Exhibit 13

Report of Independent Registered Public
Accounting Firm

(BKD LLP LOGO)

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

We have
audited the accompanying consolidated balance sheets of Princeton National
Bancorp, Inc. and subsidiary ( the Company) as of December 31, 2007 and 2006,
and the related consolidated statements of income, stockholders equity and
cash flows for each of the years in the two-year period ended December 31,
2007. The Companys management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Princeton National Bancorp, Inc.
and subsidiary as of December 31, 2007 and 2006, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2007, in conformity with accounting principles generally accepted
in the United States of America.

We also have
audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Princeton National Bancorp, Inc.s internal control over
financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our reported dated March 17, 2008 expressed an unqualified opinion
on the effectiveness of the Companys internal control over financial
reporting.

-s- BKD LLP

Decatur,
Illinois
March 17, 2008

9

---

Report of Independent Registered Public
Accounting Firm

(KPMG LOGO)

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

We have
audited the accompanying consolidated statements of income, comprehensive
income, changes in stockholders equity and cash flows for the year ended
December 31, 2005. These consolidated financial statements are the
responsibility of the Corporations management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.

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

In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of their operations and their
cash flows for the year ended December 31, 2005 in conformity with U.S.
generally accepted accounting principles.

-s- KPMG LLP

Chicago,
Illinois 
March 13, 2006

10

---

Consolidated
Balance Sheets(dollars in thousands except per share
data)

|                                                                                                    |  |               |           |      |   |           |  
|--------------------------------------------------------------------------------------------------- |  | ------------- | --------- | ---- | - | --------- | -
|                                                                                                    |  | December
  31 |          
|                                                                                                    |  | 2007          |           | 2006 |  
|                                                                                                    |  |               |           |      |  
|ASSETS                                                                                              |  |               |           |      |   |           |  
|Cash and due from banks                                                                             |  | $             | 25,801    |      | $ | 33,882    |  
|Interest-bearing deposits
  with financial institutions                                             |  |               | 1,803     |      |   | 103       |  
|Federal funds sold                                                                                  |  |               | -0-       |      |   | 5,200     |  
|                                                                                                    |  |               |           |      |   |           |  
|Total cash and cash equivalents                                                                     |  |               | 27,604    |      |   | 39,185    |  
|                                                                                                   
|Loans held-for-sale, at
  lower of cost or market                                                   |  |               | 928       |      |   | 4,512     |  
|                                                                                                   
|Investment securities:                                                                              |  |               |           |      |   |           |  
|Available-for-sale, at fair value                                                                   |  |               | 218,095   |      |   | 252,467   |  
|Held-to-maturity, at amortized cost (fair value
of $14,799 and $15,567)                             |  |               | 14,578    |      |   | 15,449    |  
|                                                                                                    |  |               |           |      |   |           |  
|Total investment securities                                                                         |  |               | 232,673   |      |   | 267,916   |  
|                                                                                                   
|Loans:                                                                                              |  |               |           |      |   |           |  
|Loans, net of unearned interest                                                                     |  |               | 722,647   |      |   | 629,472   |  
|Allowance for loan losses                                                                           |  |               | (3,248    | )    |   | (3,053    | )
|                                                                                                    |  |               |           |      |   |           |  
|Net loans                                                                                           |  |               | 719,399   |      |   | 626,419   |  
|                                                                                                   
|Premises and equipment,
  net of accumulated depreciation                                           |  |               | 30,801    |      |   | 28,670    |  
|Land held for sale, at
  lower of cost or market                                                    |  |               | 1,344     |      |   | -0-       |  
|Bank-owned life insurance                                                                           |  |               | 22,461    |      |   | 21,470    |  
|Accrued interest
  receivable                                                                       |  |               | 10,876    |      |   | 11,139    |  
|Other real estate owned                                                                             |  |               | 833       |      |   | -0-       |  
|Goodwill                                                                                            |  |               | 24,521    |      |   | 23,029    |  
|Intangible assets, net of
  accumulated amortization                                                |  |               | 5,090     |      |   | 5,921     |  
|Other assets                                                                                        |  |               | 4,172     |      |   | 3,698     |  
|                                                                                                    |  |               |           |      |   |           |  
|TOTAL ASSETS                                                                                        |  | $             | 1,080,702 |      | $ | 1,031,959 |  
|                                                                                                    |  |               |           |      |   |           |  
|                                                                                                    |  |               |           |      |   |           |  
|LIABILITIES                                                                                         |  |               |           |      |   |           |  
|Deposits:                                                                                           |  |               |           |      |   |           |  
|Demand                                                                                              |  | $             | 102,452   |      | $ | 107,834   |  
|Interest-bearing demand                                                                             |  |               | 241,749   |      |   | 231,953   |  
|Savings                                                                                             |  |               | 58,401    |      |   | 66,060    |  
|Time                                                                                                |  |               | 488,805   |      |   | 476,052   |  
|                                                                                                    |  |               |           |      |   |           |  
|Total deposits                                                                                      |  |               | 891,407   |      |   | 881,899   |  
|                                                                                                   
|Borrowings:                                                                                         |  |               |           |      |   |           |  
|Customer repurchase agreements                                                                      |  |               | 34,217    |      |   | 31,344    |  
|Federal funds purchased                                                                             |  |               | 26,500    |      |   | -0-       |  
|Interest-bearing demand notes issued to the U. S.
Treasury                                          |  |               | 1,838     |      |   | 2,333     |  
|Advances from the Federal Home Loan Bank                                                            |  |               | 6,984     |      |   | 6,970     |  
|Trust preferred securities                                                                          |  |               | 25,000    |      |   | 25,000    |  
|Note payable                                                                                        |  |               | 14,550    |      |   | 8,500     |  
|                                                                                                    |  |               |           |      |   |           |  
|Total borrowings                                                                                    |  |               | 109,089   |      |   | 74,147    |  
|                                                                                                   
|Other liabilities                                                                                   |  |               | 11,599    |      |   | 10,558    |  
|                                                                                                    |  |               |           |      |   |           |  
|TOTAL LIABILITIES                                                                                   |  |               | 1,012,095 |      |   | 966,604   |  
|                                                                                                    |  |               |           |      |   |           |  
|STOCKHOLDERS EQUITY                                                                                |  |               |           |      |   |           |  
|Common stock: $5 par
  value, 7,000,000 shares authorized:                                          |  |               |           |      |   |           |  
|4,478,295 shares issued at December 31, 2007 and
2006                                               |  |               | 22,391    |      |   | 22,391    |  
|Surpuls                                                                                             |  |               | 18,275    |      |   | 18,158    |  
|Retained earnings                                                                                   |  |               | 51,279    |      |   | 48,109    |  
|Accumulated other
  comprehensive income (loss), net of tax                                         |  |               | 344       |      |   | (960      | )
|Less: cost of 1,169,848
  and 1,126,885 treasury shares at December 31, 2007 and 2006, respectively |  |               | (23,682   | )    |   | (22,343   | )
|                                                                                                    |  |               |           |      |   |           |  
|TOTAL STOCKHOLDERS EQUITY                                                                          |  |               | 68,607    |      |   | 65,355    |  
|                                                                                                    |  |               |           |      |   |           |  
|                                                                                                   
|TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY                                                          |  | $             | 1,080,702 |      | $ | 1,031,959 |  
|                                                                                                    |  |               |           |      |   |           |  
|                                                                                                   
|                                                                                                    |  |               |           |      |   |           |  

See accompanying notes to consolidated financial statements.

11

---

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

|                                                      |  |                                   |           |      |   |           |  |   |           | 
|----------------------------------------------------- |  | --------------------------------- | --------- | ---- | - | --------- |  | - | --------- | 
|                                                      |  | For the
  Years Ended December 31 |          
|                                                      |  | 2007                              |           | 2006 |   | 2005      | 
|                                                      |  |                                   |           |      |   |           | 
|Interest
  and dividend income:                       |  |                                   |           |      |   |           |  |   |           | 
|                                                     
|Interest and fees on loans                            |  | $                                 | 49,982    |      | $ | 41,923    |  | $ | 31,339    | 
|Interest and dividends on investment
securities:      |  |                                   |           |      |   |           |  |   |           | 
|Taxable                                               |  |                                   | 6,822     |      |   | 6,370     |  |   | 4,621     | 
|Tax-exempt                                            |  |                                   | 4,302     |      |   | 4,620     |  |   | 3,824     | 
|Interest on federal funds sold                        |  |                                   | 332       |      |   | 499       |  |   | 120       | 
|Interest on interest-bearing deposits in other
banks  |  |                                   | 121       |      |   | 114       |  |   | 67        | 
|                                                      |  |                                   |           |      |   |           |  |   |           | 
|                                                     
|Total interest income                                 |  |                                   | 61,559    |      |   | 53,526    |  |   | 39,971    | 
|                                                      |  |                                   |           |      |   |           |  |   |           | 
|Interest
  expense:                                   |  |                                   |           |      |   |           |  |   |           | 
|Interest on deposits                                  |  |                                   | 30,324    |      |   | 23,843    |  |   | 13,787    | 
|Interest on borrowings                                |  |                                   | 4,181     |      |   | 3,787     |  |   | 1,939     | 
|                                                      |  |                                   |           |      |   |           |  |   |           | 
|Total interest expense                                |  |                                   | 34,505    |      |   | 27,630    |  |   | 15,726    | 
|                                                      |  |                                   |           |      |   |           |  |   |           | 
|Net
  interest income                                 |  |                                   | 27,054    |      |   | 25,896    |  |   | 24,245    | 
|                                                     
|Provision for loan losses                             |  |                                   | 640       |      |   | 285       |  |   | -0-       | 
|                                                      |  |                                   |           |      |   |           |  |   |           | 
|Net interest
  income after provision for loan losses |  |                                   | 26,414    |      |   | 25,611    |  |   | 24,245    | 
|                                                      |  |                                   |           |      |   |           |  |   |           | 
|Non-interest
  income:                                |  |                                   |           |      |   |           |  |   |           | 
|Trust & farm management fees                          |  |                                   | 1,507     |      |   | 1,467     |  |   | 1,601     | 
|Service charges on deposit accounts                   |  |                                   | 4,431     |      |   | 4,235     |  |   | 3,448     | 
|Other service charges                                 |  |                                   | 1,966     |      |   | 1,782     |  |   | 1,407     | 
|Gain on sales of securities
available-for-sale        |  |                                   | 541       |      |   | 250       |  |   | 89        | 
|Gain on sales of loans                                |  |                                   | -0-       |      |   | 90        |  |   | 63        | 
|Brokerage fee income                                  |  |                                   | 920       |      |   | 736       |  |   | 697       | 
|Mortgage banking income                               |  |                                   | 903       |      |   | 755       |  |   | 780       | 
|Bank-owned life insurance income                      |  |                                   | 816       |      |   | 770       |  |   | 604       | 
|Other operating income                                |  |                                   | 214       |      |   | 160       |  |   | 151       | 
|                                                      |  |                                   |           |      |   |           |  |   |           | 
|Total non-interest income                             |  |                                   | 11,298    |      |   | 10,245    |  |   | 8,840     | 
|                                                      |  |                                   |           |      |   |           |  |   |           | 
|Non-interest
  expense:                               |  |                                   |           |      |   |           |  |   |           | 
|Salaries and employee benefits                        |  |                                   | 16,874    |      |   | 15,884    |  |   | 13,400    | 
|Occupancy                                             |  |                                   | 2,393     |      |   | 1,985     |  |   | 1,558     | 
|Equipment expense                                     |  |                                   | 3,158     |      |   | 2,933     |  |   | 2,124     | 
|Federal insurance assessments                         |  |                                   | 338       |      |   | 313       |  |   | 244       | 
|Intangible assets amortization                        |  |                                   | 704       |      |   | 651       |  |   | 324       | 
|Data processing                                       |  |                                   | 1,101     |      |   | 1,032     |  |   | 870       | 
|Advertising                                           |  |                                   | 722       |      |   | 841       |  |   | 770       | 
|Other operating expense                               |  |                                   | 4,275     |      |   | 4,696     |  |   | 3,963     | 
|                                                      |  |                                   |           |      |   |           |  |   |           | 
|Total non-interest expense                            |  |                                   | 29,565    |      |   | 28,335    |  |   | 23,253    | 
|                                                      |  |                                   |           |      |   |           |  |   |           | 
|Income
  before income taxes                          |  |                                   | 8,147     |      |   | 7,521     |  |   | 9,832     | 
|Income tax expense                                    |  |                                   | 1,377     |      |   | 1,033     |  |   | 2,258     | 
|                                                      |  |                                   |           |      |   |           |  |   |           | 
|Net
  income                                          |  | $                                 | 6,770     |      | $ | 6,488     |  | $ | 7,574     | 
|                                                      |  |                                   |           |      |   |           |  |   |           | 
|                                                     
|Earnings
  per share:                                 |  |                                   |           |      |   |           |  |   |           | 
|Basic                                                 |  | $                                 | 2.04      |      | $ | 1.93      |  | $ | 2.39      | 
|Diluted                                               |  | $                                 | 2.03      |      | $ | 1.91      |  | $ | 2.37      | 
|                                                      |  |                                   |           |      |   |           |  |   |           | 
|Basic weighted average
  shares outstanding           |  |                                   | 3,326,467 |      |   | 3,369,567 |  |   | 3,174,321 | 
|Diluted weighted average
  shares outstanding         |  |                                   | 3,334,406 |      |   | 3,389,765 |  |   | 3,201,154 | 
|                                                     
|                                                      |  |                                   |           |      |   |           |  |   |           | 

See accompanying notes to consolidated financial statements.

12

---

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

|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |        |   |         |   |        |        |        |        |  
|---------------------------------------------------------------------------- |  | ------------- | ------ | ------- | - | ------------------ |  | ------------------------------------------------------------------- | ------ | --------------- | - | ----- | ------ | - | ------- | - | ------ | ------ | ------ | ------ | -
|                                                                             |  | Common
 Stock |        | Surplus |   | Retained
 Earnings |  | Accumulated
 Other
 Comprehensive
 Income (Loss)
 net of tax effect |        | Treasury
 Stock |   | Total |       
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |       
|Balance, January
 1, 2005                                                    |  | $             | 20,699 |         | $ | 7,810              |  | $                                                                   | 42,156 |                 | $ | 951   |        | $ | (19,247 | ) | $      | 52,369 |       
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |        |   |         |   |        |        |        |        |  
|Net income                                                                   |  |               |        |         |   |                    |  |                                                                     | 7,574  |                 |   |       |        |   |         |   |        |        |        | 7,574  |  
|Sale of 6,098
 shares of treasury stock                                      |  |               |        |         |   | 75                 |  |                                                                     |        |                 |   |       |        |   |         |   | 115    |        |        | 190    |  
|Purchase of
 100,000 shares of treasury stock                                |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |        |   |         |   | (3,150 | )      |        | (3,150 | )
|Exercise of
 stock options and re-issuance of treasury stock (43,891 shares) |  |               |        |         |   | 776                |  |                                                                     | (611   | )               |   |       |        |   |         |   | 762    |        |        | 927    |  
|Cash dividends ($1.03
 per share)                                            |  |               |        |         |   |                    |  |                                                                     | (3,333 | )               |   |       |        |   |         |   |        |        |        | (3,333 | )
|Issuance of
 338,600 shares of common stock                                  |  |               | 1,693  |         |   | 8,307              |  |                                                                     |        |                 |   |       |        |   |         |   |        |        |        | 10,000 |  
|Other
 comprehensive loss, net of $906 tax effect                            |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       | (1,433 | ) |         |   |        |        | (1,433 | )     
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |        |   |         |   |        |        |       
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |        |   |         |   |        |        |        |        |  
|Balance,
 December 31, 2005                                                  |  | $             | 22,392 |         | $ | 16,968             |  | $                                                                   | 45,786 |                 | $ | (482  | )      | $ | (21,520 | ) | $      | 63,144 |       
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |        |   |         |   |        |        |        |        |  
|Net income                                                                   |  |               |        |         |   |                    |  |                                                                     | 6,488  |                 |   |       |        |   |         |   |        |        |        | 6,488  |  
|Sale of 2,202
 shares of treasury stock                                      |  |               |        |         |   | 32                 |  |                                                                     |        |                 |   |       |        |   |         |   | 38     |        |        | 70     |  
|Purchase of
 60,000 shares of treasury stock                                 |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |        |   |         |   | (2,024 | )      |        | (2,024 | )
|Exercise of
 stock options and re-issuance of treasury stock (62,766 shares) |  |               |        |         |   | 1,157              |  |                                                                     | (623   | )               |   |       |        |   |         |   | 1,163  |        |        | 1,697  |  
|Adjustment for
 fractional shares                                            |  |               | (1     | )       |   | 1                  |  |                                                                     |        |                 |   |       |        |   |         |   |        |        |        |        |  
|Cash dividends ($1.05
 per share)                                            |  |               |        |         |   |                    |  |                                                                     | (3,542 | )               |   |       |        |   |         |   |        |        |        | (3,542 | )
|Other
 comprehensive income, net of $90 tax effect                           |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       | 144    |   |         |   |        |        | 144    |       
|Adjustment to
 initially apply FAS 158, net of $393 tax effect               |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       | (622   | ) |         |   |        |        | (622   | )     
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |        |   |         |   |        |        |       
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |        |   |         |   |        |        |        |        |  
|Balance,
 December 31, 2006                                                  |  | $             | 22,391 |         | $ | 18,158             |  | $                                                                   | 48,109 |                 | $ | (960  | )      | $ | (22,343 | ) | $      | 65,355 |       
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |        |   |         |   |        |        |        |        |  
|Net income                                                                   |  |               |        |         |   |                    |  |                                                                     | 6,770  |                 |   |       |        |   |         |   |        |        |        | 6,770  |  
|Sale of 6,537
 shares of treasury stock                                      |  |               |        |         |   | 63                 |  |                                                                     |        |                 |   |       |        |   |         |   | 112    |        |        | 175    |  
|Purchase of
 50,000 shares of treasury stock                                 |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |        |   |         |   | (1,459 | )      |        | (1,459 | )
|Exercise of
 stock options and re-issuance of treasury stock (500 shares)    |  |               |        |         |   | 7                  |  |                                                                     | (3     | )               |   |       |        |   |         |   | 8      |        |        | 12     |  
|Cash dividends ($1.08
 per share)                                            |  |               |        |         |   |                    |  |                                                                     | (3,597 | )               |   |       |        |   |         |   |        |        |        | (3,597 | )
|Amortization of
 unearned compensation expense                               |  |               |        |         |   | 47                 |  |                                                                     |        |                 |   |       |        |   |         |   |        |        |        | 47     |  
|Other
 comprehensive income, net of $825 tax effect                          |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       | 1,304  |   |         |   |        |        | 1,304  |       
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |        |   |         |   |        |        |       
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |        |   |         |   |        |        |        |        |  
|Balance,
 December 31, 2007                                                  |  | $             | 22,391 |         | $ | 18,275             |  | $                                                                   | 51,279 |                 | $ | 344   |        | $ | (23,682 | ) | $      | 68,607 |       
|                                                                             |  |               |        |         |   |                    |  |                                                                     |        |                 |   |       |        |   |         |   |        |        |       

