10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 2007

Commission File Number 0-20050

PRINCETON NATIONAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware	36-32110283
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
606 South Main Street
Princeton, Illinois	61356-2080
(Address of principal executive offices)	(Zip Code)

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

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

Title of each class	Name of each exchange on which registered
Common Stock	The Nasdaq Stock Market
Preferred Share Purchase Rights

Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known season issuer, as defined in Rule 405 of the Securities Act.				Yes	o	No	x
Indicate by check mark if the registrant is not required to file reports pursuant to Sections 13 or 15(d) of the Act.				Yes	o	No	x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.				Yes	x	No	o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.					o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
	Large accelerated filer	o	Accelerated filer		x
	Non-accelerated filer	o	Smaller reporting company		o
	(do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).				Yes	o	No	x
At February 29, 2008, 3,303,447 shares of Common Stock, $5.00 Par Value, were outstanding, and the aggregate market value of the common stock (based upon the closing representative bid price of the common stock on June 30, 2007 of $27.60, the last business day of the Registrant’s most recently completed second quarter, as reported by NASDAQ) held by nonaffiliates was approximately $91,175,137.
Determination of stock ownership by nonaffiliates was made solely for the purpose of responding to this requirement and the registrant is not bound by this determination for any other purpose.
Portions of the following documents are incorporated by reference:
2008 Notice and Proxy Statement for the Annual Meeting of Stockholders April 29, 2008 (the “Proxy Statement”) - Part III and portions of the Corporation’s 2007 Annual Report (the “Annual Report”) - Part II

Page 1 of 76 pages

PART I

Item 1. Business

          Princeton National Bancorp, Inc. (“PNBC”, the “Corporation”, or the “Company”) is a single-bank holding company which operates in one business segment conducting a full-service commercial banking, trust and investment brokerage business through its subsidiary bank, Citizens First National Bank (“Citizens Bank”, “the Bank”, or the “subsidiary bank”). PNBC was incorporated as a Delaware corporation in 1981 in contemplation of the acquisition of all of the outstanding common stock of Citizens Bank and other future acquisitions. At December 31, 2007, the Corporation had consolidated total assets of $1,080,702,000 and stockholders’ equity of $68,607,000.

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

          Corporate policy, strategy and goals are established by the Board of Directors of PNBC. Pursuant to PNBC’s holding company philosophy, operational and administrative policies for the Bank are also established at the holding company level. Within this framework, the Bank focuses on providing personalized services and quality products to its customers to meet the needs of the communities in which its offices are located. In 2007, the majority of the directors of PNBC also served as the directors of Citizens Bank, which further assists PNBC to directly implement its policies at Citizens Bank.

Acquisition and Expansion Strategy

          PNBC seeks to diversify both its market area and asset base and increase profitability through acquisitions and expansion. PNBC’s goal, as reflected by its acquisition policy, is to expand through the acquisition of established financial service organizations (primarily commercial banks to the extent suitable candidates may be identified) and by expanding into potential high-growth areas. In integrating acquisitions, PNBC focuses on, among other actions, implementing the policies established at Citizens Bank, improving asset quality, the net interest margin, and encouraging community involvement. In 2007, PNBC acquired the Plainfield office of HomeStar Bank and in 2005, PNBC acquired Somonauk FSB Bancorp, Inc. and its subsidiary, Farmers State Bank, with branches in Somonauk, Millbrook, Newark and Sandwich (subsequently merged into Citizens Bank).

          PNBC will also consider establishing branch facilities as a means of expanding its presence into new market areas. PNBC opened new branch facilities in the Peru/LaSalle/Oglesby area in 1994, in Minooka in 1994, Hampshire in 1995, Henry in 1999, Huntley in 2001, Plano in 2005 and Aurora in 2006. Several of these locations, along with the Plainfield office, are located in rapidly growing communities that will provide significant loan and deposit growth opportunities, as well as increased revenue potential.

