<S>                                                    <C>        <C>        <C>
Operating activities:
   Net income                                          $ 4,259    $ 4,359    $ 3,427
   Adjustments to reconcile net income to
      net cash provided by operating activities:
        Amortization of investment securities,
           net of accretion                                  0         (1)        (4)
        (Gain) loss on securities transactions, net          0         (2)        26
        Equity in undistributed income                   1,732     (2,290)    (1,429)
        Amortization of goodwill
           and other intangible assets                      63         63         63
        (Increase) decrease in other assets               (101)       261       (987)
        Increase (decrease) in other liabilities           983     (1,056)         7
                                                       -------    -------    -------
                  NET CASH PROVIDED BY
                  OPERATING ACTIVITIES                   6,936      1,334      1,103
                                                       -------    -------    -------
Investing activities:
   Proceeds from sales of investment securities
      available-for-sale                                     0        925      1,067
   Proceeds from maturities of investment securities
      available-for-sale                                     0          8        196
   Purchase of investment securities
      available-for-sale                                     0          0       (373)
                                                       -------    -------    -------
                  NET CASH PROVIDED BY
                  INVESTING ACTIVITIES                       0        933        890
                                                       -------    -------    -------
Financing activities:
   Repayments of borrowings                             (4,750)      (600)    (1,350)
   Proceeds from borrowings                              2,200          0      1,000
   Sale of treasury stock                                  116         76        101
   Purchase of treasury stock                           (3,496)    (1,084)         0
   Dividends paid                                       (1,241)    (1,140)    (1,034)
                                                       -------    -------    -------
                  NET CASH USED BY
                  FINANCING ACTIVITIES                  (7,171)    (2,748)    (1,283)
                                                       -------    -------    -------
(Decrease) increase in cash and cash equivalents          (235)      (481)       710
Cash and cash equivalents at beginning of year             544      1,025        315
                                                       -------    -------    -------
CASH AND CASH EQUIVALENTS AT END OF YEAR               $   309    $   544    $ 1,025
                                                       =======    =======    =======


</TABLE>


<PAGE>


[LOGO] KPMG


   The Board Of Directors and Stockholders
   Princeton National Bancorp, Inc.
   Princeton, Illinois

   We have audited the accompanying consolidated balance sheets of Princeton
   National Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and
   the related consolidated statements of income, comprehensive income, changes
   in stockholders' equity, and cash flows for each of the years in the
   three-year period ended December 31, 1998. These consolidated financial
   statements are the responsibility of the Corporation's management. Our
   responsibility is to express an opinion on these consolidated financial based
   on our audits.

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

   In our opinion, the consolidated financial statements referred to above
   present fairly, in all material respects, the financial position of Princeton
   National Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and
   the results of their operations and their cash flows for each of the years in
   the three-year period ended December 31, 1998 in conformity with generally
   accepted accounting principles.

                                           KPMG LLP

   Chicago, Illinois
   January 29, 1999

<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         There were no changes in and disagreements with accountants on
         accounting and financial disclosure.



                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Certain information regarding executive officers of the Corporation is
included as a Supplementary Item at the end of Part I of this Form 10-K.

         Information regarding executive officers and directors of the
Corporation is included in the Corporation's Definitive Proxy Statement for the
Annual Meeting of Stockholders to be held April 13, 1999 (the "Proxy Statement"
under the caption "Proposal 1-Election of Directors"), which information is
incorporated by reference herein.

         Information regarding compliance with Section 16(a) of the Exchange Act
is included in the Proxy Statement under the caption "Section 16(a) Beneficial
Ownership Compliance Reporting", which information is incorporated by reference
herein.

ITEM 11.  EXECUTIVE COMPENSATION

         Information regarding executive compensation is included in the Proxy
Statement under the captions "Proposal 1-Election of Directors--Board of
Directors Meetings and Committees", and "Executive Compensation -- Summary; --
Summary Compensation Table; and Employment Agreements," which information is
incorporated by reference herein.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information regarding security ownership is included in the Proxy
Statement under the captions "Election of Directors" and "Security Ownership of
Certain Beneficial Owners," which information is incorporated by reference
herein.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information regarding relationships and transactions is included in the
Proxy Statement under the caption "Certain Transactions," which information is
incorporated by reference herein.



<PAGE>



                                    PART IV.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1)   The following is a list of the Financial Statements included in
         Part II, Item 8 of this report:

                  Consolidated Balance Sheets as of December 31, 1998 and 1997

                  Consolidated Statements of Income for the years ended December
                  31, 1998, 1997 and 1996.