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

13

---

Consolidated Statements of Cash Flows(dollars in thousands)

|                                                                                   |  |                                 |         |      |   |         |   |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                   |  | For the Years Ended December 31 |        
|                                                                                   |  | 2007                            |         | 2006 |   | 2005    |  
|                                                                                   |  |                                 |         |      |   |         |  
|Operating
activities:                                                              |  |                                 |         |      |   |         |   |   |         |  
|Net income                                                                         |  | $                               | 6,770   |      | $ | 6,488   |   | $ | 7,574   |  
|Adjustments to
 reconcile net income to net cash provided by operating activities: |  |                                 |         |      |   |         |   |   |         |  
|Depreciation                                                                       |  |                                 | 2,482   |      |   | 2,304   |   |   | 1,589   |  
|Provision for
 loan losses                                                         |  |                                 | 640     |      |   | 285     |   |   | -0-     |  
|Deferred income
 taxes                                                             |  |                                 | (466    | )    |   | (916    | ) |   | 258     |  
|Amortization of
 intangible assets and other purchase accounting adjustments, net  |  |                                 | 704     |      |   | 651     |   |   | 324     |  
|Amortization
 (accretion) of premiums and discounts on investment securities, net  |  |                                 | (217    | )    |   | 107     |   |   | 1,355   |  
|Gain on sales of
 securities available-for-sale, net                               |  |                                 | (541    | )    |   | (250    | ) |   | (89     | )
|Compensation
 expense for vested stock options                                     |  |                                 | 47      |      |   | -0-     |   |   | -0-     |  
|Gain on sales of
 loans                                                            |  |                                 | -0-     |      |   | (90     | ) |   | (63     | )
|Loss (gain) on
 sales of other real estate owned, net                              |  |                                 | 47      |      |   | 122     |   |   | (29     | )
|FHLB Stock
 dividends                                                              |  |                                 | -0-     |      |   | (24     | ) |   | (78     | )
|Loans originated
 for sale                                                         |  |                                 | (56,791 | )    |   | (56,864 | ) |   | (40,227 | )
|Proceeds from
 sales of loans originated for sale                                  |  |                                 | 60,375  |      |   | 54,939  |   |   | 38,941  |  
|Increase in
 accrued interest payable                                              |  |                                 | 530     |      |   | 1,513   |   |   | 1,610   |  
|Decrease
 (increase) in accrued interest receivable                                |  |                                 | 348     |      |   | (2,425  | ) |   | (1,458  | )
|Increase in
 other assets                                                          |  |                                 | (1,465  | )    |   | (1,804  | ) |   | (4,939  | )
|(Decrease)
 increase in other liabilities                                          |  |                                 | 466     |      |   | (1,737  | ) |   | 1,748   |  
|                                                                                   |  |                                 |         |      |   |         |   |   |         |  
|                                                                                   |  |                                 |         |      |   |         |   |   |         |  
|Net cash
 provided by operating activities                                         |  |                                 | 12,929  |      |   | 2,299   |   |   | 6,516   |  
|                                                                                   |  |                                 |         |      |   |         |   |   |         |  
|                                                                                   |  |                                 |         |      |   |         |   |   |         |  
|Investing
 activities:                                                             |  |                                 |         |      |   |         |   |   |         |  
|Proceeds from
 sales of investment securities available-for-sale                   |  |                                 | 17,455  |      |   | 8,904   |   |   | 28,446  |  
|Proceeds from
 maturities of investment securities available-for-sale              |  |                                 | 63,876  |      |   | 40,247  |   |   | 39,366  |  
|Purchase of
 investment securities available-for-sale                              |  |                                 | (44,572 | )    |   | (65,567 | ) |   | (51,831 | )
|Proceeds from
 maturities of investment securities held-to-maturity                |  |                                 | 3,108   |      |   | 2,370   |   |   | 2,658   |  
|Purchase of
 investment securities held-to-maturity                                |  |                                 | (2,237  | )    |   | (2,025  | ) |   | (1,960  | )
|Proceeds from
 sales of other real estate owned                                    |  |                                 | 410     |      |   | 377     |   |   | 97      |  
|Proceeds from
 sales of loan portfolios                                            |  |                                 | -0-     |      |   | 19,579  |   |   | 546     |  
|Net increase in
 loans                                                             |  |                                 | (77,600 | )    |   | (67,241 | ) |   | (57,122 | )
|Purchase of
 premises and equipment                                                |  |                                 | (1,457  | )    |   | (4,562  | ) |   | (3,815  | )
|Payments related
 to acquisitions, net of cash and cash equivalents acquired       |  |                                 | (10,182 | )    |   | -0-     |   |   | (43,559 | )
|                                                                                   |  |                                 |         |      |   |         |   |   |         |  
|                                                                                   |  |                                 |         |      |   |         |   |   |         |  
|Net cash used in
 investing activities                                             |  |                                 | (51,199 | )    |   | (67,918 | ) |   | (87,174 | )
|                                                                                   |  |                                 |         |      |   |         |   |   |         |  
|                                                                                   |  |                                 |         |      |   |         |   |   |         |  
|Financing
 activities:                                                             |  |                                 |         |      |   |         |   |   |         |  
|Net (decrease)
 increase in deposits                                               |  |                                 | (3,369  | )    |   | 83,310  |   |   | 43,119  |  
|Issuance of
 trust preferred securities                                            |  |                                 | -0-     |      |   | -0-     |   |   | 25,000  |  
|Issuance of
 common stock                                                          |  |                                 | -0-     |      |   | -0-     |   |   | 10,000  |  
|Net increase in
 borrowings                                                        |  |                                 | 34,927  |      |   | 1,548   |   |   | 17,560  |  
|Dividends paid                                                                     |  |                                 | (3,597  | )    |   | (3,542  | ) |   | (3,333  | )
|Purchase of
 treasury stock                                                        |  |                                 | (1,459  | )    |   | (2,024  | ) |   | (3,150  | )
|Exercise of
 stock options and issuance of treasury stock                          |  |                                 | 12      |      |   | 1,697   |   |   | 927     |  
|Sales of
 treasury stock                                                           |  |                                 | 175     |      |   | 70      |   |   | 190     |  
|                                                                                   |  |                                 |         |      |   |         |   |   |         |  
|                                                                                   |  |                                 |         |      |   |         |   |   |         |  
|Net cash
 provided by financing activities                                         |  |                                 | 26,689  |      |   | 81,059  |   |   | 90,313  |  
|                                                                                   |  |                                 |         |      |   |         |   |   |         |  
|                                                                                   |  |                                 |         |      |   |         |   |   |         |  
|(Decrease)
 increase in cash and cash equivalents                                  |  |                                 | (11,581 | )    |   | 15,440  |   |   | 9,655   |  
|Cash and cash
 equivalents at beginning of year                                    |  |                                 | 39,185  |      |   | 23,745  |   |   | 14,090  |  
|                                                                                   |  |                                 |         |      |   |         |   |   |         |  
|                                                                                   |  |                                 |         |      |   |         |   |   |         |  
|Cash and cash
 equivalents at end of year                                          |  | $                               | 27,604  |      | $ | 39,185  |   | $ | 23,745  |  
|                                                                                   |  |                                 |         |      |   |         |   |   |         |  
|                                                                                   |  |                                 |         |      |   |         |   |   |         |  
|Cash paid during
 the year for:                                                    |  |                                 |         |      |   |         |   |   |         |  
|Interest                                                                           |  | $                               | 33,975  |      | $ | 26,117  |   | $ | 14,116  |  
|Income taxes                                                                       |  | $                               | 1,817   |      | $ | 1,267   |   | $ | 1,861   |  
|Supplemental
 disclosure of noncash investing activities:                          |  |                                 |         |      |   |         |   |   |         |  
|Loans
 transferred to other real estate owned                                      |  | $                               | 1,290   |      | $ | 31      |   | $ | 78      |  
|Land transferred
 to held-for-sale                                                 |  | $                               | 1,344   |      |   | -0-     |   |   | -0-     |  

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

14

---

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

1. Summary of Significant Accounting Policies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

15

---

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

Trust Assets Assets held in fiduciary or
agency capabilities are not included in the consolidated balance sheets, since
such items are not assets of the Corporation. Fees from trust activities are
recorded on an accrual basis over the period in which the service is provided.
Fees are a function of the market value of assets managed and administered, the
volume of transactions, and fees for other services rendered, as set forth in
the underlying client agreement with fiduciary services. This revenue
recognition involves the use of estimates and assumptions, including components
that are calculated based on estimated asset valuations and transaction volumes.
Generally, the actual trust fee is charged to each account on a monthly
prorated basis. Any out of pocket expenses or services not typically covered by
the fee schedule for trust activities are charged directly to the trust account
on a gross basis as trust revenue is incurred. The Corporation manages or
administers 1,002 trust accounts with assets totaling approximately $197,702 at
December 31, 2007 and 1,014 trust accounts with assets totaling approximately
$206,850 at December 31, 2006.

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

Earnings Per Share Earnings per share
have been computed based upon the weighted average common shares outstanding
during each year. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulting in the issuance of common
stock that then shared in the earnings of the Company.

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

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

Reclassification -Certain amounts in the
2006 and 2005 consolidated financial statements have been reclassified to
conform to the 2007 presentation. These reclassifications had no effect on net
income.

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

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

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

The
number of shares of common stock authorized under the stock option plans is
802,500. The option exercise price must be at least 100% of the fair market
value of the common stock on the date of the grant, and the option term cannot
exceed ten years.

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

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

Impact of New Accounting Standards -The
Corporation adopted the provisions of FASB Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes, on January 1, 2007. The
implementation of FIN 48 did not impact the Corporations financial statements.
The Corporation files income tax returns in the U.S. federal jurisdiction and
State of Illinois jurisdiction. The Corporation is no longer subject to U.S.
federal or state income tax examinations by tax authorities for years before
2003.

In
September 2006, the FASB issued SFAS No. 157 (FAS 157), Fair Value
Measurements, which provides enhanced guidance for using fair value to measure
assets and liabilities. FAS 157 establishes a common definition of fair value, provides
a framework for measuring fair value under U.S. GAAP and expands disclosure
requirements about fair value measurements. FAS 157 is effective for financial
statements issued in fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. The Corporation has evaluated the impact of
the adoption of FAS 157 and determined there is not a material impact on its
financial statement and disclosures.

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

16

---

In
September 2006, the FASB ratified Emerging Issues Task Force No. 06-4, Post
Retirement Benefits Associated with Split-Dollar Life Insurance (EITF 06-4). EITF 06-4 requires
deferred-compensation or post retirement benefit aspects of an endorsement-type
split-dollar life insurance arrangement to be recognized as a liability by the
employer and the obligation is not effectively settled by the purchase of a
life insurance policy. The liability for future benefits should be recognized
based on the substantive agreement with the employee, which may be either to
provide a future death benefit or to pay for the future cost of the life
insurance. EITF 06-4 is effective for fiscal years beginning after December 15,
2007. The Corporation has evaluated the impact of the adoption of EITF 06-4 on
its financial statements which is discussed further in Footnote 20.

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

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

In
December 2007, the FASB issued SFAS No. 160 (FAS 160), Non-controlling
Interest in Consolidated Financial Statements  an amendment of ARB No. 51.
FAS 160 requires that a non-controlling interest in a subsidiary (i.e. minority
interest) be reported in the equity section of the balance sheet instead of
being reported as a liability or in the mezzanine section between debt and
equity. It also requires that the consolidated income statement include consolidated
net income attributable to both the parent and non-controlling interest of a
consolidated subsidiary. A disclosure must be made on the face of the
consolidated income statement of the net income attributable to the parent and
to the non-controlling interest. Also, regardless of whether the parent
purchases additional ownership interest, sells a portion of its ownership
interest in a subsidiary or the subsidiary participates in a transaction that
changes the parents ownership interest, as long as the parent retains
controlling interest, the transaction is considered an equity transaction. FAS
160 is effective for annual periods beginning after December 15, 2008. The
Company is currently evaluating the impact, if any, that this standard will
have on its financial position and results of operations.

2. Earnings Per Share

The
following table sets forth the computation for basic and diluted earnings per
share for the years ended December 31, 2007, 2006 and 2005:

|                                                                           |  |      |           |      |   |           |  |   |          
|-------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                                           |  | 2007 |           | 2006 |   | 2005     
|Numerator:                                                                 |  |      |           |      |   |           |  |   |          
|Net income                                                                 |  | $    | 6,770     |      | $ | 6,488     |  | $ | 7,574    
|Denominator:                                                               |  |      |           |      |   |           |  |   |          
|Basic earnings per share - weighted average shares
outstanding             |  |      | 3,326,467 |      |   | 3,369,567 |  |   | 3,174,321
|Effect of dilutive securities - stock
options                              |  |      | 7,939     |      |   | 20,198    |  |   | 26,833   
|                                                                           |  |      |           |      |   |           |  |   |          
|Diluted earnings per share - adjusted weighted
average shares
 outstanding |  |      | 3,334,406 |      |   | 3,389,765 |  |   | 3,201,154
|                                                                          
|Earnings per share:                                                        |  |      |           |      |   |           |  |   |          
|Basic                                                                      |  | $    | 2.04      |      | $ | 1.93      |  | $ | 2.39     
|Diluted                                                                    |  | $    | 2.03      |      | $ | 1.91      |  | $ | 2.37     

The
earnings per share calculation for the years ended December 31, 2007, 2006 and
2005 does not include 221,583, 76,500 and 0 shares, respectively, which were
anti-dilutive.

3. Cash and Due From Banks

The
average compensating balances held at correspondent banks during 2007 and 2006
were $2,666 and $3,207, respectively. The subsidiary bank maintains such
compensating balances with correspondent banks to offset charges for services
rendered by those banks. In addition, the Federal Reserve Bank required the
subsidiary bank to maintain average balances of approximately $1,913 and
$1,845, for 2007 and 2006, respectively, as reserve requirements.

4. Investment Securities

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

|                                    |  |                 |         |                          |  |                           |       |                        |  |  |   |      |   |  |   |        
|----------------------------------- |  | --------------- | ------- | ------------------------ |  | ------------------------- | ----- | ---------------------- |  |  | - | ---- | - |  | - | -------
|                                    |  | 2007           
|                                    |  | Amortized
 Cost |         | Gross
 Unrealized
 Gains |  | Gross
 Unrealized
 Losses |       | Estimated
 Fair
 Value
|                                    |  |                 |         |                          |  |                           |       |                       
|Available-for-sale:                 |  |                 |         |                          |  |                           |       |                        |  |  |   |      |   |  |   |        
|United States Government Agencies   |  | $               | 63,198  |                          |  | $                         | 647   |                        |  |  | $ | (105 | ) |  | $ | 63,740 
|State and Municipal                 |  |                 | 80,171  |                          |  |                           | 853   |                        |  |  |   | (468 | ) |  |   | 80,556 
|Collateralized mortgage obligations |  |                 | 69,511  |                          |  |                           | 320   |                        |  |  |   | (130 | ) |  |   | 69,701 
|Other securities                    |  |                 | 4,098   |                          |  |                           | -0-   |                        |  |  |   | -0-  |   |  |   | 4,098  
|                                    |  |                 |         |                          |  |                           |       |                        |  |  |   |      |   |  |   |        
|Total                               |  |                 | 216,978 |                          |  |                           | 1,820 |                        |  |  |   | (703 | ) |  |   | 218,095
|                                    |  |                 |         |                          |  |                           |       |                        |  |  |   |      |   |  |   |        
|Held-to-maturity:                   |  |                 |         |                          |  |                           |       |                        |  |  |   |      |   |  |   |        
|State and
 Municipal                |  |                 | 14,578  |                          |  |                           | 246   |                        |  |  |   | (25  | ) |  |   | 14,799 
|                                    |  |                 |         |                          |  |                           |       |                        |  |  |   |      |   |  |   |        
|Total                               |  | $               | 231,556 |                          |  | $                         | 2,066 |                        |  |  | $ | (728 | ) |  | $ | 232,894
|                                    |  |                 |         |                          |  |                           |       |                        |  |  |   |      |   |  |   |        

17

---

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

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

Maturities
of investment securities classified as available-for-sale and held-to-maturity
were as follows at December 31, 2007:

|                                       |  |                 |         |                        |   |        
|-------------------------------------- |  | --------------- | ------- | ---------------------- | - | -------
|                                       |  | Amortized
 Cost |         | Estimated
 Fair
 Value
|                                       |  |                 |         |                       
|Available-for-sale:                    |  |                 |         |                        |   |        
|Due in one year or less                |  | $               | 22,558  |                        | $ | 22,509 
|Due after one year through five years  |  |                 | 17,007  |                        |   | 17,078 
|Due after five years through ten years |  |                 | 48,310  |                        |   | 49,097 
|Due after ten years                    |  |                 | 47,650  |                        |   | 47,777 
|                                       |  |                 |         |                        |   |        
|                                       |  |                 | 135,525 |                        |   | 136,461
|                                       |  |                 |         |                        |   |        
|Mortgage-backed securities             |  |                 | 7,844   |                        |   | 7,835  
|Collateralized mortgage obligations    |  |                 | 69,511  |                        |   | 69,701 
|Other securities                       |  |                 | 4,098   |                        |   | 4,098  
|                                       |  |                 |         |                        |   |        
|                                       |  | $               | 216,978 |                        | $ | 218,095
|                                       |  |                 |         |                        |   |        
|Held-to-maturity:                      |  |                 |         |                        |   |        
|Due in one year or less                |  | $               | 2,596   |                        | $ | 2,595  
|Due after one year through five years  |  |                 | 5,597   |                        |   | 5,648  
|Due after five years through ten years |  |                 | 5,594   |                        |   | 5,768  
|Due after ten years                    |  |                 | 791     |                        |   | 788    
|                                       |  |                 |         |                        |   |        
|                                       |  | $               | 14,578  |                        | $ | 14,799 
|                                       |  |                 |         |                        |   |        

Other
securities consist of Federal Home Loan Bank and Federal Reserve Bank stock
held totaling $2,373 and $1,725 at December 31, 2007, and $2,373 and $1,584 at
December 31, 2006, respectively. During the third quarter of 2007, the Federal
Home Loan Bank of Chicago received a Cease and Desist Order from their
regulator, the Federal Housing Finance Board. The order prohibits capital stock
repurchase and redemptions until a time to be determined by the Federal Housing
Finance Board. The Federal Home Loan Bank will continue to provide liquidity
and funding through advances and the purchases of mortgages through the MPF
Program. With regard to dividends, the Federal Home Loan Bank will continue to
assess their dividend capacity each quarter and make appropriate request for
approval. Management performed an analysis and deemed the investment in Federal
Home Loan Bank stock was not impaired as of December 31, 2007.

Proceeds
from sales of investment securities available-for-sale during 2007, 2006 and
2005 were $17,455, $8,904, and $28,446, respectively. Gross gains of $541 in
2007, $250 in 2006 and $89 in 2005 (resulting in tax expense of $210, $97 and
$34, respectively) were realized on those sales. There were no gross losses
from these sales in 2007, 2006 or 2005. There were no sales of investment
securities classified as held-to-maturity during 2007, 2006 and 2005.

Securities
with unrealized losses at December 31, 2007 and 2006 not recognized in income
are as follows:

|                                    |  |                     |        |                         |  |             |     |                         |  |             |        |                         |  |   |     |  |  |   |        |  |  |   |     | 
|----------------------------------- |  | ------------------- | ------ | ----------------------- |  | ----------- | --- | ----------------------- |  | ----------- | ------ | ----------------------- |  | - | --- |  |  | - | ------ |  |  | - | --- | 
|                                    |  | 2007               
|                                    |  | Less than 12 Months |        | 12 Months or More       |  | Total      
|                                    |  | Fair
 Value         |        | Gross
 Unrealized
 Loss |  | Fair
 Value |     | Gross
 Unrealized
 Loss |  | Fair
 Value |        | Gross
 Unrealized
 Loss
|                                    |  |                     |        |                         |  |             |     |                         |  |             |        |                        
|United States Government Agencies   |  | $                   | 2,040  |                         |  | $           | 14  |                         |  | $           | 19,344 |                         |  | $ | 91  |  |  | $ | 21,384 |  |  | $ | 105 | 
|State and Municipal                 |  |                     | 5,295  |                         |  |             | 75  |                         |  |             | 33,428 |                         |  |   | 418 |  |  |   | 38,723 |  |  |   | 493 | 
|Collateralized mortgage obligations |  |                     | 3,768  |                         |  |             | 21  |                         |  |             | 18,672 |                         |  |   | 109 |  |  |   | 22,440 |  |  |   | 130 | 
|Other securities                    |  |                     | -0-    |                         |  |             | -0- |                         |  |             | -0-    |                         |  |   | -0- |  |  |   | -0-    |  |  |   | -0- | 
|                                    |  |                     |        |                         |  |             |     |                         |  |             |        |                         |  |   |     |  |  |   |        |  |  |   |     | 
|Total temporarily impaired          |  | $                   | 11,103 |                         |  | $           | 110 |                         |  | $           | 71,444 |                         |  | $ | 618 |  |  | $ | 82,547 |  |  | $ | 728 | 
|                                    |  |                     |        |                         |  |             |     |                         |  |             |        |                         |  |   |     |  |  |   |        |  |  |   |     | 

18

---

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

There
are 547 securities in an unrealized loss position in the investment portfolio
at December 31, 2007, all due to interest rate changes and not credit events.
These unrealized losses are considered temporary and, therefore, have not been
recognized into income, because the issuer(s) are of high credit quality (99.7%
of the securities in the portfolio are rated AA or higher) and management has
the ability and intent to hold for the foreseeable future. The fair value is expected
to recover as the investments approach their maturity date or there is a
downward shift in interest rates.

The
carrying value of securities pledged as collateral, to secure public deposits
and for other purposes, was $212,190 at December 31, 2007 and $242,888 at
December 31, 2006.

5. Loans

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

|                           |  |      |         |      |   |        
|-------------------------- |  | ---- | ------- | ---- | - | -------
|                           |  | 2007 |         | 2006
|Loans                      |  |      |         |      |   |        
|Commercial                 |  | $    | 168,936 |      | $ | 134,402
|Agricultural               |  |      | 85,571  |      |   | 83,610 
|Real estate  construction |  |      | 46,874  |      |   | 42,991 
|Real estate  mortgage     |  |      | 348,920 |      |   | 312,398
|Installment                |  |      | 72,346  |      |   | 56,071 
|                           |  |      |         |      |   |        
|Total                      |  | $    | 722,647 |      | $ | 629,472
|                           |  |      |         |      |   |        

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

|                                           |  |      |       |      |   |       |   |   |       |  
|------------------------------------------ |  | ---- | ----- | ---- | - | ----- | - | - | ----- | -
|                                           |  | 2007 |       | 2006 |   | 2005  |  
|Balance, January 1                         |  | $    | 3,053 |      | $ | 3,109 |   | $ | 2,524 |  
|Provision for loan losses                  |  |      | 640   |      |   | 285   |   |   | -0-   |  
|Allowance of bank acquired                 |  |      | -0-   |      |   | -0-   |   |   | 752   |  
|Loans charged off                          |  |      | (664  | )    |   | (604  | ) |   | (347  | )
|Recoveries of loans previously charged off |  |      | 219   |      |   | 263   |   |   | 180   |  
|                                           |  |      |       |      |   |       |   |   |       |  
|Balance, December 31                       |  | $    | 3,248 |      | $ | 3,053 |   | $ | 3,109 |  
|                                           |  |      |       |      |   |       |   |   |       |  

Non-accrual
loans at December 31, 2007, 2006 and 2005 were $7,361, $3,893 and $3,822,
respectively. Interest income that would have been recorded on these loans, had
they remained current, was approximately $734, $397 and $281, respectively. At
December 31, 2007, 2006 and 2005, accruing loans delinquent 90 days or more
totaled $73, $33 and $3, respectively.

Impaired
loans at December 31, 2007, 2006 and 2005 totaled $4,523, $2,123 and $2,204,
respectively. Of these totals, $540, $522 and $378 of loans had valuation
reserves totaling $207, $150 and $111 at December 31, 2007, 2006 and 2005,
respectively. For the years ended December 31, 2007, 2006 and 2005, the average
recorded investment in impaired loans was approximately $3,301, $2,296 and
$1,581, respectively. Interest recognized on impaired loans during the portion
of the year that they were impaired was not material.