Citizens First National Bank

          Citizens Bank was organized in 1865 as a national banking association under the National Bank Act. Currently in its one hundred and forty-third year, Citizens Bank has twenty-one offices in seventeen different communities in north central Illinois: Aurora, DePue, Genoa, Hampshire, Henry, Huntley, Millbrook, Minooka, Newark, Oglesby, Peru, Plainfield, Plano, Princeton, Sandwich, Somonauk, and Spring Valley.

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

Commercial, Real Estate, and Agricultural Lending

          Citizens Bank’s commercial loan department provides secured and to a much lesser extent unsecured loans, including real estate loans, to companies and individuals for business purposes and to governmental units within the Bank’s market area. As of December 31, 2007, Citizens Bank had commercial loans of $168.9 million (23.4% of the Bank’s total loan portfolio) and commercial real estate loans of $160.1 million (22.2% of the Bank’s total loan portfolio). Citizens Bank does not have a concentration of commercial loans in any single industry or business, except for loans to the agricultural industry as more fully disclosed below.

          Agricultural and agricultural real estate loans are primarily related to ventures near our branch locations. As of December 31, 2007, Citizens Bank had agricultural loans of $85.6 million and agricultural real estate loans of $61.2 million, which represent approximately 11.8% and 8.5%, respectively, of the Bank’s total loan portfolio.

          Agricultural loans, many of which are secured by crops, machinery, and real estate, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery. The subsidiary bank’s agricultural loan department has the equivalent of five lending officers and works closely with all agricultural customers, including companies and individual farmers, assisting in the preparation of budgets and cash flow projections for the ensuing crop year. These budgets and cash flow projections are monitored closely by the Bank during the year. In addition, Citizens Bank works closely with governmental agencies, including the Farm Service Agency, to assist agricultural customers in obtaining credit enhancement products, such as loan guaranties.

          In accordance with its loan policy, Citizens Bank maintains a diversified loan portfolio. As part of its loan policy and community banking approach, Citizens Bank does not buy loan syndications with other lending institutions. Citizens Bank does buy and sell loan participations with other community banks. In connection with its credit relationships, Citizens Bank encourages commercial and agricultural borrowers to maintain deposit accounts at the Bank.

Personal Financial Services

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

          One of the strengths of Citizens Bank is the stability of its retail deposit base. This stability is due primarily to the Bank’s service oriented competitive strategy and the economically diverse populations of the counties encompassing the twenty-one banking offices. These locations provide convenience for customers and visibility for Citizens Bank. A variety of marketing strategies are used to attract and retain stable depositors, the most important of which is the officer call program. Nearly all officers of the Bank call on customers and potential customers of the Bank to maintain and develop relationships.

          Citizens Bank is active in consumer and mortgage lending with approximately $127.7 million in home mortgage loans (17.7 % of the Bank’s total loan portfolio) and $72.3 million in consumer installment loans (10.0% of the Bank’s total loan portfolio) as of December 31, 2007. To better serve its retail customers, Citizens Bank is active in the secondary residential mortgage market. As a matter of policy, Citizens Bank does not hold, in portfolio, long term, fixed rate, single-family home mortgage loans, however, the servicing of such loans is maintained. As of December 31, 2007, Citizens Bank had $268.4 million of loans that have been sold, but servicing has been maintained. Management believes customers receive a higher level of quality service with this arrangement.

          Citizens Bank maintains twenty-five automated teller machines. The Bank is a member of ACCEL/Exchange and NYCE as well as other major nationwide networks such as, CIRRUS and PLUS. To enhance customer service and convenience, Citizens Bank offers ATM & Debit Cards, which can be used anywhere VISA is accepted, and is viewed as a tremendous benefit to our customers. Citizens Bank also offers an entire host of Internet Banking services including Bill Pay as an additional and convenient alternative delivery mechanism for its product and service line.