                  Consolidated Statements of Comprehensive Income for the years
                  ended December 31, 1998, 1997, and 1996.

                  Consolidated Statements of Changes in Stockholders' Equity for
                  the years ended December 31, 1998, 1997, and 1996.

                  Consolidated Statements of Cash Flows for the years ended
                  December 31, 1998, 1997, and 1996.

                  Notes to Consolidated Financial Statements.

                  Independent Auditors' Report


(a)(2)   Financial Statement Schedules

                     No consolidated financial statement schedules are required
         to be included in this Report on Form 10-K.

(a)(3)   Exhibits

                    The exhibits filed herewith are listed on the Exhibit Index
         filed as part of this report on Form 10-K. Each management
         contract or compensatory plan or arrangement of the Corporation
         listed on the Exhibit Index is separately identified by an
         asterisk.

(b)      Reports on Form 8-K

                     No reports on Form 8-K were filed by the Corporation for
         the quarter ended December 31, 1998.



<PAGE>



                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registration has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                              PRINCETON NATIONAL BANCORP, INC.

                              By: ___/s/ Tony J. Sorcic____________
                                         Tony J. Sorcic
                              President and Chief Executive Officer
                              Date: March 25, 1999

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
             Signature                               Title              Date
              ---------                               -----              ----

<S>                                     <C>                            <C> 
/s/ _____ Tony J. Sorcic________        President and Chief Executive  March 25, 1999
          Tony J. Sorcic                 Officer and Director
                                        (Principal Executive Officer) 

/s/ ____ Todd D. Fanning_______         Chief Financial Officer        March 25, 1999
         Todd D. Fanning                (Principal Accounting and
                                        Financial Officer)

/s/ ____ Thomas R. Lasier_____          Chairman of the Board          March 25, 1999
         Thomas R. Lasier

/s/ ____ Don S. Browning______          Director                       March 25, 1999
         Don S. Browning

/s/ __________________________          Director
         John R. Ernat

/s/ ____ Donald E. Grubb______          Director                       March 25, 1999
         Donald E. Grubb

/s/ ___ Dr. Harold C. Hutchinson, Jr.   Director                       March 25, 1999
        Dr. Harold C. Hutchinson, Jr.

/s/ __________________________          Director
         Thomas M. Longman

/s/ _____Stephen W. Samet_____          Director                       March 25, 1999
         Stephen W. Samet

/s/ __________________________          Director
         Ervin I. Pietsch

/s/ _____Craig O. Wesner______          Director                       March 25, 1999
         Craig O. Wesner

</TABLE>

<PAGE>


                                INDEX TO EXHIBITS

EXHIBIT
NUMBER                                   EXHIBIT
------                                   -------

   3.1   Amended and Restated Certificate of Incorporation of Princeton National
         Bancorp, Inc. ("PNB") (incorporated by reference to Exhibit 3.1 to the
         PNB Registration Statement on Form S-1 (Registration No. 33-46362) (the
         "S-1 Registration Statement")).

   3.2   By-Laws of PNB (as amended through January 23, 1995), (incorporated by
         reference to Exhibit 3.2 to the PNB Annual Report on Form 10-K for the
         year ended December 31, 1995 (the "1995 Form 10-K")).

  10.1*  Employment Agreement, dated as of October 16, 1995, between PNB and
         Tony J. Sorcic (incorporated by reference to Exhibit 10.1 to the 1995
         Form 10-K).

  10.2*  Employment Agreement, dated as of July 10, 1995, between PNB and D. E.
         Van Ordstrand (incorporated by reference to Exhibit 10.2 to the 1995
         Form 10-K).

  10.3*  Citizens First National Bank Profit Sharing Plan, as amended and
         restated January 1, 1989 (incorporated by reference to Exhibit 10.4 to
         the S-1 Registration Statement).

  10.4*  Citizens First National Bank Defined Contribution Plan and Trust, as
         amended and restated January 1, 1989 (incorporated by reference to
         Exhibit 10.5 to the S-1 Registration Statement).

  10.5*  Princeton National Bancorp, Inc. Stock Option Plan (incorporated by
         reference to the Proxy Statement for the annual meeting of stockholders
         held on April 14, 1998).

   21    Subsidiaries of PNB.

   23    Consent of KPMG LLP.

   27    Financial Data Schedule.


         *    Management contract or compensatory plan.