The
Corporations subsidiary bank had loans outstanding to directors, executive
officers and to their related interests (related parties) of the Corporation
and its subsidiary of approximately $8,275, $5,530 and $4,633, at December 31,
2007, 2006 and 2005, respectively. These loans were made in the ordinary course
of business on substantially the same terms and conditions, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other customers and did not involve more than the normal risk
of collectibility. As a practice, the subsidiary bank does not make loans to
its executive officers. A summary of the activity in 2007 for loans made to
directors, executive officers, principal holders of common stock or to any
associate of such persons for which the aggregate to any such person exceeds
$60 at December 31, 2007 is as follows:

|                         |   |           |  |          |   |                            |  |   |        |  |  |   |       | 
|------------------------ | - | --------- |  | -------- | - | -------------------------- |  | - | ------ |  |  | - | ----- | 
|Balance
 January 1, 2007 |   | Additions |  | Payments |   | Balance
 December 31, 2007
|                         |   |           |  |          |   |                           
|                         | $ | 5,435     |  |          | $ | 25,454                     |  | $ | 22,614 |  |  | $ | 8,275 | 

6. Premises and Equipment

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

|                                |  |      |        |      |   |       
|------------------------------- |  | ---- | ------ | ---- | - | ------
|                                |  | 2007 |        | 2006
|Land                            |  | $    | 7,138  |      | $ | 7,756 
|Buildings                       |  |      | 30,391 |      |   | 25,518
|Furniture and Equipment         |  |      | 20,464 |      |   | 20,035
|                                |  |      |        |      |   |       
|                                |  |      | 57,993 |      |   | 53,309
|Less: accumulated
 depreciation |  |      | 27,192 |      |   | 24,639
|                                |  |      |        |      |   |       
|Total                           |  | $    | 30,801 |      | $ | 28,670
|                                |  |      |        |      |   |       

19

---

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

In
2004, the Corporation purchased approximately 14 acres of land in Aurora,
Illinois in anticipation of the construction of a new branch facility.
Construction was completed in May, 2006 with the remaining acreage sub-divided
into two lots and the necessary infrastructure completed. These lots, with a
cost basis of $1,344, were determined to be held-for-sale as of March 31, 2007.
A real estate appraisal has been completed indicating the market value of each
lot to be approximately $2,000. Accordingly, these lots were removed from the
land balance and are now shown on the Corporations balance sheet as land
held-for-sale, at the lower of cost or market.

Depreciation
expense charged to operating expense for 2007, 2006 and 2005 was $2,482, $2,304
and $1,589, respectively.

7. Acquisition

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

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

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

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

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

|                                            |  |                                                    |   |                                                    |  |                                                    |  |   |           |  |  |  |   |           |  | 
|------------------------------------------- |  | -------------------------------------------------- | - | -------------------------------------------------- |  | -------------------------------------------------- |  | - | --------- |  |  |  | - | --------- |  | 
|                                            |  | Pro Forma
  For the Year Ended
  December 31, 2007 |   | Pro Forma
  For the Year Ended
  December 31, 2006 |  | Pro Forma
  For the Year Ended
  December 31, 2005 | 
|                                            |  |                                                    |   |                                                    |  |                                                    | 
|Net interest income                         |  |                                                    | $ | 27,094                                             |  |                                                    |  | $ | 26,169    |  |  |  | $ | 24,518    |  | 
|Provision for loan losses                   |  |                                                    |   | 640                                                |  |                                                    |  |   | 285       |  |  |  |   | -0-       |  | 
|Non-interest income                         |  |                                                    |   | 11,333                                             |  |                                                    |  |   | 10,465    |  |  |  |   | 9,060     |  | 
|Non-interest expense                        |  |                                                    |   | 29,580                                             |  |                                                    |  |   | 29,014    |  |  |  |   | 23,932    |  | 
|                                            |  |                                                    |   |                                                    |  |                                                    |  |   |           |  |  |  |   |           |  | 
|Income before income taxes                  |  |                                                    |   | 8,207                                              |  |                                                    |  |   | 7,335     |  |  |  |   | 9,646     |  | 
|Income tax expense                          |  |                                                    |   | 1,401                                              |  |                                                    |  |   | 961       |  |  |  |   | 2,186     |  | 
|                                            |  |                                                    |   |                                                    |  |                                                    |  |   |           |  |  |  |   |           |  | 
|Net income                                  |  |                                                    | $ | 6,806                                              |  |                                                    |  | $ | 6,374     |  |  |  | $ | 7,460     |  | 
|Earnings per share:                         |  |                                                    |   |                                                    |  |                                                    |  |   |           |  |  |  |   |           |  | 
|Basic                                       |  |                                                    | $ | 2.05                                               |  |                                                    |  | $ | 1.89      |  |  |  | $ | 2.35      |  | 
|Diluted                                     |  |                                                    | $ | 2.04                                               |  |                                                    |  | $ | 1.88      |  |  |  | $ | 2.33      |  | 
|                                           
|Basic weighted average shares outstanding   |  |                                                    |   | 3,326,467                                          |  |                                                    |  |   | 3,369,567 |  |  |  |   | 3,174,321 |  | 
|Diluted weighted average shares outstanding |  |                                                    |   | 3,334,406                                          |  |                                                    |  |   | 3,389,765 |  |  |  |   | 3,201,154 |  | 

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

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

20

---

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

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

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

|                                            |  |                                        |   |           |  | 
|------------------------------------------- |  | -------------------------------------- | - | --------- |  | 
|                                            |  | For the Year Ended
  December 31, 2005 |  
|                                            |  |                                        |  
|Net interest income                         |  |                                        | $ | 27,023    |  | 
|Provision for loan losses                   |  |                                        |   | 126       |  | 
|Non-interest income                         |  |                                        |   | 9,456     |  | 
|Non-interest expense                        |  |                                        |   | 27,225    |  | 
|                                            |  |                                        |   |           |  | 
|Income before income taxes                  |  |                                        |   | 9,128     |  | 
|Income tax expense                          |  |                                        |   | 2,000     |  | 
|                                            |  |                                        |   |           |  | 
|Net income                                  |  |                                        | $ | 7,128     |  | 
|Earnings per share:                         |  |                                        |   |           |  | 
|Basic                                       |  |                                        | $ | 2.11      |  | 
|Diluted                                     |  |                                        | $ | 2.10      |  | 
|Basic weighted average shares outstanding   |  |                                        |   | 3,370,903 |  | 
|Diluted weighted average shares outstanding |  |                                        |   | 3,397,736 |  | 

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

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

8. Goodwill and Intangible Assets

The
balance of goodwill totaled $24,521 at December 31, 2007 and $23,029 at December
31, 2006. The increase in the goodwill during 2007 was due to the Plainfield
acquisition (see note 7 for additional details). Goodwill is tested annually
for impairment. If the implied fair value of goodwill is lower than its carrying
amount, goodwill impairment is indicated and goodwill is written down to its
implied fair value. Subsequent increases in goodwill value are not recognized
in the financial statements. The balance of intangible assets, net of
accumulated amortization, totaled $5,090 and $5,921 at December 31, 2007 and
December 31, 2006, respectively.

The
following table summarizes the Corporations intangible assets, which are
subject to amortization, as of December 31, 2007 and 2006:

|                        |  |                         |   |                            |  |                       |  |                          |        |   |  |  |   |       |  |  |  |   |        |   | 
|----------------------- |  | ----------------------- | - | -------------------------- |  | --------------------- |  | ------------------------ | ------ | - |  |  | - | ----- |  |  |  | - | ------ | - | 
|                        |  | 2007                    |   | 2006                       | 
|                        |  | Gross Carrying
  Amount |   | Accumulated
  Amortization |  | Gross
Carrying
Amount |  | Accumulated
Amortization |       
|                        |  |                         |   |                            |  |                       |  |                          |       
|Core deposit intangible |  |                         | $ | 9,004                      |  |                       |  | $                        | (4,006 | ) |  |  | $ | 9,004 |  |  |  | $ | (3,112 | ) | 
|Other acquisition costs |  |                         |   | 234                        |  |                       |  |                          | (142   | ) |  |  |   | 160   |  |  |  |   | (131   | ) | 
|                        |  |                         |   |                            |  |                       |  |                          |        |   |  |  |   |       |  |  |  |   |        |   | 
|Total                   |  |                         | $ | 9,238                      |  |                       |  | $                        | (4,148 | ) |  |  | $ | 9,164 |  |  |  | $ | (3,243 | ) | 
|                        |  |                         |   |                            |  |                       |  |                          |        |   |  |  |   |       |  |  |  |   |        |   | 

21

---

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

Intangible
asset amortization expense charged to operating expense for 2007, 2006 and 2005
was $704, $651 and $324, respectively. The following table shows the future
estimated amortization expense for the Corporations intangible assets based on
existing balances as of December 31, 2007:

Estimated
Amortization Expense for the year ended December 31:

|           |  |   |       | 
|---------- |  | - | ----- | 
|2008       |  | $ | 884   | 
|2009       |  |   | 860   | 
|2010       |  |   | 816   | 
|2011       |  |   | 653   | 
|2012       |  |   | 549   | 
|Thereafter |  |   | 1,328 | 

Mortgage
servicing rights, which are included in other assets on the consolidated
balance sheets, are accounted for on an individual loan-by-loan basis.
Accordingly, amortization is recorded in proportion to the amount of principal
payment received on loans serviced. The mortgage servicing rights are subject to
periodic impairment testing. During the years ended December 31, 2007, 2006 and
2005 no impairment had been recorded and the recorded value was determined to
approximate the fair market value. Changes in the carrying value of mortgage
servicing rights are summarized as follows:

|                                                                                                                |  |      |       |      |   |       |   |   |       |  
|--------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- | - | ----- | - | - | ----- | -
|                                                                                                                |  | 2007 |       | 2006 |   | 2005  |  
|Balance, January 1                                                                                              |  | $    | 2,079 |      | $ | 2,002 |   | $ | 1,405 |  
|Servicing rights capitalized                                                                                    |  |      | 662   |      |   | 773   |   |   | 479   |  
|Amortization of servicing rights                                                                                |  |      | (243  | )    |   | (345  | ) |   | (233  | )
|Mortgage servicing rights resulting from
acquisition                                                            |  |      | -0-   |      |   | -0-   |   |   | 351   |  
|Adjustment to recorded mortgage servicing rights
related to the
  Somonauk acquisition reclassified to goodwill |  |      | -0-   |      |   | (351  | ) |   | -0-   |  
|Impairment of servicing rights                                                                                  |  |      | -0-   |      |   | -0-   |   |   | -0-   |  
|                                                                                                                |  |      |       |      |   |       |   |   |       |  
|Balance, December 31                                                                                            |  | $    | 2,498 |      | $ | 2,079 |   | $ | 2,002 |  
|                                                                                                                |  |      |       |      |   |       |   |   |       |  

The
following table shows the future estimated amortization expense for mortgage
servicing rights based on existing balances as of December 31, 2007. The
Corporations actual amortization expense in any given period may be
significantly different from the estimated amounts displayed, depending on the
amount of additional mortgage servicing rights, changes in mortgage interest
rates, estimated prepayment speeds and market conditions.

Estimated
Amortization Expense for the year ended December 31:

|           |  |   |       | 
|---------- |  | - | ----- | 
|2008       |  | $ | 281   | 
|2009       |  |   | 264   | 
|2010       |  |   | 247   | 
|2011       |  |   | 232   | 
|2012       |  |   | 218   | 
|Thereafter |  |   | 1,256 | 

The
Corporation services loans for others with unpaid principal balances at
December 31, 2007, 2006 and 2005 of approximately $268,391, $236,893 and
$202,042, respectively.

9. Deposits

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

|                                |  |      |         |      |   |         |  |   |         | 
|------------------------------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- | 
|                                |  | 2007 |         | 2006 |   | 2005    | 
|Amount                          |  | $    | 158,542 |      | $ | 140,300 |  | $ | 105,591 | 
|Interest expense for the
  year |  |      | 4,204   |      |   | 4,285   |  |   | 1,919   | 
|                               

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

|                        |  |      |        |      |   |        |  |   |        | 
|----------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                       
|                        |  | 2007 |        | 2006 |   | 2005   | 
|Interest-bearing demand |  | $    | 6,567  |      | $ | 4,877  |  | $ | 3,224  | 
|Savings                 |  |      | 249    |      |   | 326    |  |   | 267    | 
|Time                    |  |      | 23,508 |      |   | 18,640 |  |   | 10,296 | 
|                        |  |      |        |      |   |        |  |   |        | 
|Total                   |  | $    | 30,324 |      | $ | 23,843 |  | $ | 13,787 | 
|                        |  |      |        |      |   |        |  |   |        | 

At
December 31, 2007, the scheduled maturities of time deposits are as follows:

|           |  |   |         | 
|---------- |  | - | ------- | 
|2008       |  | $ | 426,243 | 
|2009       |  |   | 50,939  | 
|2010       |  |   | 6,301   | 
|2011       |  |   | 2,694   | 
|2012       |  |   | 2,541   | 
|Thereafter |  |   | 87      | 
|           |  |   |        
|Total      |  | $ | 488,805 | 
|           |  |   |        

22

---

10. Borrowings

As of December
31, borrowings consisted of the following:

|                                                           |  |        |         |                         |  |        |   |                         |        |  |  |      |  
|---------------------------------------------------------- |  | ------ | ------- | ----------------------- |  | ------ | - | ----------------------- | ------ |  |  | ---- | -
|                                                           |  | 2007   |         | 2006                    | 
|                                                           |  | Amount |         | Weighted
 Average
 Rate |  | Amount |   | Weighted
 Average
 Rate |       
|                                                           |  |        |         |                         |  |        |   |                         |       
|Customer repurchase agreements                             |  | $      | 34,217  |                         |  | 3.69   | % | $                       | 31,344 |  |  | 4.66 | %
|Advances from the Federal Home Loan Bank of
 Chicago due:  |  |        |         |                         |  |        |   |                         |        |  |  |      |  
|February 1, 2008                                           |  |        | 1,000   |                         |  | 4.00   |   |                         | 1,000  |  |  | 4.00 | %
|February 27, 2008                                          |  |        | 2,500   |                         |  | 5.37   |   |                         | 2,500  |  |  | 5.37 |  
|June 19, 2008                                              |  |        | 2,500   |                         |  | 5.44   |   |                         | 2,500  |  |  | 5.44 |  
|November 2, 2009                                           |  |        | 984     |                         |  | 3.84   |   |                         | 970    |  |  | 3.84 |  
|Federal funds purchased                                    |  |        | 26,500  |                         |  | 4.33   |   |                         | -0-    |  |  | n/a  |  
|Interest-bearing demand notes issued to the
 U.S. Treasury |  |        | 1,838   |                         |  | 4.00   |   |                         | 2,333  |  |  | 5.04 |  
|Trust preferred securities                                 |  |        | 25,000  |                         |  | 5.68   |   |                         | 25,000 |  |  | 5.68 |  
|Note payable                                               |  |        | 14,550  |                         |  | 6.25   |   |                         | 8,500  |  |  | 7.25 |  
|                                                           |  |        |         |                         |  |        |   |                         |        |  |  |      |  
|Total                                                      |  | $      | 109,089 |                         |  | 4.73   | % | $                       | 74,147 |  |  | 5.34 | %
|                                                           |  |        |         |                         |  |        |   |                         |        |  |  |      |  

The
subsidiary bank has adopted a collateral pledge agreement whereby they agreed
to keep on hand at all times, free of all other pledges, liens and
encumbrances, first mortgages with unpaid principal balances aggregating no
less than 167% of the outstanding secured advances from the Federal Home Loan
Bank of Chicago (FHLB). The advances from the FHLB, which have fixed interest
rates ranging from 3.84% to 5.44% as of December 31, 2007, are subject to
restrictions or penalties in the event of prepayment. The advance maturing on
February 1, 2008 was not renewed. A new advance for $5,000 was obtained
maturing February 1, 2010 at a rate of 2.87%. The advance maturing February 27,
2008 was renewed for one year at a rate of 2.74% and will mature February 27,
2009. All stock in the FHLB is also pledged as additional collateral for these
advances.

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

The
Corporation has a note payable with a balance of $14,550 and $8,500 at December
31, 2007 and 2006, respectively. The note payable is a demand note that carries
a floating interest rate equal to the lenders prime rate less one percent
(6.25% at December 31, 2007). The note, which is secured by the capital stock
certificates of the subsidiary bank, has a maturity of July 29, 2008 and
contains the covenant the subsidiary bank will maintain risk-based capital at a
minimum of 10% of risk-weighted assets.

Customer
repurchase agreements consist of obligations of the Bank to other parties. The
obligations are secured by government agency securities and mortgage-backed
securities and such collateral is held by the Bank. The maximum amount of
outstanding agreements at any month-end during 2007 and 2006 totaled $38,011
and $35,625, respectively, and the daily average of such agreements totaled
$33,042 and $34,149 for 2007 and 2006, respectively. The agreements at December
31, 2007 are ongoing and, as such, have no fixed maturity date.

11. Income Taxes

Income tax
expense (benefit) consisted of the following:

|                              |  |         |       |          |   |       |   |   |       | 
|----------------------------- |  | ------- | ----- | -------- | - | ----- | - | - | ----- | 
|                              |  | Current |       | Deferred |   | Total |  
|                              |  |         |       |          |   |       |  
|Year ended December 31, 2007: |  |         |       |          |   |       |   |   |       | 
|Federal                       |  | $       | 1,490 |          | $ | (440  | ) | $ | 1,050 | 
|State                         |  |         | 353   |          |   | (26   | ) |   | 327   | 
|                              |  |         |       |          |   |       |   |   |       | 
|Total                         |  | $       | 1,843 |          | $ | (466  | ) | $ | 1,377 | 
|                              |  |         |       |          |   |       |   |   |       | 
|Year ended December 31, 2006: |  |         |       |          |   |       |   |   |       | 
|Federal                       |  | $       | 1,605 |          | $ | (966  | ) | $ | 639   | 
|State                         |  |         | 344   |          |   | 50    |   |   | 394   | 
|                              |  |         |       |          |   |       |   |   |       | 
|Total                         |  | $       | 1,949 |          | $ | (916  | ) | $ | 1,033 | 
|                              |  |         |       |          |   |       |   |   |       | 
|Year ended December 31, 2005: |  |         |       |          |   |       |   |   |       | 
|Federal                       |  | $       | 1,584 |          | $ | 209   |   | $ | 1,793 | 
|State                         |  |         | 416   |          |   | 49    |   |   | 465   | 
|                              |  |         |       |          |   |       |   |   |       | 
|Total                         |  | $       | 2,000 |          | $ | 258   |   | $ | 2,258 | 
|                              |  |         |       |          |   |       |   |   |       | 

23

---

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

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

|                                                     |  |      |        |      |   |        |   |   |        |  
|---------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                     |  | 2007 |        | 2006 |   | 2005   |  
|                                                     |  |      |        |      |   |        |  
|Computed expected tax expense                      |  | $    | 2,770  |      | $ | 2,557  |   | $ | 3,343  |  
|                                                    
|Increase (decrease) in income taxes
 resulting from: |  |      |        |      |   |        |   |   |        |  
|Tax-exempt income                                    |  |      | (1,499 | )    |   | (1,603 | ) |   | (1,319 | )
|Non-deductible interest expense                      |  |      | 203    |      |   | 197    |   |   | 116    |  
|State income taxes, net of federal tax
 benefit      |  |      | 204    |      |   | 170    |   |   | 298    |  
|Bank-owned life insurance income                     |  |      | (271   | )    |   | (265   | ) |   | (211   | )
|Other, net                                           |  |      | (31    | )    |   | (23    | ) |   | 31     |  
|                                                     |  |      |        |      |   |        |   |   |        |  
|                                                     |  | $    | 1,377  |      | $ | 1,033  |   | $ | 2,258  |  
|                                                     |  |      |        |      |   |        |   |   |        |  

The
tax effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 2007 and
2006 are presented below:

|                                                                         |  |      |        |      |   |        |  
|------------------------------------------------------------------------ |  | ---- | ------ | ---- | - | ------ | -
|                                                                         |  | 2007 |        | 2006 |  
|                                                                         |  |      |        |      |   |        |  
|Deferred tax
 assets:                                                    |  |      |        |      |   |        |  
|Deferred compensation                                                    |  | $    | 153    |      | $ | 133    |  
|Allowance for loan losses                                                |  |      | 1,261  |      |   | 1,185  |  
|Unrealized loss on investment securities
 available-for-sale             |  |      | -0-    |      |   | 214    |  
|Nonaccrual loan interest income                                          |  |      | 285    |      |   | 154    |  
|AMT credit carry forwards                                                |  |      | 577    |      |   | 411    |  
|FAS 158 benefit accrual                                                  |  |      | 427    |      |   | 550    |  
|Other, net                                                               |  |      | 14     |      |   | -0-    |  
|                                                                         |  |      |        |      |   |        |  
|Total gross deferred tax assets                                          |  |      | 2,717  |      |   | 2,647  |  
|                                                                         |  |      |        |      |   |        |  
|Deferred tax
 liabilities:                                               |  |      |        |      |   |        |  
|Buildings and equipment, principally due to
 differences in depreciation |  |      | (527   | )    |   | (487   | )
|Accretion                                                                |  |      | (125   | )    |   | (107   | )
|Purchase accounting adjustments                                          |  |      | (2,464 | )    |   | (2,669 | )
|FHLB Stock dividends                                                     |  |      | (276   | )    |   | (272   | )
|Mortgage servicing rights                                                |  |      | (970   | )    |   | (807   | )
|Prepaid expenses                                                         |  |      | (134   | )    |   | (131   | )
|Unrealized gain on investment securities
 available-for-sale             |  |      | (434   | )    |   | -0-    |  
|Other, net                                                               |  |      | -0-    |      |   | (42    | )
|                                                                         |  |      |        |      |   |        |  
|Total gross deferred tax liabilities                                     |  |      | (4,930 | )    |   | (4,515 | )
|                                                                         |  |      |        |      |   |        |  
|Net deferred tax liabilities                                             |  | $    | (2,213 | )    | $ | (1,868 | )
|                                                                         |  |      |        |      |   |        |  

Management
believes it is more likely than not that the deferred tax assets will be
realized. Therefore, no valuation allowance has been recorded at December 31,
2007 and 2006.