          Citizens Bank continues to maintain an intensive sales training program, which includes team coaching, setting goals, measuring results, and reward recognition. In 2007, Citizens Bank continues to focus on making quality product referrals and sales.

Citizens Financial Advisors (“CFA”)

          CFA Fiduciary Services took a significant competitive stride forward in 2007 with its affiliation with Matrix Settlement and Clearing Services of Denver, Colorado. Matrix will provide a platform to expand the mutual funds from the current two prominent fund families, that of Federated and Accessor Funds, to virtually all funds in the entire industry. This “open architecture” offering will allow Fiduciary Services to give its clients a choice of over 36,000 various mutual funds and share classes.

          Fiduciary Services continued to transfer additional duties of the various 401(K) client businesses to BPA-Harbridge, Inc. (“BPA”) in 2007. These transfers allowed for the record keeping responsibilities of nearly $11 million to be professionally accounted for by BPA. These transferees allowed Fiduciary Services additional time to obtain new customers while retaining all oversight and control of the accounts.

          During the year, Fiduciary Services also hired two new Relationship Mangers, both of which are highly trained with many years of experience. One of the Relationship Mangers is an Illinois licensed attorney while the other possesses an MBA from Northwestern University. With the addition of these two new Relationship Managers, Fiduciary Services has the most competent staff in its history and is poised for continued future growth.

          Fiduciary Services completed the year with a 2.7% increase in total Income to $1,507,000. The increase was more significant since it is compared to 2006, which contained an additional $83,000 in farm management operations that were sold off during 2006.

          CFA Investment Services (“Brokerage”) experienced excellent results through the continued entrenchment of the Client Advisors put into service at their particular branches during the previous year and the continued emphasis of broad needs-based client consultations. This emphasis allowed the Brokerage program to increase the percentage of client dollars invested in a wider variety of products such as separately managed accounts, stocks, bonds, and mutual funds and away from traditional high-client cost products such as fixed and variable annuities. Brokerage, after a specific concentration on the support of customer needs, increased their year over year total income by an impressive 24.9% to an all-time high of $920,000.

Competition

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

Supervision and Regulation

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

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

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

          In November, 1999, the Gramm-Leach-Bliley Act (“GLB Act”) was signed into law. Under the GLB Act, bank holding companies that meet certain standards and elect to become “financial holding companies” are permitted to engage in a wider range of activities than those permitted for bank holding companies, including securities and insurance activities. Specifically, a bank holding company that elects to become a financial holding company may engage in any activity that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines is (i) financial in nature or incidental thereto, or (ii) complementary to any such financial-in-nature activity, provided that such complementary activity does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. A bank holding company may elect to become a financial holding company only if each of its depository institution subsidiaries is well-capitalized, well-managed, and has a Community Reinvestment Act rating of “satisfactory” or better at their most recent examination.

          The GLB Act specifies many activities that are financial in nature, including lending, exchanging, transferring, investing for others, or safeguarding money or securities; underwriting and selling insurance; providing financial, investment, or economic advisory services; underwriting, dealing in, or making a market in securities; and those activities currently permitted for bank holding companies that are so closely related to banking or managing or controlling banks, as to be a proper incident thereto.

          The GLB Act changed federal laws to facilitate affiliation between banks and entities engaged in securities and insurance activities. The law also established a system of functional regulation under which banking activities, securities activities, and insurance activities conducted by financial holding companies and their subsidiaries and affiliates will be separately regulated by banking, securities, and insurance regulators, respectively.

          PNBC is a legal entity separate and distinct from the Bank. The major source of PNBC’s revenue is dividends received from the Bank. The right of PNBC to participate as a stockholder in any distribution of assets of the Bank upon its liquidation or reorganization or otherwise is subject to the prior claims of creditors of the Bank. The Bank is subject to claims by creditors for long-term and short-term debt obligations, including obligations for federal funds purchased and securities sold under repurchase agreements, as well as deposit liabilities. The Bank is subject to regulation and examinations by the Office of Comptroller of the Currency (the “OCC”).

          The Bank may declare dividends out of undivided profits, except that until the surplus fund of the Bank is equal to its common capital, no dividend can be declared until one-tenth of the Bank’s net income for the applicable period has been carried to the surplus fund. The Bank, however, cannot declare or pay a dividend, if after making the dividend, the Bank would be undercapitalized. In addition, prior approval of the OCC is required if dividends declared by the Bank in any calendar year will exceed its net income for that year combined with its retained net income for the preceding two years. Under national banking regulations and capital guidelines, as of December 31, 2007, the Bank was authorized to distribute approximately $9,009,000 as dividends without prior approval from the OCC, based on net income for 2007 and retained net income for 2005 and 2006. As of January 1, 2008, retained net income for the prior two years was approximately $7,556,000 and during 2008 the Bank may pay dividends without prior approval from the OCC equal to that amount plus any 2008 net income. Future payments of dividends by the Bank will be dependent on individual regulatory capital requirements and levels of profitability. The ability of the Bank to pay dividends may be further restricted as a result of regulatory policies and guidelines relating to dividend payments and capital adequacy.

          Federal laws limit certain transactions between the Bank and its affiliates, including PNBC. Such transactions include loans or extensions of credit by the Bank to PNBC, the purchase of assets or securities of PNBC, the acceptance of PNBC’s securities as collateral for loans, and the issuance of a guaranty, acceptance or letter of credit on behalf of PNBC. Transactions of this kind are limited to 10% of the Bank’s capital and surplus for transactions with one affiliate, and 20% of the Bank’s capital and surplus for transactions with all affiliates. Such transactions are also subject to certain collateral requirements. These transactions, as well as other transactions between the Bank and PNBC, must also be on terms substantially the same as, or at least as favorable as, those prevailing at the time for comparable transactions with nonaffiliated companies or, in the absence of comparable transactions, on terms, or under circumstances, including credit standards, that would be offered to, or would apply to, nonaffiliated companies.

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

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

          Under the risk-adjusted capital standards, a minimum ratio of qualifying total capital to risk-weighted assets of 8% and of Tier l Capital to risk-weighted assets of 4% is required. The FRB and OCC also have adopted a minimum leverage ratio of Tier 1 Capital to total assets of 3% for banks rated “1” under the Uniform Financial Institutions Rating System or bank holding companies rated “1” under the rating system of bank holding companies. All other banks and bank holding companies must maintain a leverage ratio of 4%. In addition, all banks and bank holding companies are expected to have capital commensurate with the level and nature of all risks to which they are exposed.

          At December 31, 2007, PNBC had a total capital to risk-weighted assets ratio of 8.44%, a Tier 1 capital to risk-based assets ratio of 8.03%, and a leverage ratio of 6.33%. PNBC is classified as adequately capitalized for the first ratio and well-capitalized for the last two ratios. At December 31, 2007, the Bank had a total capital to risk-weighted assets ratio of 10.07%, a Tier 1 capital to risk-weighted assets ratio of 9.66%, and a leverage ratio of 7.61%. The Bank is classified as well-capitalized for all three ratios.

          Currently, the Bank’s deposits are insured by the Deposit Insurance Fund, which is administered by the FDIC. The Deposit Insurance Fund was created by the Federal Deposit Insurance Reform Act of 2005 (the “FDIRA”), which merged the Bank Insurance Fund (“BIF”) with the Savings Association Insurance Fund (“SAIF”) during 2006.