12. Comprehensive Income

Other
comprehensive income components and related taxes were as follows:

|                                                                         |  |      |       |      |   |      |   |   |        |  
|------------------------------------------------------------------------ |  | ---- | ----- | ---- | - | ---- | - | - | ------ | -
|                                                                         |  | 2007 |       | 2006 |   | 2005 |  
|                                                                         |  |      |       |      |   |      |  
|Net unrealized gains (losses) on securities
 available-for-sale          |  | $    | 2,211 |      | $ | 484  |   | $ | (2,250 | )
|Less: Reclassification adjustment for
 realized gains included in income |  |      | (541  | )    |   | (250 | ) |   | (89    | )
|                                                                         |  |      |       |      |   |      |   |   |        |  
|                                                                         |  |      | 1,670 |      |   | 234  |   |   | (2,339 | )
|Defined benefit pension plan                                            
|Net prior
 service credit                                                |  |      | 640   |      |   | -0-  |   |   | -0-    |  
|Amortization of transition obligation                                    |  |      | 16    |      |   | -0-  |   |   | -0-    |  
|Net loss                                                                 |  |      | (197  | )    |   | -0-  |   |   | -0-    |  
|                                                                         |  |      |       |      |   |      |   |   |        |  
|Other comprehensive income, before tax
 effect                           |  |      | 2,129 |      |   | 234  |   |   | (2,339 | )
|Tax expense                                                              |  |      | 825   |      |   | 90   |   |   | 906    |  
|                                                                         |  |      |       |      |   |      |   |   |        |  
|Other comprehensive income (loss)                                        |  | $    | 1,304 |      | $ | 144  |   | $ | (1,433 | )
|                                                                         |  |      |       |      |   |      |   |   |        |  

24

---

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

|                                                             |  |      |       |      |   |        |   |   |      |  
|------------------------------------------------------------ |  | ---- | ----- | ---- | - | ------ | - | - | ---- | -
|                                                             |  | 2007 |       | 2006 |   | 2005   |  
|Net unrealized gain (loss) on securities
 available-for-sale |  | $    | 1,118 |      | $ | (552   | ) | $ | (787 | )
|Net unrealized benefit obligations                           |  |      | (556  | )    |   | -0-    |   |   | -0-  |  
|Adjustment to initially apply FAS 158                        |  |      | -0-   |      |   | (1,016 | ) |   | -0-  |  
|                                                             |  |      |       |      |   |        |   |   |      |  
|                                                             |  |      | 562   |      |   | (1,568 | ) |   | (787 | )
|Tax effect                                                   |  |      | (218  | )    |   | 608    |   |   | 305  |  
|                                                             |  |      |       |      |   |        |   |   |      |  
|Net-of-tax amount                                            |  | $    | 344   |      | $ | (960   | ) | $ | (482 | )
|                                                             |  |      |       |      |   |        |   |   |      |  

13. Regulatory Matters

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

Quantitative
measures established by regulation to ensure capital adequacy require the
Corporation and its subsidiary bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital to risk-weighted assets,
and of Tier 1 capital to average adjusted assets. As of December 31, 2007 and
2006, the subsidiary bank is categorized as well-capitalized for all three
ratios under the regulatory framework, while the Corporation is classified as
well-capitalized for two ratios and adequately-capitalized for one ratio at
December 31, 2007 and 2006.

The
most recent notifications, at December 31, 2007 and 2006, from the federal
banking agencies categorized the subsidiary bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Corporation and the subsidiary bank must maintain total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table
that follows, at December 31, 2007.

The
Corporations and the subsidiary banks actual capital amounts and ratios as of
December 31, 2007 and 2006 are as follows:

|                                              |  |        |        |                                |       |                                                                      |   |        |  |        |   |       |        |  |       |  
|--------------------------------------------- |  | ------ | ------ | ------------------------------ | ----- | -------------------------------------------------------------------- | - | ------ |  | ------ | - | ----- | ------ |  | ----- | -
|                                              |  | Actual |        | For Capital
 Adequacy Purposes |       | To Be Well-
 Capitalized Under
 Prompt Corrective
 Action Provisions |  
|                                              |  | Amount |        | Ratio                          |       | Amount                                                               |   | Ratio  |  | Amount |   | Ratio |       
|                                              |  |        |        |                                |       |                                                                      |   |        |  |        |   |       |       
|As of December 31, 2007:                      |  |        |        |                                |       |                                                                      |   |        |  |        |   |       |        |  |       |  
|                                             
|Total Capital (to risk-weighted assets):      |  |        |        |                                |       |                                                                      |   |        |  |        |   |       |        |  |       |  
|Princeton National Bancorp, Inc.              |  | $      | 66,914 |                                | 8.44  | %                                                                    | $ | 63,393 |  | 8.00   | % | $     | 79,242 |  | 10.00 | %
|Citizens First National Bank                  |  |        | 79,798 |                                | 10.07 | %                                                                    |   | 63,384 |  | 8.00   | % |       | 79,230 |  | 10.00 | %
|                                             
|Tier 1 Capital (to risk-weighted assets):     |  |        |        |                                |       |                                                                      |   |        |  |        |   |       |        |  |       |  
|Princeton National Bancorp, Inc.              |  | $      | 63,667 |                                | 8.03  | %                                                                    | $ | 31,697 |  | 4.00   | % | $     | 47,545 |  | 6.00  | %
|Citizens First National Bank                  |  |        | 76,550 |                                | 9.66  | %                                                                    |   | 31,692 |  | 4.00   | % |       | 47,538 |  | 6.00  | %
|                                             
|Tier 1 Capital (to average adjusted
 assets): |  |        |        |                                |       |                                                                      |   |        |  |        |   |       |        |  |       |  
|Princeton National Bancorp, Inc.              |  | $      | 63,667 |                                | 6.33  | %                                                                    | $ | 40,255 |  | 4.00   | % | $     | 50,318 |  | 5.00  | %
|Citizens First National Bank                  |  |        | 76,550 |                                | 7.61  | %                                                                    |   | 40,249 |  | 4.00   | % |       | 50,311 |  | 5.00  | %
|                                              |  |        |        |                                |       |                                                                      |   |        |  |        |   |       |        |  |       |  

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

25

---

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

14. Employee, Officer and Director Benefit Plans

The
subsidiary bank has a defined contribution investment 401 (k) plan. Under this
plan, in 2007, employees could elect to contribute, on a tax-deferred basis, up
to a maximum of $16 ($20 for those employees eligible to make catch-up
contributions). In addition, the subsidiary bank will match employees
contributions up to three percent of each employees salary and match 50% of
the next two percent contributed. The subsidiary banks contribution to the
defined contribution investment 401 (k) plan for 2007, 2006 and 2005 was $410,
$382 and $319, respectively.

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

The
subsidiary bank also has a profit sharing plan. Annual contributions to the
subsidiary banks plan are based on a formula. The total contribution is at the
discretion of the Board of Directors. The cost of the profit sharing plan
charged to operating expense was $350 in 2007, $350 in 2006 and $357 in 2005.

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

The
fair value of each option award is estimated on the date of grant using a
Black-Scholes closed-form model that uses the assumptions noted in the
following table. Expected volatility is based on historical volatility of the
Corporations stock and other factors. In 2007 and 2006, the volatility was
much lower than in previous years, due to a more stable stock price as opposed
to the rapidly increasing stock price of the previous few years. The
Corporation uses historical data to estimate option exercise and employee
termination within the valuation model. The expected term of the options
granted is derived from the Corporations historical option exercise experience
and represents the period of time that options granted are expected to be
outstanding. The risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the time of the
grant. The following assumptions were used in estimating the fair value for
options granted in 2007, 2006 and 2005:

| |                          |  |      |       |      |  |       |   |  |       |   | 
| | ------------------------ |  | ---- | ----- | ---- |  | ----- | - |  | ----- | - | 
| |                          |  | 2007 |       | 2006 |  | 2005  |   | 
| |                          |  |      |       |      |  |       |   | 
| | Expected volatility      |  |      | .100  |      |  | .061  |   |  | .270  |   | 
| | Expected dividends       |  |      | 4.03  | %    |  | 3.23  | % |  | 3.10  | % | 
| | Expected term (in years) |  |      | 3yrs. |      |  | 3yrs. |   |  | 3yrs. |   | 
| | Risk-free rate           |  |      | 3.07  | %    |  | 4.74  | % |  | 4.37  | % | 

A
summary of option activity under the Plan as of December 31, 2007, 2006 and
2005, and changes during the years then ended, is presented as follows:

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

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

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

26

---

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

The
weighted-average grant date fair value of options granted during the years 2007,
2006 and 2005 was $103, $151 and $490, respectively. The total intrinsic value
of options exercised during the years ended December 31, 2007, 2006 and 2005
was $2, $455 and $611, respectively.

A
summary of the status of the Corporations non-vested shares and changes during
the year ended December 31, 2007, 2006 and 2005 is presented below:

| |                               |  |        |          |                                           |   |       |  | 
| | ----------------------------- |  | ------ | -------- | ----------------------------------------- | - | ----- |  | 
| |                               |  | 2007   |          |                                          
| |                               |  | Shares |          | Weighted
 Average
 Grant-Date
 Fair Value |   |      
| |                               |  |        |          |                                           |   |       |  | 
| | Non-vested, beginning of year |  |        | 83,783   |                                           | $ | 1.80  |  | 
| | Granted                       |  |        | 86,750   |                                           |   | 1.19  |  | 
| | Vested                        |  |        | (27,594  | )                                         |   | 1.80  |  | 
| | Forfeited                     |  |        | (1,000   | )                                         |   | 1.80  |  | 
| |                               |  |        |          |                                           |   |       |  | 
| | Non-vested, end of year       |  |        | 141,939  |                                           | $ | 1.43  |  | 
| |                               |  |        |          |                                           |   |       |  | 
| |                               |  |        |          |                                           |   |       |  | 
| |                               |  |        |          |                                           |   |       |  | 
| |                               |  | 2006   |          |                                          
| |                               |  | Shares |          | Weighted
 Average
 Grant-Date
 Fair Value |   |      
| |                               |  |        |          |                                           |   |       |  | 
| | Non-vested, beginning of year |  |        | -0-      |                                           |   | n/a   |  | 
| | Granted                       |  |        | 83,783   |                                           | $ | 1.80  |  | 
| | Vested                        |  |        | -0-      |                                           |   | n/a   |  | 
| | Forfeited                     |  |        | -0-      |                                           |   | n/a   |  | 
| |                               |  |        |          |                                           |   |       |  | 
| | Non-vested, end of year       |  |        | 83,783   |                                           | $ | 1.80  |  | 
| |                               |  |        |          |                                           |   |       |  | 
| |                               |  |        |          |                                           |   |       |  | 
| |                               |  | 2005   |          |                                          
| |                               |  | Shares |          | Weighted
 Average
 Grant-Date
 Fair Value |   |      
| |                               |  |        |          |                                           |   |       |  | 
| | Non-vested, beginning of year |  |        | 146,167  |                                           | $ | 12.29 |  | 
| | Granted                       |  |        | 80,700   |                                           |   | 6.07  |  | 
| | Vested                        |  |        | (222,865 | )                                         |   | 10.02 |  | 
| | Forfeited                     |  |        | (4,002   | )                                         |   | 12.27 |  | 
| |                               |  |        |          |                                           |   |       |  | 
| | Non-vested, end of year       |  |        | -0-      |                                           | $ | -0-   |  | 
| |                               |  |        |          |                                           |   |       |  | 

As
of December 31, 2007, there was $204 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the
plan. That cost is expected to be recognized over a weighted-average period of
3 years. The total fair value of shares vested during the years ended December
31, 2007, 2006 and 2005, was $50, $0 and $2,233, respectively.

27

---

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

15. Pension and Other Post-Retirement Benefits

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

| |                               |  |                                 |       |      |   |       |   | 
| | ----------------------------- |  | ------------------------------- | ----- | ---- | - | ----- | - | 
| |                               |  | Post Retirement Health Benefits |       |     
| |                               |  | 2007                            |       | 2006 |   |      
|
| | Change in benefit
 obligation |  |                                 |       |      |   |       |   | 
| | Beginning of year             |  | $                               | 1,536 |      | $ | 1,150 |   | 
| | Service cost                  |  |                                 | 37    |      |   | 61    |   | 
| | Interest cost                 |  |                                 | 92    |      |   | 66    |   | 
| | Actuarial loss                |  |                                 | 147   |      |   | 309   |   | 
| | Benefits paid                 |  |                                 | (76   | )    |   | (50   | ) | 
| | Amendments                    |  |                                 | (640  | )    |   | -0-   |   | 
| |                               |  |                                 |       |      |   |       |   | 
| | Funded status at end of year  |  | $                               | 1,096 |      | $ | 1,536 |   | 
| |                               |  |                                 |       |      |   |       |   | 

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

| |                                        |  |                                |   |             |   |                               |  |   |       |   |  |  |   |         |   |  | 
| | -------------------------------------- |  | ------------------------------ | - | ----------- | - | ----------------------------- |  | - | ----- | - |  |  | - | ------- | - |  | 
| |                                        |  | Before application
 of FAS 158 |   | Adjustments |   | After application
 of FAS 158 |  |  
| |                                        |  |                                |   |             |   |                               |  |  
| | Liability for post-retirement benefits |  |                                | $ | 521         |   |                               |  | $ | 1,015 |   |  |  | $ | 1,536   |   |  | 
| | Deferred tax liability                 |  |                                |   | 2,261       |   |                               |  |   | (393  | ) |  |  |   | 1,868   |   |  | 
| | Total liabilities                      |  |                                |   | 965,982     |   |                               |  |   | 622   |   |  |  |   | 966,604 |   |  | 
| | Accumulated other comprehensive loss   |  |                                |   | (338        | ) |                               |  |   | (622  | ) |  |  |   | (960    | ) |  | 
| | Total stockholders equity             |  |                                |   | 65,977      |   |                               |  |   | (622  | ) |  |  |   | 65,355  |   |  | 

The
components of the 2007, 2006 and 2005 net periodic post-retirement benefit cost
are shown below:

| |                                           |  |      |     |      |   |      |  |   |     |  | 
| | ----------------------------------------- |  | ---- | --- | ---- | - | ---- |  | - | --- |  | 
| |                                           |  | 2007 |     | 2006 |   | 2005 |  |  
| | Service cost                              |  | $    | 37  |      | $ | 61   |  | $ | 51  |  | 
| | Interest cost                             |  |      | 92  |      |   | 66   |  |   | 48  |  | 
| | Amortization of prior service cost        |  |      | 16  |      |   | 16   |  |   | 16  |  | 
| | Amortization of net loss                  |  |      | 58  |      |   | 31   |  |   | 14  |  | 
| |                                           |  |      |     |      |   |      |  |   |     |  | 
| | Net periodic post-retirement benefit cost |  | $    | 203 |      | $ | 174  |  | $ | 129 |  | 
| |                                           |  |      |     |      |   |      |  |   |     |  | 

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

| |                                                                                      |  |                                 |      |      |   |        |   | 
| | ------------------------------------------------------------------------------------ |  | ------------------------------- | ---- | ---- | - | ------ | - | 
| |                                                                                      |  | Post Retirement Health Benefits |      |     
| |                                                                                      |  | 2007                            |      | 2006 |   |       
| | Net loss                                                                             |  | $                               | (197 | )    | $ | -0-    |   | 
| | Prior service credit established                                                     |  |                                 | 640  |      |   | -0-    |   | 
| | Amortization of transition obligation                                                |  |                                 | 16   |      |   | -0-    |   | 
| | Newly established accumulated other comprehensive income under FAS
158               |  |                                 | -0-  |      |   | (1,016 | ) | 
| |                                                                                      |  |                                 |      |      |   |        |   | 
| | Total recognized in other comprehensive income (loss)                                |  |                                 | 459  |      |   | (1,016 | ) | 
| |                                                                                      |  |                                 |      |      |   |        |   | 
| | Total recognized in net periodic benefit cost and other comprehensive
 income (loss) |  | $                               | 256  |      | $ | (1,190 | ) | 
| |                                                                                      |  |                                 |      |      |   |        |   | 

The
estimated net loss, prior service cost and transition obligation for the
defined benefit plan that will be amortized from accumulated other
comprehensive income (loss) into net periodic benefit cost over the next fiscal
year is a net loss of $7.

Amounts
recognized in the balance sheets:

| |             |  |                                 |       |      |   |       |  | 
| | ----------- |  | ------------------------------- | ----- | ---- | - | ----- |  | 
| |             |  | Post Retirement Health Benefits |       |     
| |             |  | 2007                            |       | 2006 |   |      
|
| | Liabilities |  | $                               | 1,096 |      | $ | 1,536 |  | 

28

---

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

| |                                   |  |                                 |       |      |   |       |  | 
| | --------------------------------- |  | ------------------------------- | ----- | ---- | - | ----- |  | 
| |                                   |  | Post Retirement Health Benefits |       |     
| |                                   |  | 2007                            |       | 2006 |   |      
|
| | Net loss                          |  | $                               | 1,017 |      | $ | 918   |  | 
| | Unrecognized prior service credit |  |                                 | (558  | )    |   | -0-   |  | 
| | Transition obligation             |  |                                 | -0-   |      |   | 98    |  | 
| |                                   |  |                                 |       |      |   |       |  | 
| |                                   |  | $                               | 459   |      | $ | 1,016 |  | 
| |                                   |  |                                 |       |      |   |       |  | 

The
accumulated benefit obligation for all defined benefit plans was $1,096 and
$1,536 at December 31, 2007 and 2006, respectively.

Significant
assumptions include:

| |                                                                    |  |                                 |   |      |     |   |  | 
| | ------------------------------------------------------------------ |  | ------------------------------- | - | ---- | --- | - |  | 
| |                                                                    |  | Post Retirement Health Benefits |   |     
| |                                                                    |  | 2007                            |   | 2006 |     |  
|
| | Weighted average assumptions used to determine benefit
obligation: |  |                                 |   |      |     |   |  | 
| | Discount rate                                                      |  | 6.0                             | % |      | 6.0 | % |  | 
| | Rate of compensation increase                                      |  | n/a                             |   |      | n/a |   |  | 
| |                                                                    |  |                                 |   |      |     |   |  | 
| | Weighted average assumptions used to determine benefit
cost:       |  |                                 |   |      |     |   |  | 
| | Discount rate                                                      |  | 6.0                             | % |      | 6.0 | % |  | 
| | Expected return on plan assets                                     |  | n/a                             |   |      | n/a |   |  | 
| | Rate of compensation increase                                      |  | n/a                             |   |      | n/a |   |  | 

For
measurement purposes, a 7.0% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2007 and 2006, respectively. The
rate was assumed to decrease gradually to 5.00% by the year 2012 and remain at
that level thereafter.

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

| |                                                         |  |                               |   |                               |  |  |  |   |      |   |  | 
| | ------------------------------------------------------- |  | ----------------------------- | - | ----------------------------- |  |  |  | - | ---- | - |  | 
| |                                                         |  | 1-Percentage-
 Point Increase |   | 1-Percentage-
 Point Decrease |  | 
|
| | Effect on total of service and interest cost components |  |                               | $ | 19                            |  |  |  | $ | (16  | ) |  | 
| | Effect on post-retirement benefit obligation            |  |                               |   | 127                           |  |  |  |   | (110 | ) |  | 

The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid as of December 31, 2007:

| |           |  |                                  |   |     |  | 
| | --------- |  | -------------------------------- | - | --- |  | 
| |           |  | Post Retirement
 Health Benefits |  
| |           |  |                                  |  
| | 2008      |  |                                  | $ | 75  |  | 
| | 2009      |  |                                  |   | 72  |  | 
| | 2010      |  |                                  |   | 79  |  | 
| | 2011      |  |                                  |   | 91  |  | 
| | 2012      |  |                                  |   | 75  |  | 
| | 2013-2017 |  |                                  |   | 475 |  | 

16. Fair Value of Financial Instruments

Statement
of Financial Accounting Standards No. 107 (FAS 107), Disclosures about Fair
Value of Financial Instruments, requires all entities to disclose the
estimated fair value of their financial instrument assets and liabilities. For
the Corporation, as for most financial institutions, the majority of its assets
and liabilities are considered financial instruments as defined in FAS 107.
Many of the Corporations financial instruments, however, lack an available
trading market as characterized by a willing buyer and willing seller engaging
in an exchange transaction. It is also the Corporations general practice and
intent to hold its financial instruments to maturity and to not engage in
trading or sales activities except for loans held-for-sale and
available-for-sale securities. Therefore, significant estimations and
assumptions, as well as present value calculations, were used by the
Corporation for the purposes of this disclosure.

Estimated
fair values have been determined by the Corporation using the best available
data and an estimation methodology suitable for each category of financial
instruments. For those loans and deposits with floating interest rates, it is
presumed that estimated fair values generally approximate the recorded book
balances. The estimation methodologies used, the estimated fair values, and the
recorded book balances at December 31, 2007 and 2006, were as follows:

29

---

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

|                                                            |  |                 |           |             |   |               |  |            |         |  |   |         | 
|----------------------------------------------------------- |  | --------------- | --------- | ----------- | - | ------------- |  | ---------- | ------- |  | - | ------- | 
|                                                            |  | 2007            |           | 2006        |  
|                                                            |  | Carrying
 Value |           | Fair
 Value |   | CarryingValue |  | Fair
Value |        
|                                                            |  |                 |           |             |   |               |  |            |        
|                                                           
|Financial
 Assets:                                          |  |                 |           |             |   |               |  |            |         |  |   |         | 
|                                                            |  |                 |           |             |   |               |  |            |         |  |   |         | 
|Cash and due from banks                                     |  | $               | 25,801    |             | $ | 25,801        |  | $          | 33,882  |  | $ | 33,882  | 
|Interest-bearing deposits in financial
institutions         |  |                 | 1,803     |             |   | 1,803         |  |            | 103     |  |   | 103     | 
|Federal funds sold                                          |  |                 | -0-       |             |   | -0-           |  |            | 5,200   |  |   | 5,200   | 
|Investment securities                                       |  |                 | 232,673   |             |   | 232,894       |  |            | 267,916 |  |   | 268,034 | 
|Loans, net, including loans held-for-sale                   |  |                 | 720,327   |             |   | 720,715       |  |            | 630,931 |  |   | 628,725 | 
|Accrued interest receivable                                 |  |                 | 10,876    |             |   | 10,876        |  |            | 11,139  |  |   | 11,139  | 
|                                                            |  |                 |           |             |   |               |  |            |         |  |   |         | 
|Total Financial Assets                                      |  | $               | 991,480   |             | $ | 992,089       |  | $          | 949,171 |  | $ | 947,083 | 
|                                                            |  |                 |           |             |   |               |  |            |         |  |   |         | 
|                                                           
|Financial Liabilities:                                      |  |                 |           |             |   |               |  |            |         |  |   |         | 
|                                                            |  |                 |           |             |   |               |  |            |         |  |   |         | 
|Non-interest-bearing demand deposits                        |  | $               | 102,452   |             | $ | 102,452       |  | $          | 107,834 |  | $ | 107,834 | 
|Interest-bearing deposits                                   |  |                 | 788,955   |             |   | 794,200       |  |            | 774,065 |  |   | 778,192 | 
|Borrowings                                                  |  |                 | 109,089   |             |   | 107,517       |  |            | 74,147  |  |   | 71,482  | 
|Accrued interest payable                                    |  |                 | 5,141     |             |   | 5,141         |  |            | 4,611   |  |   | 4,611   | 
|                                                            |  |                 |           |             |   |               |  |            |         |  |   |         | 
|Total Financial Liabilities                                 |  | $               | 1,005,637 |             | $ | 1,009,310     |  | $          | 960,657 |  | $ | 962,119 | 
|Unrecognized financial instruments (net of contract
amount) |  |                 |           |             |   |               |  |            |         |  |   |         | 
|Commitments to originate loans                              |  |                 | -0-       |             |   | -0-           |  |            | -0-     |  |   | -0-     | 
|Lines of credit                                             |  |                 | -0-       |             |   | -0-           |  |            | -0-     |  |   | -0-     | 
|                                                            |  |                 |           |             |   |               |  |            |         |  |   |         | 

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

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

Financial
instrument liabilities with no stated maturities have an estimated fair value
equal to both the amount payable on demand and the recorded book balance.

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

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

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

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

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

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

17. Undistributed Earnings of Subsidiary Bank

National
banking regulations and capital guidelines limit the amount of dividends that
may be paid by banks. At December 31, 2007, the subsidiary bank had $9,009
available for dividends. Additionally, according to the guidelines, at January
1, 2008, the subsidiary bank had $7,556 available for dividends. Future
dividend payments by the subsidiary bank will be dependent upon individual
regulatory capital requirements and levels of profitability. Since the
Corporation is a legal entity, separate and distinct from the bank, the
dividends of the Corporation are not subject to such bank regulatory
guidelines.

18. Commitments, Contingencies and Credit Risk

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

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

30

---

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, 2007, commitments to extend credit and standby
letters of credit were approximately $143,506 and $7,690, respectively. At
December 31, 2006, commitments to extend credit and standby letters of credit
were approximately $138,806 and $9,208, respectively.

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

Standby
letters of credit are conditional commitments issued by the subsidiary bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that
involved in extending loan facilities to customers. The subsidiary bank secures
the standby letters of credit with the same collateral used to secure the loan.
The maximum amount of credit that would be extended under standby letters of
credit is equal to the off-balance sheet contract amount. At December 31, 2007
and 2006, the standby letters of credit have terms that expire in one year or
less.

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

19. FDIC One-time Assessment Credit

Effective
November 17, 2006, the FDIC implemented a one-time credit of $4.7 billion to
eligible institutions. The purpose of the credit is to recognize contributions
made by certain institutions to capitalize the Bank Insurance Fund and Savings
Association Insurance Fund, which have now been merged into the Deposit
Insurance Fund. The Bank is an eligible institution and received notice from
the FDIC that its share of the credit is $647. This amount is not reflected in
the accompanying financial statements as it represents contingent future
credits against future insurance assessment payments. As such, the timing and
ultimate recoverability of the one-time credit may change. In 2007, FDIC
premium credits received totaled $381 against the premium expense, leaving a
remaining credit of $266 to offset future premium expense.

20. Future Change in Accounting Principle

The
Financial Accounting Standards Board Emerging Issues Task Force ( EITF)
recently issued EITF No. 06-4 Accounting for Deferred Compensation and Post
Retirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements, which requires the Company to recognize a liability and
compensation expense for endorsement split-dollar life insurance arrangements
that provide a benefit to an employee that extends to post retirement periods.
The Company adopted EITF 06-4 as of January 1, 2008, through a cumulative
effect adjustment as a liability and a decrease to retained earnings of $597.
Effective January 1, 2008, an expense will be recorded as the remaining benefit
is earned with a corresponding addition to the post retirement benefit
obligation. The amount of the expense for 2008 is estimated to be
approximately $54. For the period from retirement to the estimated date of
death for the participants, this liability is reversed into income.

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

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

Condensed Balance Sheets

|                                                           |  |             |         |      |   |         |  
|---------------------------------------------------------- |  | ----------- | ------- | ---- | - | ------- | -
|                                                           |  | December 31 |        
|                                                           |  | 2007        |         | 2006 |  
|                                                          
|Assets                                                     |  |             |         |      |   |         |  
|Cash                                                       |  | $           | 240     |      | $ | 693     |  
|Interest-bearing deposits
 in subsidiary bank              |  |             | 75      |      |   | 901     |  
|Other assets                                               |  |             | 1,651   |      |   | 1,483   |  
|Investment in subsidiary
 bank                             |  |             | 106,345 |      |   | 96,140  |  
|                                                           |  |             |         |      |   |         |  
|Total assets                                               |  |             | 108,311 |      |   | 99,217  |  
|                                                           |  |             |         |      |   |         |  
|Liabilities                                                |  |             |         |      |   |         |  
|Borrowings                                                 |  | $           | 39,550  |      | $ | 33,500  |  
|Other liabilities                                          |  |             | 154     |      |   | 362     |  
|                                                           |  |             |         |      |   |         |  
|Total liabilities                                          |  |             | 39,704  |      |   | 33,862  |  
|                                                           |  |             |         |      |   |         |  
|Stockholders
 Equity                                      |  |             |         |      |   |         |  
|Common stock                                               |  |             | 22,391  |      |   | 22,391  |  
|Surplus                                                    |  |             | 18,275  |      |   | 18,158  |  
|Retained earnings                                          |  |             | 51,279  |      |   | 48,109  |  
|Accumulated other
 comprehensive income (loss), net of tax |  |             | 344     |      |   | (960    | )
|Less: Cost of treasury
 shares                             |  |             | (23,682 | )    |   | (22,343 | )
|                                                           |  |             |         |      |   |         |  
|Total stockholders equity                                 |  |             | 68,607  |      |   | 65,355  |  
|                                                           |  |             |         |      |   |         |  
|Total liabilities and stockholders
equity                 |  | $           | 108,311 |      | $ | 99,217  |  
|                                                           |  |             |         |      |   |         |  

31

---

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

Condensed Statements of Income

|                                                                                  |  |                                 |       |      |   |       |   |   |       |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ----- | ---- | - | ----- | - | - | ----- | -
|                                                                                  |  |                                 |       |      |   |       |  
|                                                                                  |  | For the Years Ended December 31 |      
|                                                                                  |  | 2007                            |       | 2006 |   | 2005  |  
|                                                                                 
|Income                                                                            |  |                                 |       |      |   |       |   |   |       |  
|Dividends received from
 subsidiary bank                                          |  | $                               | 4,300 |      | $ | 4,200 |   | $ | 6,800 |  
|Interest income                                                                   |  |                                 | 7     |      |   | 24    |   |   | 22    |  
|Other income                                                                      |  |                                 | 24    |      |   | 37    |   |   | 24    |  
|                                                                                  |  |                                 |       |      |   |       |   |   |       |  
|Total income                                                                      |  |                                 | 4,331 |      |   | 4,261 |   |   | 6,846 |  
|                                                                                  |  |                                 |       |      |   |       |   |   |       |  
|Expenses                                                                          |  |                                 |       |      |   |       |   |   |       |  
|Interest
 expense                                                                 |  |                                 | 2,209 |      |   | 1,887 |   |   | 817   |  
|Amortization and
 depreciation                                                    |  |                                 | 7     |      |   | 7     |   |   | 7     |  
|Other expenses                                                                    |  |                                 | 264   |      |   | 212   |   |   | 248   |  
|                                                                                  |  |                                 |       |      |   |       |   |   |       |  
|Total expenses                                                                    |  |                                 | 2,480 |      |   | 2,106 |   |   | 1,072 |  
|                                                                                  |  |                                 |       |      |   |       |   |   |       |  
|Income before income taxes
 and equity in undistributed income of subsidiary bank |  |                                 | 1,851 |      |   | 2,155 |   |   | 5,774 |  
|Applicable income tax
 benefit                                                    |  |                                 | (924  | )    |   | (772  | ) |   | (346  | )
|                                                                                  |  |                                 |       |      |   |       |   |   |       |  
|Income before equity in
 undistributed income of subsidiary bank                  |  |                                 | 2,775 |      |   | 2,927 |   |   | 6,120 |  
|Equity in undistributed
 income of subsidiary bank                                |  |                                 | 3,995 |      |   | 3,561 |   |   | 1,454 |  
|                                                                                  |  |                                 |       |      |   |       |   |   |       |  
|Net income                                                                        |  | $                               | 6,770 |      | $ | 6,488 |   | $ | 7,574 |  
|                                                                                  |  |                                 |       |      |   |       |   |   |       |  

Condensed Statements of Cash Flows

|                                                                                    |  |                                 |         |      |   |        |   |   |         |  
|----------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- | - | ------ | - | - | ------- | -
|                                                                                    |  | For the Years Ended December 31 |        
|                                                                                    |  | 2007                            |         | 2006 |   | 2005   |  
|                                                                                   
|Operating activities:                                                               |  |                                 |         |      |   |        |   |   |         |  
|Net income                                                                          |  | $                               | 6,770   |      | $ | 6,488  |   | $ | 7,574   |  
|                                                                                    |  |                                 |         |      |   |        |   |   |         |  
|Adjustments to reconcile net in come to net cash
provided by operating
 activities: |  |                                 |         |      |   |        |   |   |         |  
|Equity in undistributed income of subsidiary
bank                                   |  |                                 | (3,995  | )    |   | (3,561 | ) |   | (1,454  | )
|Amortization of other intangible assets                                             |  |                                 | 7       |      |   | 7      |   |   | 7       |  
|(Increase) decrease in other assets                                                 |  |                                 | 5,148   |      |   | (2,416 | ) |   | 4,105   |  
|(Decrease) increase in other liabilities                                            |  |                                 | (208    | )    |   | (1,006 | ) |   | 1,281   |  
|                                                                                    |  |                                 |         |      |   |        |   |   |         |  
|Net
 cash (used) provided by operating activities                                   |  |                                 | 7,722   |      |   | (488   | ) |   | 11,513  |  
|                                                                                    |  |                                 |         |      |   |        |   |   |         |  
|                                                                                   
|Investing Activities:                                                               |  |                                 |         |      |   |        |   |   |         |  
|Payments related to acquisitions, net of cash and
cash equivalents
 acquired        |  |                                 | (10,182 | )    |   | -0-    |   |   | (43,559 | )
|                                                                                    |  |                                 |         |      |   |        |   |   |         |  
|Net
 cash used in investing activities                                              |  |                                 | (10,182 | )    |   | -0-    |   |   | (43,559 | )
|                                                                                    |  |                                 |         |      |   |        |   |   |         |  
|                                                                                   
|Financing activities:                                                               |  |                                 |         |      |   |        |   |   |         |  
|Net increase in borrowings                                                          |  |                                 | 6,050   |      |   | 1,800  |   |   | 5,800   |  
|Issuance of trust preferred securities                                              |  |                                 | -0-     |      |   | -0-    |   |   | 25,000  |  
|Sale of treasury stock                                                              |  |                                 | 175     |      |   | 70     |   |   | 190     |  
|Purchase of treasury stock                                                          |  |                                 | (1,459  | )    |   | (2,024 | ) |   | (3,150  | )
|Exercise of stock options and issuance of treasury
stock                            |  |                                 | 12      |      |   | 1,697  |   |   | 927     |  
|Dividends paid                                                                      |  |                                 | (3,597  | )    |   | (3,542 | ) |   | (3,333  | )
|Issuance of common stock                                                            |  |                                 | -0-     |      |   | -0-    |   |   | 10,000  |  
|                                                                                    |  |                                 |         |      |   |        |   |   |         |  
|Net
 cash (used) provided by financing activities                                   |  |                                 | 1,181   |      |   | (1,999 | ) |   | 35,434  |  
|                                                                                    |  |                                 |         |      |   |        |   |   |         |  
|(Decrease) increase in cash and cash equivalents                                    |  |                                 | (1,279  | )    |   | (2,487 | ) |   | 3,388   |  
|Cash and cash equivalents at beginning of year                                      |  |                                 | 1,594   |      |   | 4,081  |   |   | 693     |  
|                                                                                    |  |                                 |         |      |   |        |   |   |         |  
|Cash and cash equivalents at end of year                                            |  | $                               | 315     |      | $ | 1,594  |   | $ | 4,081   |  
|                                                                                    |  |                                 |         |      |   |        |   |   |         |  

32

---

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

The
following discussion and analysis provides information about the Corporations
financial condition and results of operations for the years ended December 31,
2007, 2006 and 2005. This discussion and analysis should be read in conjunction
with Selected Statistical Data, and the Corporations Consolidated Financial
Statements and the Notes thereto included in this report.

Overview

After
a slow start to 2007, the Corporation had two outstanding quarters to finish
the year strong and surpassed 2006 income by $282 or 4.4%. The following
represents net income and earnings per share for each quarter of 2007.

|            |  |            |       |                    |   |      | 
|----------- |  | ---------- | ----- | ------------------ | - | ---- | 
|            |  | Net Income |       | Earnings per Share |  
|            |  |            |       |                    |  
|1st Quarter |  | $          | 1,429 |                    | $ | 0.43 | 
|2nd Quarter |  |            | 1,553 |                    |   | 0.47 | 
|3rd Quarter |  |            | 1,740 |                    |   | 0.53 | 
|4th Quarter |  |            | 2,048 |                    |   | 0.62 | 

As
indicated in the table above, there was steady improvement each quarter with
net income improving over 43% from the first quarter to the fourth quarter! One
of the biggest reasons for the improvement was the increase in the net interest
margin, which reached a low of 3.11% during the first quarter of 2007 and ended
the fourth quarter at 3.29%. This improvement was due to an aggressive
re-pricing of the subsidiary banks deposit products along with a favorable
change in asset mix as the loan-to-asset ratio increased.

Non-interest
income continues to be very strong and is an integral part of the success of
the Corporation. From service charges on deposits, to loan fee income, to
mortgage banking, to CFA brokerage and fiduciary services, all areas
contributed to an increase of $1,053 over the past year and surpassing budget
by 10.6%. Additionally, non-interest expenses in total were less than budget
and, as a percentage of average assets, decreased to 2.85% in 2007, from 2.95%
in 2006. This is one of the lowest levels in the history of the Corporation.

On
the balance sheet side, the Corporation experienced asset growth of 4.7%,
ending the year at $1,080,702 in total assets. Loan growth was very steady
during 2007, growing by $93.2 million (or 14.8%), while deposits grew at a more
modest clip of $9.5 million (or 1.0%). During 2007, management decided not to
renew $32.1 million in State of Illinois deposits, limiting deposit growth to
1.0% and further improving the balance sheet structure.

During
the year, the Corporation continued its plan to manage capital balances through
stock repurchases and increased dividend payments, the goal of which is to
improve long-term shareholder return, as measured by return on average equity
and earnings per share. During 2007, the Corporation repurchased 50,000 shares
of its common stock at a total cost of $1,459. Since 1997, the Corporation has
repurchased 1,344,271 shares of common stock through repurchase programs.
Additionally, the Corporation paid dividends of $1.08 per share representing a
total of $3,597, increases of $.03 per share (or 2.9%) and $.05 (or 4.9%) from
2006 and 2005, respectively. Total stockholders equity increased by $3.3
million (or 5.0%) to $68,607 at December 31, 2007, compared to $65,355 at
December 31, 2006.

|     |  |                      |           |                  |  |                      |   |                  |        |              |  |                  |   |   |       |  |  |        |  
|---- |  | -------------------- | --------- | ---------------- |  | -------------------- | - | ---------------- | ------ | ------------ |  | ---------------- | - | - | ----- |  |  | ------ | -
|     |  | Assets at
  Year-End |           | Percent
  Change |  | Equity at
  Year-End |   | Percent
  Change |        | Net
  Income |  | Percent
  Change |  
|     |  |                      |           |                  |  |                      |   |                  |        |              |  |                  |  
|2007 |  | $                    | 1,080,702 |                  |  | 4.72                 | % | $                | 68,607 |              |  | 4.98             | % | $ | 6,770 |  |  | 4.35   | %
|2006 |  |                      | 1,031,959 |                  |  | 9.17                 |   |                  | 65,355 |              |  | 3.50             |   |   | 6,488 |  |  | (14.34 | )
|2005 |  |                      | 945,263   |                  |  | 44.15                |   |                  | 63,144 |              |  | 20.58            |   |   | 7,574 |  |  | 10.22  |  

Analysis of Results of Operations

Net Income. Net income for 2007 increased
$282 (or 4.3%) to $6,770 (or $2.04 basic earnings per share and $2.03 diluted
earnings per share), from $6,488 (or $1.93 basic earnings per share and $1.91
diluted earnings per share) in 2006. This increase is due to growth in the
Companys balance sheet. Average interest-earning assets increased by $65.7
million during 2007 compared to 2006, generating an additional $1.2 million in
net interest income. For a more detailed review of the net interest margin,
non-interest income and non-interest expense, please refer to those sections
contained in this Managements Discussion and Analysis.

Net
income for 2006 decreased $1,086 (or 14.3%) to $6,488 (or $1.93 basic earnings
per share and $1.91 diluted earnings per share), from $7,574 (or $2.39 basic
earnings per share and $2.37 diluted earnings per share) in 2005. Although
average interest-earning assets increased by $146.9 million during 2006
compared to 2005, the net yield on average interest-earning assets declined to
3.33% from 3.73% over the same time period. This compression of the net
interest margin was the reason for the lower net income figure.

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

33

---

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

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

|                                                           |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  
|---------------------------------------------------------- |  | -------------------------------- | --------- | -------- | - | ------------- |  | ----------------- | - | -------- | ------- | ------------- | - | ----------------- |  | -------- | - | ------------- | ------- |  | - | ------ |  | ---- | -
|                                                           |  | For the Years Ending December 31 |          
|                                                           |  |                                  |          
|                                                           |  | 2007                             |           | 2006     |   | 2005          | 
|                                                           |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  
|                                                           |  | Average
  Balance                |           | Interest |   | Yield/
  Cost |  | Average
  Balance |   | Interest |         | Yield/
  Cost |   | Average
  Balance |  | Interest |   | Yield/
  Cost |        
|                                                           |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  
|Average Interest-Earning Assets                            |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  
|                                                           |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  
|Interest-bearing deposits                                  |  | $                                | 2,456     |          | $ | 122           |  | 4.97              | % | $        | 2,232   |               | $ | 114               |  | 5.11     | % | $             | 2,044   |  | $ | 67     |  | 3.26 | %
|Taxable investment securities                              |  |                                  | 152,220   |          |   | 6,822         |  | 4.48              |   |          | 154,576 |               |   | 6,370             |  | 4.12     |   |               | 131,913 |  |   | 4,621  |  | 3.50 |  
|Tax-exempt investment securities (a)                       |  |                                  | 89,989    |          |   | 6,518         |  | 7.24              |   |          | 100,519 |               |   | 7,001             |  | 6.96     |   |               | 86,039  |  |   | 5,794  |  | 6.73 |  
|Federal funds sold                                         |  |                                  | 6,706     |          |   | 332           |  | 4.95              |   |          | 9,777   |               |   | 499               |  | 5.10     |   |               | 3,162   |  |   | 120    |  | 3.79 |  
|Net loans (a) (b)                                          |  |                                  | 666,853   |          |   | 50,072        |  | 7.51              |   |          | 585,382 |               |   | 42,025            |  | 7.18     |   |               | 482,448 |  |   | 31,417 |  | 6.51 |  
|                                                           |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  
|Total interest-earning assets                              |  |                                  | 918,224   |          |   | 63,866        |  | 6.96              |   |          | 852,486 |               |   | 56,009            |  | 6.57     |   |               | 705,606 |  |   | 42,019 |  | 5.96 |  
|                                                           |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  
|Average non-interest-earning assets                        |  |                                  | 118,000   |          |   |               |  |                   |   |          | 108,278 |               |   |                   |  |          |   |               | 76,561  |  |   |        |  |      |  
|                                                           |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  
|Total average assets                                       |  | $                                | 1,036,224 |          |   |               |  |                   |   | $        | 960,764 |               |   |                   |  |          |   | $             | 782,167 |  |   |        |  |      |  
|                                                           |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  
|Average Interest-Bearing Liabilities                       |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  
|                                                           |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  
|Interest-bearing demand deposits                           |  | $                                | 238,568   |          |   | 6,567         |  | 2.75              | % | $        | 216,540 |               |   | 4,877             |  | 2.25     | % | $             | 209,903 |  |   | 3,224  |  | 1.54 | %
|Savings deposits                                           |  |                                  | 63,357    |          |   | 249           |  | 0.39              |   |          | 70,726  |               |   | 326               |  | 0.46     |   |               | 66,481  |  |   | 267    |  | 0.40 |  
|Time deposits                                              |  |                                  | 481,725   |          |   | 23,509        |  | 4.88              |   |          | 431,153 |               |   | 18,640            |  | 4.32     |   |               | 314,932 |  |   | 10,296 |  | 3.27 |  
|Interest-bearing demand notes issued to the U.S. Treasury  |  |                                  | 1,035     |          |   | 49            |  | 4.73              |   |          | 848     |               |   | 39                |  | 4.56     |   |               | 759     |  |   | 23     |  | 3.07 |  
|Federal funds purchased and customer repurchase agreements |  |                                  | 34,622    |          |   | 1,556         |  | 4.49              |   |          | 32,416  |               |   | 1,486             |  | 4.58     |   |               | 24,844  |  |   | 756    |  | 3.04 |  
|Advances from Federal Home Loan Bank                       |  |                                  | 6,976     |          |   | 366           |  | 5.25              |   |          | 7,673   |               |   | 375               |  | 4.89     |   |               | 6,728   |  |   | 342    |  | 5.09 |  
|Trust preferred securities                                 |  |                                  | 25,000    |          |   | 1,420         |  | 5.68              |   |          | 25,000  |               |   | 1,410             |  | 5.64     |   |               | 11,644  |  |   | 621    |  | 5.33 |  
|Note payable                                               |  |                                  | 11,224    |          |   | 789           |  | 7.03              |   |          | 6,613   |               |   | 477               |  | 7.22     |   |               | 3,424   |  |   | 196    |  | 5.73 |  
|                                                           |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  
|                                                           |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  
|Total interest-bearing liabilities                         |  |                                  | 862,507   |          |   | 34,505        |  | 4.00              |   |          | 790,969 |               |   | 27,630            |  | 3.49     |   |               | 638,715 |  |   | 15,725 |  | 2.46 |  
|                                                           |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  
|Net yield on average interest-earning assets               |  |                                  |           |          | $ | 29,361        |  | 3.20              | % |          |         |               | $ | 28,379            |  | 3.33     | % |               |         |  | $ | 26,294 |  | 3.73 | %
|                                                           |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  
|Average non-interest-bearing liabilities                   |  |                                  | 108,093   |          |   |               |  |                   |   |          | 105,382 |               |   |                   |  |          |   |               | 87,037  |  |   |        |  |      |  
|                                                           |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  
|Average stockholders equity                               |  |                                  | 65,624    |          |   |               |  |                   |   |          | 64,414  |               |   |                   |  |          |   |               | 56,415  |  |   |        |  |      |  
|                                                           |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  
|Total average liabilities and stockholders
equity         |  | $                                | 1,036,224 |          |   |               |  |                   |   | $        | 960,764 |               |   |                   |  |          |   | $             | 782,167 |  |   |        |  |      |  
|                                                           |  |                                  |           |          |   |               |  |                   |   |          |         |               |   |                   |  |          |   |               |         |  |   |        |  |      |  

|    |                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Interest income on
  non-taxable investment securities and non-taxable loans includes the effects
  of taxable-equivalent adjustments, using a tax rate of 34% in adjusting
  interest on tax-exempt securities and tax-exempt loans to a taxable
  equivalent basis. The amount of taxable equivalent adjustments were $2,307 in
  2007, $2,483 in 2006 and $2,048 in 2005.
|    |                                                                                                                                                                                                                                                                                                                                                                             
|(b) | Includes $165 in 2007, $78
  in 2006 and $26 in 2005 attributable to interest from non-accrual loans.                                                                                                                                                                                                                                                                       