          Following the adoption of the FDIRA, the FDIC has the opportunity, through its rulemaking authority, to better price deposit insurance for risk than was previously authorized. The FDIC adopted regulations effective January 1, 2007 that create a system of risk-based assessments. Under the regulations there are four risk categories, and each insured institution will be assigned to a risk category based on capital levels and supervisory ratings. Well-capitalized institutions with CAMELS composite ratings of 1 or 2 will be placed in Risk Category I while other institutions will be placed in Risk Categories II, III or IV depending on their capital levels and CAMELS composite ratings. Current assessment rates established by the FDIC provide that the highest rated institutions, those in Risk Category I, will pay premiums of between .05% and .07% of deposits and the lowest rated institutions, those in Risk Category IV, will pay premiums of .43% of deposits. The assessment rates may be changed by the FDIC as necessary to maintain the insurance fund at the reserve ratio designated by the FDIC, which currently is 1.25% of insured deposits. The FDIC may set the reserve ratio annually at between 1.15% and 1.50% of insured deposits. Deposit insurance assessments are collected for a quarter at the end of the next quarter. Assessments are based on deposit balances at the end of the quarter, except for institutions with $1 billion or more in assets and institutions that become insured on or after January 1, 2007 will have their assessment base determined using average daily balances of insured deposits.

          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 $647,000. 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 $381,000 against the premium expense, leaving a remaining credit of $266,000 to offset future premium expense.

          All FDIC-insured depository institutions must pay a quarterly assessment to provide funds for the payment of interest on bonds issued by the Financing Corporation, a federal corporation chartered under the authority of the Federal Housing Finance Board. The bonds (commonly referred to as FICO bonds) were issued to capitalize the Federal Savings and Loan Insurance Corporation.

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

          Banks are permitted to merge with one another across state lines and thereby create a main bank with branches in separate states. After establishing branches in a state through an interstate merger transaction, a bank can establish and acquire additional branches at any location in the state where any bank involved in the merger could have established or acquired branches under applicable federal or state law. In addition, the laws of some states, including Illinois, permit a bank with its main office in another state to establish de novo branches or to acquire a branch of another bank without acquiring the entire bank. Therefore, if the laws of another state so permit, the Bank could establish a de novo branch or acquire a branch of a bank in such state, even if the laws of such state require a reciprocal provision.

          PNBC does not have current plans to acquire banking organizations located outside the state of Illinois.

          National banks may establish operating subsidiaries to engage in activities in which the bank could engage directly.

          National banks are also authorized by the GLB Act to engage, through “financial subsidiaries,” in activities that are permissible for financial holding companies and activities that the Secretary of the Treasury, in consultation with the FRB, determines are financial in nature or incidental to any such financial activity, except (i) insurance underwriting, (ii) real estate development or real estate investment activities (unless otherwise permitted by law), (iii) insurance company portfolio investments, and (iv) merchant banking. A national bank’s authority to invest in a financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank be well-managed and well-capitalized (after deducting from capital the bank’s outstanding investment in financial subsidiaries).

          The GLB Act affected many other changes to federal law applicable to PNBC and the Bank. One of these changes was a requirement that financial institutions take steps to protect customers’ “nonpublic personal information.”

Employees

          PNBC presently has no employees. However, certain of the employees and executive officers of Citizens Bank provide their services to PNBC. An annual fee for these services is paid by PNBC to Citizens Bank. This fee is based upon an average of the number of hours worked during the year.

          As of December 31, 2007, Citizens Bank employed 272 full-time and 79 part-time employees. The Bank offers a variety of employee benefits. Citizens Bank employees are not represented by a union or a collective bargaining agreement, and employee relations are considered to be excellent.

          Citizens Bank believes one of its strengths is its ability to attract and retain experienced and well-trained personnel who are knowledgeable of the market areas in which it operates. Management believes that PNBC generally has an easier time attracting and retaining quality employees than other banks in North Central Illinois. This is due primarily to its size and management style, which affords greater opportunities to employees for direct participation and development of managerial and banking skills.

          In order to implement PNBC’s community banking philosophy and to promote itself as a community oriented organization, the Bank has a formal officer call program. Nearly every officer of the Bank calls on existing or potential customers and is expected to become actively involved in leadership positions in community organizations. As of December 31, 2007, employees of the Bank participated in approximately 371 community organizations, providing over 13,600 hours of community service.