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

|                                          |  |      |        |      |   |        |  |   |        | 
|----------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                                          |  | 2007 |        | 2006 |   | 2005   | 
|                                          |  |      |        |      |   |        |  |   |        | 
|Net interest income as stated             |  | $    | 27,054 |      | $ | 25,896 |  | $ | 24,245 | 
|Taxable-equivalent adjustment-investments |  |      | 2,216  |      |   | 2,381  |  |   | 1,971  | 
|Taxable-equivalent adjustment-loans       |  |      | 91     |      |   | 102    |  |   | 78     | 
|                                          |  |      |        |      |   |        |  |   |        | 
|Taxable-equivalent net
  interest income  |  | $    | 29,361 |      | $ | 28,379 |  | $ | 26,294 | 
|                                          |  |      |        |      |   |        |  |   |        | 

34

---

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

|                                                        |  |      |   |      |      |      |  |      |   | 
|------------------------------------------------------- |  | ---- | - | ---- | ---- | ---- |  | ---- | - | 
|                                                        |  | 2007 |   | 2006 |      | 2005 | 
|                                                        |  |      |   |      |      |      |  |      |   | 
|Net yield on interest-earning assets                    |  | 2.95 | % |      | 3.04 | %    |  | 3.44 | % | 
|Taxable equivalent adjustment-investments               |  | 0.24 |   |      | 0.28 |      |  | 0.28 |   | 
|Taxable equivalent adjustment-loans                     |  | 0.01 |   |      | 0.01 |      |  | 0.01 |   | 
|                                                        |  |      |   |      |      |      |  |      |   | 
|Taxable equivalent net yield on interest-earning assets |  | 3.20 | % |      | 3.33 | %    |  | 3.73 | % | 
|                                                        |  |      |   |      |      |      |  |      |   | 

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

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

|                                                             |  |                        |       |                       |   |                       |   |           |       |         |   |       |  |           |        |         |   |        |  |   |       |  |   |       |   |   |        | 
|------------------------------------------------------------ |  | ---------------------- | ----- | --------------------- | - | --------------------- | - | --------- | ----- | ------- | - | ----- |  | --------- | ------ | ------- | - | ------ |  | - | ----- |  | - | ----- | - | - | ------ | 
|                                                             |  | Year ended December 31 |      
|                                                             |  |                        |      
|                                                             |  | 2007 compared to 2006  |       | 2006 compared to 2005 |   | 2005 compared to 2004 |  
|                                                             |  | Volume(a)              |       | Rate(a)               |   | Net                   |   | Volume(a) |       | Rate(a) |   | Net   |  | Volume(a) |        | Rate(a) |   | Net    | 
|                                                             |  |                        |       |                       |   |                       |   |           |       |         |   |       |  |           |        |         |   |        | 
|Interest from interest-earning assets                        |  |                        |       |                       |   |                       |   |           |       |         |   |       |  |           |        |         |   |        |  |   |       |  |   |       |   |   |        | 
|                                                             |  |                        |       |                       |   |                       |   |           |       |         |   |       |  |           |        |         |   |        |  |   |       |  |   |       |   |   |        | 
|Interest-bearing time deposits                               |  | $                      | 11    |                       | $ | (3                    | ) | $         | 8     |         | $ | 8     |  | $         | 39     |         | $ | 47     |  | $ | 9     |  | $ | 34    |   | $ | 43     | 
|Taxable investment securities                                |  |                        | (101  | )                     |   | 553                   |   |           | 452   |         |   | 800   |  |           | 949    |         |   | 1,749  |  |   | 803   |  |   | 559   |   |   | 1,362  | 
|Tax-exempt investment securities (b)                         |  |                        | (748  | )                     |   | 265                   |   |           | (483  | )       |   | 1,027 |  |           | 179    |         |   | 1,206  |  |   | 1,460 |  |   | (42   | ) |   | 1,418  | 
|Federal funds sold                                           |  |                        | (154  | )                     |   | (13                   | ) |           | (167  | )       |   | 278   |  |           | 101    |         |   | 379    |  |   | 32    |  |   | 58    |   |   | 90     | 
|Net loans (c)                                                |  |                        | 5,983 |                       |   | 2,064                 |   |           | 8,047 |         |   | 7,047 |  |           | 3,562  |         |   | 10,609 |  |   | 5,748 |  |   | 2,123 |   |   | 7,871  | 
|                                                             |  |                        |       |                       |   |                       |   |           |       |         |   |       |  |           |        |         |   |        |  |   |       |  |   |       |   |   |        | 
|Total income from interest-earning assets                    |  |                        | 4,991 |                       |   | 2,866                 |   |           | 7,857 |         |   | 9,160 |  |           | 4,830  |         |   | 13,990 |  |   | 8,052 |  |   | 2,732 |   |   | 10,784 | 
|                                                             |  |                        |       |                       |   |                       |   |           |       |         |   |       |  |           |        |         |   |        |  |   |       |  |   |       |   |   |        | 
|Expense of interest-bearing liabilities                      |  |                        |       |                       |   |                       |   |           |       |         |   |       |  |           |        |         |   |        |  |   |       |  |   |       |   |   |        | 
|                                                             |  |                        |       |                       |   |                       |   |           |       |         |   |       |  |           |        |         |   |        |  |   |       |  |   |       |   |   |        | 
|Interest-bearing demand deposits                             |  |                        | 551   |                       |   | 1,139                 |   |           | 1,690 |         |   | 126   |  |           | 1,527  |         |   | 1,653  |  |   | 334   |  |   | 861   |   |   | 1,195  | 
|Savings deposits                                             |  |                        | (31   | )                     |   | (46                   | ) |           | (77   | )       |   | 84    |  |           | (25    | )       |   | 59     |  |   | 90    |  |   | (31   | ) |   | 59     | 
|Time deposits                                                |  |                        | 2,327 |                       |   | 2,542                 |   |           | 4,869 |         |   | 3,814 |  |           | 4,530  |         |   | 8,344  |  |   | 1,830 |  |   | 2,107 |   |   | 3,937  | 
|Interest-bearing demand notes issued to the U.S. Treasury    |  |                        | 9     |                       |   | 1                     |   |           | 10    |         |   | 3     |  |           | 13     |         |   | 16     |  |   | 1     |  |   | 14    |   |   | 15     | 
|Federal funds purchased and securities repurchase
agreements |  |                        | 100   |                       |   | (30                   | ) |           | 70    |         |   | 289   |  |           | 441    |         |   | 730    |  |   | 255   |  |   | 354   |   |   | 609    | 
|Advances from Federal Home Loan Bank                         |  |                        | (35   | )                     |   | 26                    |   |           | (9    | )       |   | 48    |  |           | (15    | )       |   | 33     |  |   | 92    |  |   | (38   | ) |   | 54     | 
|Trust preferred securities                                   |  |                        | -0-   |                       |   | 10                    |   |           | 10    |         |   | 733   |  |           | 56     |         |   | 789    |  |   | 621   |  |   | -0-   |   |   | 621    | 
|Note payable                                                 |  |                        | 328   |                       |   | (16                   | ) |           | 312   |         |   | 207   |  |           | 74     |         |   | 281    |  |   | 106   |  |   | 59    |   |   | 165    | 
|                                                             |  |                        |       |                       |   |                       |   |           |       |         |   |       |  |           |        |         |   |        |  |   |       |  |   |       |   |   |        | 
|Total expense from interest-bearing
liabilities              |  |                        | 3,249 |                       |   | 3,626                 |   |           | 6,875 |         |   | 5,304 |  |           | 6,601  |         |   | 11,905 |  |   | 3,329 |  |   | 3,326 |   |   | 6,655  | 
|                                                             |  |                        |       |                       |   |                       |   |           |       |         |   |       |  |           |        |         |   |        |  |   |       |  |   |       |   |   |        | 
|                                                             |  |                        |       |                       |   |                       |   |           |       |         |   |       |  |           |        |         |   |        |  |   |       |  |   |       |   |   |        | 
|Net difference                                               |  | $                      | 1,742 |                       | $ | (760                  | ) | $         | 982   |         | $ | 3,856 |  | $         | (1,771 | )       | $ | 2,085  |  | $ | 4,723 |  | $ | (594  | ) | $ | 4,129  | 
|                                                             |  |                        |       |                       |   |                       |   |           |       |         |   |       |  |           |        |         |   |        |  |   |       |  |   |       |   |   |        | 

|    |                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The change in interest due
  both to rate and volume has been allocated equally.                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                               
|(b) | Interest income on
  non-taxable investment securities and non-taxable loans includes the effects
  of taxable-equivalent adjustments using a tax rate of 34% in adjusting
  interest on tax-exempt securities and tax-exempt loans to a
  taxable-equivalent basis. The amount of taxable-equivalent adjustments were
  $2,307 in 2007, $2,483 in 2006 and $2,048 in 2005.                   
|    |                                                                                                                                                                                                                                                                                                                                                                                               
|(c) | Includes
  loan fees of $1,287 in 2007, $782 in 2006, and $774 in 2005. Interest income
  on loans includes the effect of taxable-equivalent adjustments for
  non-taxable loans using a tax rate of 34% in adjusting interest on tax-exempt
  loans to a taxable-equivalent basis. Includes non-accrual loans, with
  year-end balances of $7,361 in 2007, $3,893 in 2006 and $3,822 in 2005.

35

---

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

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

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

|                                               |  |                                 |        |      |   |        |   |   |       |  
|---------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------ | - | - | ----- | -
|                                               |  | For the Years ended December 31 |       
|                                               |  |                                 |       
|                                               |  | 2007                            |        | 2006 |   | 2005   |  
|                                               |  |                                 |        |      |   |        |   |   |       |  
|Trust and farm management fees                 |  | $                               | 1,507  |      | $ | 1,467  |   | $ | 1,601 |  
|Service charges on deposit accounts            |  |                                 | 4,431  |      |   | 4,235  |   |   | 3,448 |  
|Other service charges                          |  |                                 | 1,966  |      |   | 1,782  |   |   | 1,407 |  
|Gain on sales of securities available-for-sale |  |                                 | 541    |      |   | 250    |   |   | 89    |  
|Gain on sale of loans                          |  |                                 | -0-    |      |   | 90     |   |   | 63    |  
|Brokerage fee income                           |  |                                 | 920    |      |   | 736    |   |   | 697   |  
|Mortgage banking income                        |  |                                 | 903    |      |   | 755    |   |   | 780   |  
|Bank-owned life insurance income               |  |                                 | 816    |      |   | 770    |   |   | 604   |  
|Other operating income                         |  |                                 | 214    |      |   | 160    |   |   | 151   |  
|                                               |  |                                 |        |      |   |        |   |   |       |  
|Total non-interest income                      |  | $                               | 11,298 |      | $ | 10,245 |   | $ | 8,840 |  
|                                               |  |                                 |        |      |   |        |   |   |       |  
|Non-interest income to average total assets    |  |                                 | 1.09   | %    |   | 1.07   | % |   | 1.13  | %

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

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

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

|                                             |  |                                  |        |      |   |        |   |   |        |  
|-------------------------------------------- |  | -------------------------------- | ------ | ---- | - | ------ | - | - | ------ | -
|                                             |  | For the
 Years ended December 31 |       
|                                             |  |                                  |       
|                                             |  | 2007                             |        | 2006 |   | 2005   |  
|                                             |  |                                  |        |      |   |        |   |   |        |  
|Salaries and employee benefits               |  | $                                | 16,874 |      | $ | 15,884 |   | $ | 13,400 |  
|Occupancy                                    |  |                                  | 1,707  |      |   | 1,458  |   |   | 1,144  |  
|Equipment expense                            |  |                                  | 3,158  |      |   | 2,933  |   |   | 2,124  |  
|Federal insurance assessments                |  |                                  | 338    |      |   | 313    |   |   | 244    |  
|Intangible assets amortization               |  |                                  | 704    |      |   | 651    |   |   | 324    |  
|Data processing                              |  |                                  | 1,101  |      |   | 1,032  |   |   | 870    |  
|Advertising                                  |  |                                  | 722    |      |   | 841    |   |   | 770    |  
|Postage                                      |  |                                  | 542    |      |   | 539    |   |   | 431    |  
|Property taxes                               |  |                                  | 686    |      |   | 527    |   |   | 414    |  
|Supplies                                     |  |                                  | 448    |      |   | 427    |   |   | 378    |  
|Other real estate owned expense (income)     |  |                                  | 157    |      |   | 149    |   |   | (21    | )
|Other operating expense                      |  |                                  | 3,128  |      |   | 3,581  |   |   | 3,175  |  
|                                             |  |                                  |        |      |   |        |   |   |        |  
|Total non-interest expense                   |  | $                                | 29,565 |      | $ | 28,335 |   | $ | 23,253 |  
|                                             |  |                                  |        |      |   |        |   |   |        |  
|Non-interest expense to average total assets |  |                                  | 2.85   | %    |   | 2.95   | % |   | 2.97   | %

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

36

---

Income taxes. Income tax expense totaled
$1,377 in 2007, $1,033 in 2006 and $2,258 in 2005. The effective tax rates were
16.9%, 13.7% and 23.0% for the respective years then ended. The higher
effective tax rate in 2007 was primarily due to a decrease in the amount of
interest income earned from municipal (tax-exempt) securities.

Analysis of Financial Condition

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

|                      |  |             |           |           |  |        |   |            |           |        |  |            |   |        |         |            |       |        |   |            |  |       |   |   |         |  |       |  
|--------------------- |  | ----------- | --------- | --------- |  | ------ | - | ---------- | --------- | ------ |  | ---------- | - | ------ | ------- | ---------- | ----- | ------ | - | ---------- |  | ----- | - | - | ------- |  | ----- | -
|                      |  | December 31 |          
|                      |  |             |          
|                      |  | 2007        |           | 2006      |  | 2005   |   | 2004       |           | 2003   | 
|                      |  | Amount      |           | % ofTotal |  | Amount |   | %
of
Total |           | Amount |  | %
of
Total |   | Amount |         | %
of
Total |       | Amount |   | %
of
Total | 
|                      |  |             |           |           |  |        |   |            |           |        |  |            |   |        |         |            |       |        |   |            | 
|Agricultural          |  | $           | 85,571    |           |  | 11.8   | % | $          | 83,610    |        |  | 13.3       | % | $      | 73,884  |            | 12.7  | %      | $ | 42,063     |  | 10.3  | % | $ | 42,954  |  | 11.2  | %
|Commercial            |  |             | 168,936   |           |  | 23.4   |   |            | 134,402   |        |  | 21.4       |   |        | 114,342 |            | 19.7  |        |   | 96,390     |  | 23.5  |   |   | 80,711  |  | 21.1  |  
|Real Estate           |  |             |           |           |  |        |   |            |           |        |  |            |   |        |         |            |       |        |   |            |  |       |   |   |         |  |       |  
|1-4 family residences |  |             | 127,656   |           |  | 17.7   |   |            | 120,585   |        |  | 19.1       |   |        | 138,959 |            | 23.9  |        |   | 76,644     |  | 18.7  |   |   | 66,070  |  | 17.2  |  
|Agricultural          |  |             | 61,158    |           |  | 8.5    |   |            | 61,511    |        |  | 9.8        |   |        | 56,069  |            | 9.6   |        |   | 39,688     |  | 9.7   |   |   | 38,683  |  | 10.1  |  
|Construction          |  |             | 46,874    |           |  | 6.5    |   |            | 42,991    |        |  | 6.8        |   |        | 37,286  |            | 6.4   |        |   | 17,271     |  | 4.2   |   |   | 13,302  |  | 3.5   |  
|Commercial            |  |             | 160,106   |           |  | 22.2   |   |            | 130,302   |        |  | 20.7       |   |        | 113,110 |            | 19.4  |        |   | 105,073    |  | 25.6  |   |   | 107,672 |  | 28.1  |  
|                      |  |             |           |           |  |        |   |            |           |        |  |            |   |        |         |            |       |        |   |            |  |       |   |   |         |  |       |  
|Real Estate Total     |  |             | 395,794   |           |  | 54.8   |   |            | 355,389   |        |  | 56.4       |   |        | 345,424 |            | 59.3  |        |   | 238,676    |  | 58.2  |   |   | 225,727 |  | 58.9  |  
|Installment           |  |             | 72,346    |           |  | 10.0   |   |            | 56,071    |        |  | 8.9        |   |        | 48,074  |            | 8.3   |        |   | 32,915     |  | 8.0   |   |   | 33,661  |  | 8.8   |  
|                      |  |             |           |           |  |        |   |            |           |        |  |            |   |        |         |            |       |        |   |            |  |       |   |   |         |  |       |  
|Total loans           |  | $           | 722,647   |           |  | 100.0  | % | $          | 629,472   |        |  | 100.0      | % | $      | 581,724 |            | 100.0 | %      | $ | 410,044    |  | 100.0 | % | $ | 383,053 |  | 100.0 | %
|                      |  |             |           |           |  |        |   |            |           |        |  |            |   |        |         |            |       |        |   |            |  |       |   |   |         |  |       |  
|Total assets          |  | $           | 1,080,702 |           |  |        |   | $          | 1,031,959 |        |  |            |   | $      | 945,263 |            |       |        | $ | 655,738    |  |       |   | $ | 609,737 |  |       |  
|Loans to total assets |  |             |           |           |  | 66.9   | % |            |           |        |  | 61.0       | % |        |         |            | 61.6  | %      |   |            |  | 62.5  | % |   |         |  | 62.8  | %

Total
loans increased $93.2 million (or 14.8%) in 2007, as compared to an increase of
$47.7 million (or 8.2%) in 2006. Approximately $17 million of the 2007 increase
came from the Plainfield acquisition; the balance was internal growth. The
increase reflects business expansion in growth markets served by the subsidiary
bank in 2007, as well as expansion of relationship banking in all markets.

Commercial
loans increased $34.5 million (or 25.7%) in 2007, which compares to an increase
of $20.1 million (or 17.5%) in 2006. Building relationships with commercial
businesses has been the largest component of loan growth in recent years.
Increases occurred in both higher-growth areas and established markets served
by the subsidiary bank. Competition for high-quality commercial and
agricultural customers remains strong.

Loans
to agricultural operations increased $2.0 million (or 2.3%) in 2007, which
compares to an increase of $9.7 million (or 13.2%) in 2006. Short-term agricultural
loans are seasonal in nature with paydown from grain sales occurring near the
end of each year. Rapid growth in the bio-fuels industry (primarily ethanol)
and rising worldwide food demand have dramatically influenced corn prices since
the latter part of 2006. Rising corn prices have influenced soybean prices as
the two commodities compete for planted acreage. Corn and soybeans are the two
primary crops of the Corporations market area. This creates an environment for
significant profitability in agricultural crop production. While loan
repayments are strong, costs of production have also increased, creating a
higher demand for operating credit. The highly experienced agricultural staff
continues to effectively manage risk and seek opportunities in this portfolio.
Agricultural loans as a percentage of total loans were 11.8% at year-end 2007,
compared to 13.3% at year-end 2006.