Available Information

          Our Internet address is www.citizens1st.com. There we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our SEC reports can be accessed through the investor relations section of our Web site. The information found on our Web site is not part of this or any other report we file with or furnish to the SEC.

          You may also read and copy materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site (www.sec.gov) that contains reports, proxy statements and other information that we electronically file with the SEC.

Item 1A. Risk Factors

          An investment in PNBC’s common stock is subject to risks inherent to the Corporation’s business. An investor should carefully consider the risks described below and information contained in this Annual Report on Form 10-K together with all of the other information incorporated by reference before deciding to purchase PNBC common stock. The risks and uncertainties described below are not the only ones facing the Corporation. Additional risks and uncertainties that management is not aware of or focused on or deems immaterial may arise or become material in the future and affect PNBC’s business. If any of these risks actually occur, PNBC’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of PNBC common stock could decrease significantly.

PNBC’s concentration of agricultural loans is subject to risks that could adversely affect earnings.

          PNBC’s agricultural and agricultural real estate loan portfolio total $146.7 million at December 31, 2007, comprising 20.3% of total loans. The primary risks associated with agricultural loans are weather and borrower’s management. In the event of catastrophic weather conditions, such as severe drought or flooding, these loans would represent a higher risk due to poor crop sales and reduced cash flow that could impact the borrowers’ ability to repay the loan on a timely basis.

Changes in interest rates could adversely impact the financial condition and results of operations.

          PNBC’s ability to make a profit, like that of most financial institutions, substantially depends upon its net interest income. However, certain assets and liabilities may react differently to changes in market interest rates. In a period of changing rates, interest expense may increase at different rates than the interest earned. Accordingly, changes in interest rates could decrease net interest income.

The allowance for loan losses may not be sufficient to cover actual loan losses decreasing earnings.

          In determining the appropriate level of allowance for loan losses, management considers, among other things, the overall composition of the loan portfolio, types of loans, past loss experience, loan delinquencies, potential substandard and doubtful loans, underlying collateral, and other factors that, in management’s best judgment, deserve evaluation. Although management monitors the allowance monthly and considers it adequate to absorb probable losses at December 31, 2007, if any of the assumptions are incorrect, the allowance may not be sufficient to cover future loan losses. Future adjustments may be necessary to allow for different economic conditions or adverse developments in the loan portfolio. Consequently, a problem with one or more loans could require the Corporation to significantly increase the level of its provision for loan losses resulting in a reduction of earnings.

The Internal Controls of PNBC may not be effective.

          Management reviews and tests on a quarterly basis its system of internal controls, disclosure controls and procedures, and corporate governance polices and procedures. Any system of internal controls, however well designed, is based on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are actually being met. Any failure or circumvention of these controls could have a material adverse effect on the Corporation’s financial condition and results of operations.

There is competition within the PNBC market areas which may limit growth and profitability.

          Because the banking business is highly competitive, PNBC faces significant competition both in originating loans and attracting deposits. Competition can not only be affected by the pricing of loans and deposits, but also by the variety of products offered. The ability of the Corporation to continue to grow in the markets served while effectively managing interest rate risk is contingent upon being able to operate in this competitive environment, which ultimately affects the Corporation’s profitability.

The success of PNBC is dependent on hiring and retaining key personnel.

          PNBC’s performance is largely dependent on the talents and efforts of highly skilled individuals. The Corporation relies on key personnel to manage and operate its business and the loss of any of these individuals may adversely affect the Corporation’s ability to maintain and/or manage the business effectively. This could have a material adverse effect on the Corporation’s financial condition and results of operations.

PNBC operates in a highly regulated environment.

          PNBC is subject to extensive regulation, supervision and examination. Any changes in the regulations or applicable laws and the failure of the Corporation to comply with any of the regulations and laws could have a material adverse effect on the Corporation’s financial condition and results of operations.

Item 1B. Unresolved Staff Comments

          None.