Real
estate loans increased $40.4 million (or 11.3%) in 2007 compared to an increase
of $10.0 million (or 2.9%) in 2006. The growth in real estate loans was
primarily in the commercial area. Residential real estate loans with fixed
rates of more than five years are generally sold into the secondary market. The
Corporation retains the servicing of sold loans, maintaining the local
relationship with customers and generating servicing fee income. Total home
mortgage closings were over $97 million in 2007. This was above budgeted
volume, which is a notable achievement in a time of reduced real estate sales.
The Corporation has not originated any sub-prime mortgages for our own
portfolio or to sell in the secondary market.

Consumer
installment loans increased $16.3 million (or 29.0%) in 2007 from 2006. This
follows an increase of $8.0 million (or 16.6%) in 2006. The growth is attributed
to a focus on increasing consumer loans. Home equity loans have seen the
largest growth. Home equity lending comprises two-thirds of the installment
portfolio.

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

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

37

---

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

Non-performing Loans and Other Real Estate Owned.
Non-performing loans amounted to 1.03% of total loans at year-end 2007 compared
to .62% at year-end 2006. The increase reflects a higher level of stress in the
residential building industry. Problem credits are closely monitored by the
lending staff, and an independent loan review staff provides further assistance
in identifying problem situations. Loans over 90 days past due are normally
either charged off, or if well-secured and in the process of collection, placed
on a non-accrual status. Problem credits have a life cycle. They either improve
or they move through a workout/liquidation process. The workout process often
includes non-accrual status. The allowance for possible loan losses was 43.7%
and 77.8% of non-performing loans at year-end 2007 and 2006, 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, 2007 was $833. The
Corporation had $0 in other real estate owned as of December 31, 2006. The
following table provides information on the Corporations non-performing loans since
2003:

|                                                              |  |             |       |      |   |       |   |      |       |      |   |      |   |   |      |  
|------------------------------------------------------------- |  | ----------- | ----- | ---- | - | ----- | - | ---- | ----- | ---- | - | ---- | - | - | ---- | -
|                                                              |  | December 31 |      
|                                                              |  |             |      
|                                                              |  | 2007        |       | 2006 |   | 2005  |   | 2004 |       | 2003 |  
|                                                              |  |             |       |      |   |       |   |      |       |      |  
|Non-accrual                                                   |  | $           | 7,361 |      | $ | 3,893 |   | $    | 3,822 |      | $ | 328  |   | $ | 925  |  
|90 days past due and accruing                                 |  |             | 73    |      |   | 33    |   |      | 3     |      |   | -0-  |   |   | 44   |  
|Restructured                                                  |  |             | -0-   |      |   | -0-   |   |      | -0-   |      |   | -0-  |   |   | -0-  |  
|                                                              |  |             |       |      |   |       |   |      |       |      |   |      |   |   |      |  
|Total non-performing loans                                    |  | $           | 7,434 |      | $ | 3,926 |   | $    | 3,825 |      | $ | 328  |   | $ | 969  |  
|                                                              |  |             |       |      |   |       |   |      |       |      |   |      |   |   |      |  
|Non-performing loans to total loans(net of unearned
interest) |  |             | 1.03  | %    |   | 0.62  | % |      | 0.66  | %    |   | 0.08 | % |   | 0.25 | %

As
of December 31, 2007 and 2006, loans about which the Corporations management
had serious doubts as to the ability of borrowers to comply with loan repayment
terms not carried as non-performing loans totaled approximately $115 (or .02%
of the total loan portfolio), and $199 (or .03% of the total loan portfolio), respectively.

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

|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|----------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- | - | ------- | - | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                    |  | For the Years Ended December 31 |        
|                                                                                    |  |                                 |        
|                                                                                    |  | 2007                            |         | 2006 |   | 2005    |   | 2004 |         | 2003 |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |  
|Amount of loans outstanding at end of year (net of unearned
interest)               |  | $                               | 722,647 |      | $ | 629,472 |   | $    | 581,812 |      | $ | 410,044 |   | $ | 383,053 |  
|Average amount of loans outstanding for the year (net of unearned
 interest)        |  | $                               | 666,853 |      | $ | 585,382 |   | $    | 482,448 |      | $ | 390,755 |   | $ | 369,469 |  
|Allowance for loan losses at beginning of year                                      |  | $                               | 3,053   |      | $ | 3,109   |   | $    | 2,524   |      | $ | 2,250   |   | $ | 2,660   |  
|Allowance of bank acquired                                                          |  |                                 | -0-     |      |   | -0-     |   |      | 752     |      |   | -0-     |   |   | -0-     |  
|Charge-offs:                                                                        |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Agricultural                                                                        |  |                                 | -0-     |      |   | 162     |   |      | -0-     |      |   | -0-     |   |   | 106     |  
|Commercial                                                                          |  |                                 | 373     |      |   | 227     |   |      | 85      |      |   | 54      |   |   | 479     |  
|Real estate-mortgage                                                                |  |                                 | 22      |      |   | 21      |   |      | 10      |      |   | 3       |   |   | 45      |  
|Installment                                                                         |  |                                 | 269     |      |   | 194     |   |      | 252     |      |   | 301     |   |   | 448     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total charge-offs                                                                   |  |                                 | 664     |      |   | 604     |   |      | 347     |      |   | 358     |   |   | 1,078   |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Recoveries:                                                                         |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Agricultural                                                                        |  |                                 | 1       |      |   | -0-     |   |      | -0-     |      |   | -0-     |   |   | -0-     |  
|Commercial                                                                          |  |                                 | 29      |      |   | 90      |   |      | 2       |      |   | 54      |   |   | 6       |  
|Real estate-mortgage                                                                |  |                                 | 17      |      |   | 5       |   |      | -0-     |      |   | 4       |   |   | 4       |  
|Installment                                                                         |  |                                 | 172     |      |   | 168     |   |      | 178     |      |   | 199     |   |   | 198     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Total recoveries                                                                    |  |                                 | 219     |      |   | 263     |   |      | 180     |      |   | 257     |   |   | 208     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Net loans charged off                                                               |  |                                 | 445     |      |   | 341     |   |      | 167     |      |   | 101     |   |   | 870     |  
|Provision for loan losses                                                           |  |                                 | 640     |      |   | 285     |   |      | -0-     |      |   | 375     |   |   | 460     |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Allowance for loan losses at end of year                                            |  | $                               | 3,248   |      | $ | 3,053   |   | $    | 3,109   |      | $ | 2,524   |   | $ | 2,250   |  
|                                                                                    |  |                                 |         |      |   |         |   |      |         |      |   |         |   |   |         |  
|Net loans charged off to average loans                                              |  |                                 | 0.07    | %    |   | 0.06    | % |      | 0.03    | %    |   | 0.03    | % |   | 0.24    | %
|Allowance for loan losses to non-performing loans                                   |  |                                 | 43.69   | %    |   | 77.76   | % |      | 81.28   | %    |   | 769.51  | % |   | 232.20  | %
|Allowance for loan losses to total loans at end of year (net of
 unearned interest) |  |                                 | 0.45    | %    |   | 0.49    | % |      | 0.53    | %    |   | 0.62    | % |   | 0.59    | %

38

---

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

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

Net
charge-offs were less than .07% of average total loans in 2007. The allowance
for loan losses at year-end 2007 was $3.25 million, .45% of total loans, net of
unearned interest, and 43.7% of non-performing loans. Non-performing loans are
comprised of credits that management believes will not result in significant
losses to the Corporation. There are $207 specific loan loss reserves for the
non-performing or impaired loans as of December 31, 2007. Management considers
the allowance for loan losses adequate to meet probable losses as of December
31, 2007.

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

|                                      |  |             |         |      |   |         | 
|------------------------------------- |  | ----------- | ------- | ---- | - | ------- | 
|                                      |  | December 31 |        
|                                      |  |             |        
|                                      |  | 2007        |         | 2006 |  
|                                     
|U.S.
  Treasuries                     |  | $           | -0-     |      | $ | 1,001   | 
|U.S.
  Government Agencies            |  |             | 63,740  |      |   | 63,748  | 
|State and
  Municipal                 |  |             | 95,134  |      |   | 105,928 | 
|Collateralized
  mortgage obligations |  |             | 69,701  |      |   | 93,282  | 
|Other
  securities                    |  |             | 4,098   |      |   | 3,957   | 
|                                      |  |             |         |      |   |         | 
|Total                                 |  | $           | 232,673 |      | $ | 267,916 | 
|                                      |  |             |         |      |   |         | 

Investment
securities totaled $232.7 million on December 31, 2007, a decrease of $35.2
million (or 13.2%) from the December 31, 2006 total of $267.9 million. The
reduction in the portfolio was primarily due to liquidity needs to meet strong
loan demand and a decision to reduce participation in the State of Illinois Ag
Link Deposit program. Some changes occurred in the investment mix during 2007,
as a result of maturities and principal paydowns that were not reinvested.
Collateralized mortgage obligations (CMOs) decreased by 25.3%, or $23.6
million, and now represent 30.0% of the portfolio, down from 34.8%. Municipal
bond holdings dropped by $10.8 million or 10.2%. The current yield on the total
portfolio on a year over year basis fell by 7 basis points from 5.37% to 5.30%.
The decrease in the yield of the municipal bond portfolio was the major
contributing factor, with a drop of 16 basis points. This decline was largely a
function of falling interest rates and subsequent calls exercised on higher coupon
securities with imbedded unamortized premiums. Conversely, the current yield
improved on all other investment categories.

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

Deposits.
Total deposits increased in 2007 by approximately $9.5 million, a 1.1% increase
over 2006. Time deposits represented an increase of $12.8 million, a 2.7%
increase over the prior year, largely due to customers continuing their prior
year trend of investing in term accounts rather than liquid accounts. The time
deposits from the State of Illinois Ag Link Deposit program in the amount of
$32.1 million were not renewed to improve the management of the overall net
interest margin, while still being able to offer competitive loan rates as a
service to our agricultural community. Interest-bearing demand accounts
increased $9.8 million, a 4.2% increase over 2006. Non-interest bearing demand
accounts showed a decrease of $5.4 million with money moving to
interest-bearing accounts. Regular savings accounts represented a decrease of
approximately $7.7 million, which also moved primarily to time deposits and
money market products. The average rate for overall deposits increased .49% in
2007, primarily as a result of lower rate certificates maturing and repricing.
Also, liquid account pricing stayed relatively flat, with the exception of the
concentration in the high-yield money market portfolio of $121.3 million being
offered at slightly higher rates than the other money market products. In 2007,
there was an increase of $29.8 million over 2006 balances in this product.
These depositor patterns represent a continuing trend of customers moving to
FDIC-insured investments over the last several years, as well as customer and
deposit growth in all markets served by the subsidiary bank, including the
acquisition of Plainfield. (See Note 7 to Consolidated Financial Statements).

Over
the last three years, the subsidiary bank has seen overall deposits increase
55%. The increase in consumer deposits reflects our continued focus on
investing in offices in high-growth areas, and continued focus of officers
calling on customers and potential customers through our officer call program
to develop deposit relationships. This growth also reflects the well-trained
staff that strives to assist customers by identifying needs and providing sound
solutions. There continues to be considerable interest in alternative delivery
mechanisms, such as ATMs, Internet Banking with Bill Payment and Telebanker as
a convenient means for customers to better manage their money, maximize return,
and have peace of mind by dealing safely and securely with only one financial
institution. Due to the diversity within our various market areas, such
delivery mechanisms will continue to position us well for the future.

39

---

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

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

|                              |  |                                 |         |      |         |      |      |         |         |      |  |      |   |   |         |  |  |      |  
|----------------------------- |  | ------------------------------- | ------- | ---- | ------- | ---- | ---- | ------- | ------- | ---- |  | ---- | - | - | ------- |  |  | ---- | -
|                              |  | For the Years Ended December 31 |        
|                              |  |                                 |        
|                              |  | 2007                            |         | 2006 |         | 2005 |     
|                              |  | Balance                         |         | Rate | Balance |      | Rate | Balance |         | Rate
|                              |  |                                 |         |      |         |      |      |         |         |     
|Non-interest
  bearing demand |  | $                               | 102,452 |      |         | n/a  |      | $       | 107,834 |      |  | n/a  |   | $ | 103,622 |  |  | n/a  |  
|Interest-bearing
  demand     |  |                                 | 241,749 |      |         | 2.75 | %    |         | 231,953 |      |  | 2.25 | % |   | 222,675 |  |  | 1.54 | %
|Savings                       |  |                                 | 58,401  |      |         | 0.39 |      |         | 66,060  |      |  | 0.46 |   |   | 74,195  |  |  | 0.40 |  
|Time
  deposits               |  |                                 | 488,805 |      |         | 4.88 |      |         | 476,052 |      |  | 4.32 |   |   | 398,066 |  |  | 3.27 |  
|                              |  |                                 |         |      |         |      |      |         |         |      |  |      |   |   |         |  |  |      |  
|Total                         |  | $                               | 891,407 |      |         | 3.45 | %    | $       | 881,899 |      |  | 2.96 | % | $ | 798,558 |  |  | 2.10 | %
|                              |  |                                 |         |      |         |      |      |         |         |      |  |      |   |   |         |  |  |      |  

The
following table summarizes time deposits in amounts of $100 or more by time
remaining until maturity as of December 31, 2007. These time deposits are made
by individuals, corporations and public entities:

|                                       |  |   |         | 
|-------------------------------------- |  | - | ------- | 
|Three months
  or less                 |  | $ | 43,309  | 
|Over three
  months through six months |  |   | 38,659  | 
|Over six
  months through one year     |  |   | 59,630  | 
|Over one
  year                        |  |   | 16,944  | 
|                                       |  |   |         | 
|Total                                  |  | $ | 158,542 | 
|                                       |  |   |         | 

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

The
ratio of temporary investments and other short-term available funds (those
investments maturing within one year plus twelve months projected payments on
mortgage-backed securities and collateralized mortgage obligations, and cash
and due from banks balances) to volatile liabilities (50% of non-public entity
certificates of deposit over $100, repurchase agreements issued to public
entities, treasury tax and loan deposits, short-term borrowings from banks, and
deposits of public entities) was 45.3% at December 31, 2007 and 59.0% at
December 31, 2006, respectively. Core deposits (demand deposits,
interest-bearing checking accounts, total savings, and certificates of deposit
less than $100) were 90.5% of total deposits at December 31, 2007 and 87.4% of
total deposits at December 31, 2006. Money market accounts of approximately
$138.2 million at December 31, 2007 are classified by the Corporation as core
deposits.

In
2007, the Corporation experienced a net decrease of $11.6 million in cash and
cash equivalents. Investing activities, consisting of a net increase in loans
offset by a decrease in investments, used $50.1 million. Providing the
Corporation with funds to offset the investing activities were financing
activities of $26.7 million (net increase in borrowings) and operating
activities of $11.8 million. Cash and cash equivalents of $27.6 million at
December 31, 2007, along with established lines of credit, are deemed more than
adequate to meet short-term liquidity needs.

In
2006, the Corporation experienced a net increase of $15.4 million in cash and
cash equivalents. Financing activities provided the Corporation with $81.1
million, accounted for by an increase in deposits of $83.3 million. Offsetting
this increase, investing activities, consisting of a net increase in loans and
a net increase in investments, used $67.9 million.

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

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

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

40

---

The
following table shows the estimated changes to net interest income from the
base scenario as of December 31, 2007 and 2006:

|                          |      |                               |             |  |      |       |             |   |        |  |  |       |  
|------------------------- | ---- | ----------------------------- | ----------- |  | ---- | ----- | ----------- | - | ------ |  |  | ----- | -
|Change in 
 Interest Rate |      | Estimated Net Interest Income
|                          | 2007 |                               | % of change |  | 2006 |       | %
of change
|                          |      |                               |             |  |      |       |             |  
|300 basis
 point rise     |      | $                             | 35,253      |  |      | 0.37  | %           | $ | 34,839 |  |  | 5.60  | %
|200 basis
 point rise     |      |                               | 35,439      |  |      | 0.90  |             |   | 34,321 |  |  | 4.03  |  
|100 basis
 point rise     |      |                               | 35,723      |  |      | 1.71  |             |   | 33,717 |  |  | 2.20  |  
|Base
 scenario            |      |                               | 35,124      |  |      |      |             |   | 32,992 |  |  |      |  
|100 basis
 point decline  |      |                               | 34,004      |  |      | -3.19 |             |   | 32,142 |  |  | -2.58 |  
|200 basis
 point decline  |      |                               | 32,937      |  |      | -6.23 |             |   | 31,088 |  |  | -5.77 |  
|300 basis
 point decline  |      |                               | 31,965      |  |      | -8.99 |             |   | 29,919 |  |  | -9.31 |  

Contractual Obligations, Commercial Commitments and
Off-Balance Sheet Arrangements. As disclosed in the Notes to
Consolidated Financial Statements, the Corporation has certain obligations and
commitments to make future payments under contracts. At December 31, 2007, the
aggregate contracted obligations (excluding bank deposits) and commercial commitments
are as follows:

|                                                           |  |       |         |                   |   |           |  |           |        |              |   |       |  |   |        |    
|---------------------------------------------------------- |  | ----- | ------- | ----------------- | - | --------- |  | --------- | ------ | ------------ | - | ----- |  | - | ------ | ---
|                                                           |  | Total |         | Less Than
 1 Year |   | 1-3 Years |  | 3-5 Years |        | Over 5 Years |  
|                                                           |  |       |         |                   |   |           |  |           |        |              |  
|Contractual Obligations:                                   |  |       |         |                   |   |           |  |           |        |              |   |       |  |   |        |    
|Time Deposits                                              |  | $     | 488,805 |                   | $ | 426,243   |  | $         | 57,240 |              | $ | 5,235 |  | $ | 87     |    
|Customer repurchase agreements                             |  |       | 34,217  |                   |   | 34,217    |  |           | -0-    |              |   | -0-   |  | $ | -0-    |    
|Interest-bearing demand notes issued to the
 U.S. Treasury |  |       | 1,838   |                   |   | 1,838     |  |           | -0-    |              |   | -0-   |  |   | -0-    |    
|Advances from the Federal Home Loan Bank                   |  |       | 6,984   |                   |   | 6,000     |  |           | 984    |              |   | -0-   |  |   | -0-    |    
|Federal funds purchased                                    |  |       | 26,500  |                   |   | 26,500    |  |           | -0-    |              |   | -0-   |  |   | -0-    |    
|Trust preferred securities                                 |  |       | 25,000  |                   |   | -0-       |  |           | -0-    |              |   | -0-   |  |   | 25,000 |    
|Note payable                                               |  |       | 14,550  |                   |   | 14,550    |  |           | -0-    |              |   | -0-   |  |   | -0-    |    
|Post-retirement health insurance                           |  |       | 867     |                   |   | 75        |  |           | 151    |              |   | 166   |  |   | 475    | (1)
|                                                           |  |       |         |                   |   |           |  |           |        |              |   |       |  |   |        |    
|Total                                                      |  | $     | 598,761 |                   | $ | 509,423   |  | $         | 58,375 |              | $ | 5,401 |  | $ | 25,562 |    
|                                                           |  |       |         |                   |   |           |  |           |        |              |   |       |  |   |        |    
|Off-Balance Sheet Arrangements:                            |  |       |         |                   |   |           |  |           |        |              |   |       |  |   |        |    
|Commitments to lend                                        |  | $     | 143,506 |                   | $ | 143,506   |  | $         | -0-    |              | $ | -0-   |  | $ | -0-    |    
|Standby letters of credit                                  |  |       | 7,690   |                   |   | 7,690     |  |           | -0-    |              |   | -0-   |  |   | -0-    |    
|                                                           |  |       |         |                   |   |           |  |           |        |              |   |       |  |   |        |    
|Total                                                      |  | $     | 151,196 |                   | $ | 151,196   |  | $         | -0-    |              | $ | -0-   |  | $ | -0-    |    
|                                                           |  |       |         |                   |   |           |  |           |        |              |   |       |  |   |        |    

|    |                                 
|--- | --------------------------------
|(1) | For the years 2013 through
 2017

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

The
following table sets forth the Corporations interest rate repricing gaps for
selected maturity periods at December 31, 2007 (dollars in thousands):

|                                                          |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |           |   |   |         |  |   |         | 
|--------------------------------------------------------- |  | --------------------- | -------- | -------- | - | -------- | - | -------- | -------- | ---------- | - | ------- | - | ---------- | --------- | - | - | ------- |  | - | ------- | 
|                                                          |  | Rate Sensitive Within |         
|                                                          |  |                       |         
|                                                          |  | 1 year                |          | 1-2 yrs. |   | 2-3 yrs. |   | 3-5 yrs. |          | Thereafter |   | Total   |   | Fair Value |          
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |          
|Interest-earning assets:                                  |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |           |   |   |         |  |   |         | 
|Interest-bearing deposits                                 |  | $                     | 1,803    |          | $ | -0-      |   | $        | -0-      |            | $ | -0-     |   | $          | -0-       |   | $ | 1,803   |  | $ | 1,803   | 
|Taxable investment securities                             |  |                       | 55,578   |          |   | 27,782   |   |          | 13,835   |            |   | 11,728  |   |            | 28,616    |   |   | 137,539 |  |   | 137,539 | 
|Tax-exempt investment securities                          |  |                       | 2,970    |          |   | 2,869    |   |          | 2,270    |            |   | 2,771   |   |            | 84,254    |   |   | 95,134  |  |   | 95,355  | 
|Loans                                                     |  |                       | 433,390  |          |   | 108,475  |   |          | 73,684   |            |   | 76,032  |   |            | 28,746    |   |   | 720,327 |  |   | 720,715 | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |           |   |   |         |  |   |         | 
|Total rate sensitive assets (RSA)                       |  | $                     | 493,741  |          | $ | 139,126  |   | $        | 89,789   |            | $ | 90,531  |   | $          | 141,616   |   | $ | 954,803 |  | $ | 955,412 | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |           |   |   |         |  |   |         | 
|Interest-bearing liabilities:                             |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |           |   |   |         |  |   |         | 
|Interest-bearing demand deposits                          |  | $                     | 241,749  |          | $ | -0-      |   | $        | -0-      |            | $ | -0-     |   | $          | -0-       |   | $ | 241,749 |  | $ | 241,749 | 
|Savings deposits                                          |  |                       | 58,401   |          |   | -0-      |   |          | -0-      |            |   | -0-     |   |            | -0-       |   |   | 58,401  |  |   | 58,401  | 
|Time deposits                                             |  |                       | 426,243  |          |   | 50,939   |   |          | 6,301    |            |   | 5,235   |   |            | 87        |   |   | 488,805 |  |   | 494,050 | 
|Customer repurchase agreements                            |  |                       | 34,217   |          |   | -0-      |   |          | -0-      |            |   | -0-     |   |            | -0-       |   |   | 34,217  |  |   | 34,217  | 
|Advances from the Federal Home Loan Bank                  |  |                       | 6,000    |          |   | 984      |   |          | -0-      |            |   | -0-     |   |            | -0-       |   |   | 6,984   |  |   | 7,019   | 
|Federal funds purchased                                   |  |                       | 26,500   |          |   | -0-      |   |          | -0-      |            |   | -0-     |   |            | -0-       |   |   | 26,500  |  |   | 26,500  | 
|Interest-bearing demand notes issued to the U.S. Treasury |  |                       | 1,838    |          |   | -0-      |   |          | -0-      |            |   | -0-     |   |            | -0-       |   |   | 1,838   |  |   | 1,838   | 
|Trust preferred securities                                |  |                       | -0-      |          |   | -0-      |   |          | -0-      |            |   | 25,000  |   |            | -0-       |   |   | 25,000  |  |   | 23,393  | 
|Note payable                                              |  |                       | 14,550   |          |   | -0-      |   |          | -0-      |            |   | -0-     |   |            | -0-       |   |   | 14,550  |  |   | 14,550  | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |           |   |   |         |  |   |         | 
|Total rate sensitive liabilities (RSL)                  |  | $                     | 809,498  |          | $ | 51,923   |   | $        | 6,301    |            | $ | 30,235  |   | $          | 87        |   | $ | 898,044 |  | $ | 901,717 | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |           |   |   |         |  |   |         | 
|                                                          |  |                       |          |          |   |          |   |          |          |            |   |         |   |            |           |   |   |         |  |   |         | 
|Interest rate sensitivity GAP (RSA less RSL)              |  | $                     | (315,757 | )        | $ | 87,203   |   | $        | 83,488   |            | $ | 60,296  |   | $          | 141,529   |   |   |         |  |   |         | 
|Cumulative GAP                                            |  | $                     | (315,757 | )        | $ | (228,554 | ) | $        | (145,066 | )          | $ | (84,770 | ) | $          | 56,759    |   |   |         |  |   |         | 
|RSA/RSL                                                   |  |                       | 60.99    | %        |   | 267.95   | % |          | 1425.00  | %          |   | 299.42  | % |            | 162777.01 | % |   |         |  |   |         | 
|Cumulative RSA/RSL                                        |  |                       | 60.99    | %        |   | 73.47    | % |          | 83.28    | %          |   | 90.56   | % |            | 106.32    | % |   |         |  |   |         | 

41

---

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

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 $51.8 million (one-half) of the interest-bearing
checking account balances and $69.1 million (one-half) of the money market
account balances (both being the components of interest-bearing demand
deposits) and all savings deposits as core, or non-rate sensitive deposits,
primarily since interest-bearing demand and savings deposits historically have
not been rate sensitive. As a general rule, the subsidiary banks policy is to
maintain RSA as a percent of RSL within a range of +70% to +120% within a
six-month time period.

At
December 31, 2007, savings deposits totaled approximately $58.4 million. If the
$58.4 million in savings deposits, the $51.8 million of interest-bearing
checking account balances and the $69.1 million in money market account
balances reflected in the less than one year time frame are excluded from the
rate sensitivity analysis above (consistent with the consideration mentioned in
the paragraph above), then rate sensitive liabilities would be approximately
$630.2 million increasing the negative gap to approximately $136.5 million. RSA
as a percent of RSL would be 78.3%.

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

Investment
Maturities and Yields.The
following table sets forth the contractual maturities of the amortized cost of
investment securities at December 31, 2007, and the taxable equivalent yields
of such securities:

|                                     |  |                       |        |                                       |  |                        |   |                              |        |        |  |       |   |        |         |       |  |      |   |   |       |  |  |      |  
|------------------------------------ |  | --------------------- | ------ | ------------------------------------- |  | ---------------------- | - | ---------------------------- | ------ | ------ |  | ----- | - | ------ | ------- | ----- |  | ---- | - | - | ----- |  |  | ---- | -
|                                     |  | Due within 
 one year |        | Due after one but within
  five years |  | Due after 
 five years |   | Other 
 (no stated maturity) |       
|                                     |  |                       |        |                                       |  |                        |   |                              |       
|                                     |  | Amount                |        | Yield                                 |  | Amount                 |   | Yield                        |        | Amount |  | Yield |   | Amount |         | Yield | 
|                                    
|U.S. Government Treasuries           |  | $                     | -0-    |                                       |  |                       |   | $                            | -0-    |        |  |      |   | $      | -0-     |       |  |     |   | $ | -0-   |  |  |     |  
|U.S. Government Agencies             |  |                       | 24,414 |                                       |  | 4.10                   | % |                              | 11,980 |        |  | 4.27  | % |        | 26,804  |       |  | 5.13 | % |   | -0-   |  |  |     |  
|State and Municipal                  |  |                       | 3,572  |                                       |  | 5.09                   |   |                              | 11,078 |        |  | 5.88  |   |        | 80,098  |       |  | 6.42 |   |   | -0-   |  |  |     |  
|Collateralized mortgage
 obligations |  |                       | -0-    |                                       |  |                       |   |                              | 2,975  |        |  | 3.58  |   |        | 66,536  |       |  | 4.58 |   |   | -0-   |  |  |     |  
|Other (no stated
 maturity)*         |  |                       | -0-    |                                       |  |                       |   |                              | -0-    |        |  |      |   |        | -0-     |       |  |     |   |   | 4,098 |  |  | 2.53 | %
|                                     |  |                       |        |                                       |  |                        |   |                              |        |        |  |       |   |        |         |       |  |      |   |   |       |  |  |      |  
|Total                                |  | $                     | 27,986 |                                       |  | 4.23                   | % |                              | 26,033 |        |  | 4.87  | % | $      | 173,438 |       |  | 5.51 | % | $ | 4,098 |  |  | 2.53 | %
|                                     |  |                       |        |                                       |  |                        |   |                              |        |        |  |       |   |        |         |       |  |      |   |   |       |  |  |      |  

* During
the third quarter of 2007, the Federal Home Loan Bank of Chicago received a
Cease and Desist Order from their regulator, the Federal Housing Finance Board.
As a result, no dividends are currently being received from the Federal Home
Loan Bank of Chicago.

Loan
Maturities.The
following table sets forth scheduled loan repayments on agricultural,
commercial and real estate construction loans at December 31, 2007:

|                         |  |                       |         |                                     |   |                      |  |             |       |       |   |       |  |   |         | 
|------------------------ |  | --------------------- | ------- | ----------------------------------- | - | -------------------- |  | ----------- | ----- | ----- | - | ----- |  | - | ------- | 
|                         |  | Due within 
 one year |         | Due after one but within five years |   | Due after five years |  | Non-accrual |       | Total |  
|                         |  |                       |         |                                     |   |                      |  |             |       |       |  
|Agricultural             |  | $                     | 76,806  |                                     | $ | 8,098                |  | $           | 667   |       | $ | -0-   |  | $ | 85,571  | 
|Commercial               |  |                       | 126,705 |                                     |   | 35,796               |  |             | 1,912 |       |   | 4,523 |  |   | 168,936 | 
|Real Estate-Construction |  |                       | 45,193  |                                     |   | 1,492                |  |             | 189   |       |   | -0-   |  |   | 46,874  | 
|                         |  |                       |         |                                     |   |                      |  |             |       |       |   |       |  |   |         | 
|Total                    |  | $                     | 248,704 |                                     | $ | 45,386               |  | $           | 2,768 |       | $ | 4,523 |  | $ | 301,381 | 
|                         |  |                       |         |                                     |   |                      |  |             |       |       |   |       |  |   |         | 

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, 2007:

|                    |  |            |        |               |   |       |  |   |        | 
|------------------- |  | ---------- | ------ | ------------- | - | ----- |  | - | ------ | 
|                    |  | Fixed rate |        | Variable rate |   | Total | 
|                    |  |            |        |               |   |       | 
|Due
 after one year |  | $          | 38,326 |               | $ | 9,828 |  | $ | 48,154 | 

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

|                     |  |                   |   |                                                    |  |                   |       |                                                      |  |                   |   |                                                       |  |                   |       |                                                       |  |                   |   |                                                       |  |  |       |   |  |  |   |       |  |  |       |   |  |  |   |       |  |  |       |   | 
|-------------------- |  | ----------------- | - | -------------------------------------------------- |  | ----------------- | ----- | ---------------------------------------------------- |  | ----------------- | - | ----------------------------------------------------- |  | ----------------- | ----- | ----------------------------------------------------- |  | ----------------- | - | ----------------------------------------------------- |  |  | ----- | - |  |  | - | ----- |  |  | ----- | - |  |  | - | ----- |  |  | ----- | - | 
|                     |  | December 31       |  
|                     |  |                   |  
|                     |  | 2007              |   | 2006                                               |  | 2005              |       | 2004                                                 |  | 2003              |  
|                     |  | Allowance
 amount |   | Percent of loans in each category
 to total
 loans |  | Allowance
 amount |       | Percent
 of loans
 in each
 category
 to total loans |  | Allowance
 amount |   | Percent
 of loans
 in each
 category
 to total
 loans |  | Allowance
 amount |       | Percent
 of loans
 in each
 category
 to total
 loans |  | Allowance
 amount |   | Percent
 of loans
 in each
 category
 to total
 loans | 
|                     |  |                   |   |                                                    |  |                   |       |                                                      |  |                   |   |                                                       |  |                   |       |                                                       |  |                   |   |                                                       | 
|Agricultural         |  |                   | $ | 580                                                |  |                   | 11.8  | %                                                    |  |                   | $ | 830                                                   |  |                   | 13.3  | %                                                     |  |                   | $ | 1,011                                                 |  |  | 12.7  | % |  |  | $ | 656   |  |  | 10.3  | % |  |  | $ | 687   |  |  | 11.2  | % | 
|Commercial           |  |                   |   | 1,188                                              |  |                   | 23.4  |                                                      |  |                   |   | 1,022                                                 |  |                   | 21.4  |                                                       |  |                   |   | 890                                                   |  |  | 19.7  |   |  |  |   | 770   |  |  | 23.5  |   |  |  |   | 692   |  |  | 21.1  |   | 
|Real estate-mortgage |  |                   |   | 743                                                |  |                   | 54.8  |                                                      |  |                   |   | 490                                                   |  |                   | 56.4  |                                                       |  |                   |   | 420                                                   |  |  | 59.3  |   |  |  |   | 193   |  |  | 58.2  |   |  |  |   | 178   |  |  | 58.9  |   | 
|Installment          |  |                   |   | 486                                                |  |                   | 10.0  |                                                      |  |                   |   | 540                                                   |  |                   | 8.9   |                                                       |  |                   |   | 484                                                   |  |  | 8.3   |   |  |  |   | 359   |  |  | 8.0   |   |  |  |   | 466   |  |  | 8.8   |   | 
|Unallocated          |  |                   |   | 251                                                |  |                   | n/a   |                                                      |  |                   |   | 171                                                   |  |                   | n/a   |                                                       |  |                   |   | 304                                                   |  |  | n/a   |   |  |  |   | 546   |  |  | n/a   |   |  |  |   | 227   |  |  | n/a   |   | 
|                     |  |                   |   |                                                    |  |                   |       |                                                      |  |                   |   |                                                       |  |                   |       |                                                       |  |                   |   |                                                       |  |  |       |   |  |  |   |       |  |  |       |   |  |  |   |       |  |  |       |   | 
|Total                |  |                   | $ | 3,248                                              |  |                   | 100.0 | %                                                    |  |                   | $ | 3,053                                                 |  |                   | 100.0 | %                                                     |  |                   | $ | 3,109                                                 |  |  | 100.0 | % |  |  | $ | 2,524 |  |  | 100.0 | % |  |  | $ | 2,250 |  |  | 100.0 | % | 

42

---

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

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

|                                                      |  |                              |        |         |   |         |  |         |        |  |   |        | 
|----------------------------------------------------- |  | ---------------------------- | ------ | ------- | - | ------- |  | ------- | ------ |  | - | ------ | 
|                                                      |  | Year Ended December 31, 2007 |       
|                                                      |  |                              |       
|                                                      |  | 1st Qtr                      |        | 2nd Qtr |   | 3rd Qtr |  | 4th Qtr |       
|                                                     
|Interest
  income                                     |  | $                            | 14,817 |         | $ | 15,234  |  | $       | 15,632 |  | $ | 15,876 | 
|Interest
  expense                                    |  |                              | 8,425  |         |   | 8,647   |  |         | 8,782  |  |   | 8,651  | 
|                                                      |  |                              |        |         |   |         |  |         |        |  |   |        | 
|Net
  interest income                                 |  |                              | 6,392  |         |   | 6,587   |  |         | 6,850  |  |   | 7,225  | 
|Provision
  for loan losses                           |  |                              | 185    |         |   | 115     |  |         | 250    |  |   | 90     | 
|                                                      |  |                              |        |         |   |         |  |         |        |  |   |        | 
|Net interest income after provision for loan
  losses |  |                              | 6,207  |         |   | 6,472   |  |         | 6,600  |  |   | 7,135  | 
|Non-interest income                                   |  |                              | 2,645  |         |   | 2,722   |  |         | 2,935  |  |   | 2,996  | 
|Non-interest expense                                  |  |                              | 7,272  |         |   | 7,394   |  |         | 7,387  |  |   | 7,512  | 
|                                                      |  |                              |        |         |   |         |  |         |        |  |   |        | 
|Income
  before income taxes                          |  |                              | 1,579  |         |   | 1,800   |  |         | 2,148  |  |   | 2,619  | 
|Income
  tax expense                                  |  |                              | 150    |         |   | 247     |  |         | 408    |  |   | 571    | 
|                                                      |  |                              |        |         |   |         |  |         |        |  |   |        | 
|Net income                                            |  | $                            | 1,429  |         | $ | 1,553   |  | $       | 1,740  |  | $ | 2,048  | 
|                                                      |  |                              |        |         |   |         |  |         |        |  |   |        | 
|Earnings
  per share:                                 |  |                              |        |         |   |         |  |         |        |  |   |        | 
|Basic                                                 |  | $                            | 0.43   |         | $ | 0.47    |  | $       | 0.53   |  | $ | 0.62   | 
|Diluted                                               |  | $                            | 0.42   |         | $ | 0.46    |  | $       | 0.52   |  | $ | 0.62   | 
|Cash
  dividends declared per share                   |  | $                            | 0.27   |         | $ | 0.27    |  | $       | 0.27   |  | $ | 0.27   | 

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

43

---

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

|                                                                                    |  |                                 |           |   |   |           |   |   |         |   |   |         |   |   |         |  
|----------------------------------------------------------------------------------- |  | ------------------------------- | --------- | - | - | --------- | - | - | ------- | - | - | ------- | - | - | ------- | -
|                                                                                    |  | For the Years Ended December 31 |          
|                                                                                    |  |                                 |          
|                                                                                    |  |                                 | 2007      |   |   | 2006      |   |   | 2005    |   |   | 2004    |   |   | 2003    |  
|                                                                                    |  |                                 |           |   |   |           |   |   |         |   |   |         |   |   |         |  
|Summary
 of Income                                                                  |  |                                 |           |   |   |           |   |   |         |   |   |         |   |   |         |  
|Inetrest income                                                                     |  | $                               | 61,559    |   | $ | 53,526    |   | $ | 39,971  |   | $ | 29,719  |   | $ | 29,394  |  
|Interest expense                                                                    |  |                                 | 34,505    |   |   | 27,630    |   |   | 15,726  |   |   | 9,070   |   |   | 10,511  |  
|Net interest income                                                                 |  |                                 | 27,054    |   |   | 25,896    |   |   | 24,245  |   |   | 20,649  |   |   | 18,883  |  
|Provision for loan losses                                                           |  |                                 | 640       |   |   | 285       |   |   | -0-     |   |   | 375     |   |   | 460     |  
|Non-interest income                                                                 |  |                                 | 11,298    |   |   | 10,245    |   |   | 8,840   |   |   | 8,315   |   |   | 9,408   |  
|Non-interest expense                                                                |  |                                 | 29,565    |   |   | 28,335    |   |   | 23,253  |   |   | 19,503  |   |   | 18,707  |  
|Income before income taxes                                                          |  |                                 | 8,147     |   |   | 7,521     |   |   | 9,832   |   |   | 9,086   |   |   | 9,124   |  
|Income tax expense                                                                  |  |                                 | 1,377     |   |   | 1,033     |   |   | 2,258   |   |   | 2,214   |   |   | 2,521   |  
|Net income                                                                          |  |                                 | 6,770     |   |   | 6,488     |   |   | 7,574   |   |   | 6,872   |   |   | 6,603   |  
|                                                                                    |  |                                 |           |   |   |           |   |   |         |   |   |         |   |   |         |  
|Per Share
 Data                                                                     |  |                                 |           |   |   |           |   |   |         |   |   |         |   |   |         |  
|Basic earnings per share                                                            |  | $                               | 2.04      |   | $ | 1.93      |   | $ | 2.39    |   | $ | 2.22    |   | $ | 2.08    |  
|Diluted earnings per share                                                          |  |                                 | 2.03      |   |   | 1.91      |   |   | 2.37    |   |   | 2.21    |   |   | 2.05    |  
|Book value (at end of period)                                                       |  |                                 | 20.74     |   |   | 19.50     |   |   | 18.87   |   |   | 17.13   |   |   | 16.29   |  
|Cash dividends declared                                                             |  |                                 | 1.08      |   |   | 1.05      |   |   | 1.03    |   |   | 0.96    |   |   | 0.89    |  
|Dividend payout ratio                                                               |  |                                 | 53.1      | % |   | 54.6      | % |   | 44.0    | % |   | 43.2    | % |   | 42.8    | %
|                                                                                    |  |                                 |           |   |   |           |   |   |         |   |   |         |   |   |         |  
|Selected
 Balances (at end of year)                                                 |  |                                 |           |   |   |           |   |   |         |   |   |         |   |   |         |  
|Total assets                                                                        |  | $                               | 1,080,702 |   | $ | 1,031,959 |   | $ | 945,263 |   | $ | 655,738 |   | $ | 609,737 |  
|Earning assets                                                                      |  |                                 | 949,534   |   |   | 904,504   |   |   | 852,286 |   |   | 616,089 |   |   | 571,965 |  
|Investments                                                                         |  |                                 | 232,673   |   |   | 267,916   |   |   | 251,486 |   |   | 188,809 |   |   | 169,892 |  
|Gross loans                                                                         |  |                                 | 723,575   |   |   | 633,984   |   |   | 584,311 |   |   | 411,345 |   |   | 385,376 |  
|Allowance for loan losses                                                           |  |                                 | 3,248     |   |   | 3,053     |   |   | 3,109   |   |   | 2,524   |   |   | 2,250   |  
|Deposits                                                                            |  |                                 | 891,407   |   |   | 881,899   |   |   | 798,558 |   |   | 573,561 |   |   | 537,827 |  
|Borrowings                                                                          |  |                                 | 109,089   |   |   | 74,147    |   |   | 72,575  |   |   | 25,535  |   |   | 16,161  |  
|Stockholders equity                                                                |  |                                 | 68,607    |   |   | 65,355    |   |   | 63,144  |   |   | 52,369  |   |   | 50,875  |  
|                                                                                    |  |                                 |           |   |   |           |   |   |         |   |   |         |   |   |         |  
|Selected
 Financial Ratios                                                          |  |                                 |           |   |   |           |   |   |         |   |   |         |   |   |         |  
|Net income to average stockholders
equity                                          |  |                                 | 10.32     | % |   | 10.07     | % |   | 13.43   | % |   | 13.46   | % |   | 13.01   | %
|Net income to average assets                                                        |  |                                 | 0.65      |   |   | 0.68      |   |   | 0.97    |   |   | 1.11    |   |   | 1.10    |  
|Average stockholders equity to average
assets                                      |  |                                 | 6.33      |   |   | 6.70      |   |   | 7.21    |   |   | 8.24    |   |   | 8.49    |  
|Average earning assets to average assets                                            |  |                                 | 88.61     |   |   | 88.73     |   |   | 90.21   |   |   | 91.37   |   |   | 91.56   |  
|Non-performing loans to total loans at end of year
(net of unearned
 interest)      |  |                                 | 1.03      |   |   | 0.62      |   |   | 0.66    |   |   | 0.08    |   |   | 0.25    |  
|Tier 1 capital to average adjusted assets                                           |  |                                 | 6.33      |   |   | 6.67      |   |   | 7.83    |   |   | 7.88    |   |   | 7.70    |  
|Risk-based capital to risk-adjusted assets                                          |  |                                 | 8.44      |   |   | 9.18      |   |   | 9.76    |   |   | 11.49   |   |   | 11.22   |  
|Net loans charged-off to average loans                                              |  |                                 | 0.07      |   |   | 0.06      |   |   | 0.03    |   |   | 0.03    |   |   | 0.24    |  
|Allowance for loan losses to total loans at end of
year (net of
 unearned interest) |  |                                 | 0.45      |   |   | 0.49      |   |   | 0.53    |   |   | 0.62    |   |   | 0.59    |  
|Average interest-bearing deposits to average
deposits                               |  |                                 | 89.01     |   |   | 88.27     |   |   | 88.29   |   |   | 88.10   |   |   | 88.96   |  
|Average non-interest-bearing deposits to average
deposits                           |  |                                 | 10.99     |   |   | 11.73     |   |   | 11.71   |   |   | 11.90   |   |   | 11.04   |  

44

---