Item 2. Properties

          PNBC’s headquarters and Citizens Bank’s principal offices are located at 606 South Main Street, Princeton, Illinois. Also located at this address is an annex building completed in 1990. The two buildings at this location are owned by Citizens Bank and contain approximately 36,000 square feet of space, all of which is occupied by PNBC and Citizens Bank. Citizens Bank also has two drive-up facilities in Princeton and branch offices in Aurora, DePue, Genoa, Hampshire, Henry, Huntley, Millbrook, Minooka, Newark, Oglesby, Peru, Plainfield, Plano, Sandwich, Somonauk and Spring Valley. Citizens Bank is the owner of each of these facilities. None of the facilities owned by the Bank are subject to a mortgage. Additionally, the mortgage banking department of the Bank is located in Spring Valley in a separate location from the branch office. This location is not owned by the Bank and is rented by lease agreement. For additional information regarding these properties, see Footnote 6 of Item 8 of this report.

Item 3. Legal Proceedings

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

Item 4. Submission of Matters to a Vote of Security Holders

          No matters were submitted to a vote of the security holders during the fourth quarter of 2007.

Supplemental Item - Executive Officers

          The following table sets forth information regarding the executive officers:

Name	Age	Position
Tony J. Sorcic	54	President & Chief Executive Officer
James B. Miller	52	Executive Vice President & Commercial Banking Officer
Todd D. Fanning	45	Senior Vice President & Chief Financial Officer
Jacqualyn L. Karlosky	47	Senior Vice President – Consumer Banking
Patrick Murray	55	Senior Vice President – Citizens Financial Advisors

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

          James B. Miller joined Citizens Bank in 1979 as an agricultural loan officer and has been the Executive Vice President of PNBC since 1996. Mr. Miller currently is the Executive Vice President and Commercial Banking Manager of Citizens Bank.

          Todd D. Fanning joined Citizens Bank in 1990 as Assistant Vice President & Controller and has been the Chief Financial Officer of PNBC since 1997. Mr. Fanning currently is the Senior Vice-President & Chief Financial Officer of Citizens Bank.

          Jacqualyn L. Karlosky joined Citizens Bank in 1994 as Assistant Vice President & Branch Manager. Ms. Funderberg became Senior Vice President – Consumer Banking in 2002 and remains in that capacity.

          Patrick Murray joined Citizens Bank in 2004 as Senior Vice President in charge of Citizens Financial Advisors and remains in that capacity.

PART II

Item 5. Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securties

          (a) Since May 15, 1992, PNBC’s Common Stock has been listed on the NASDAQ Stock Market, under the symbol PNBC.

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

					Cash Dividends Declared
	Prices
	High		Low
2007
Fourth Quarter	$	27.81	$	23.04	$	.27
Third Quarter		29.07		26.11		.27
Second Quarter		31.36		27.58		.27
First Quarter		33.72		30.00		.27
2006
Fourth Quarter	$	33.99	$	32.17	$	.31
Third Quarter		34.00		32.02		.25
Second Quarter		35.45		32.22		.25
First Quarter		34.48		32.65		.24

          On December 31, 2007, PNBC had 805 registered holders of record of its Common Stock.

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

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

COMMON STOCK PRICE PERFORMANCE GRAPH

          The following Common Stock price performance graph compares the monthly change in the Corporation’s cumulative total stockholder returns on its Common Stock, assuming the Common Stock was purchased on December 31, 2002 and sold on December 31, 2007, with the cumulative total return of stocks included in the Russell 3000, the NASDAQ Bank Index and the SNL Midwest Bank Stock Index for the same period. The amounts shown assume the reinvestment of dividends.

	Period Ending
Index	12/31/02		12/31/03		12/31/04		12/31/05		12/31/06		12/31/07
Princeton National Bancorp, Inc.		100.00		139.83		145.88		173.96		175.76		135.89
Russell 3000		100.00		131.06		146.71		155.69		180.16		189.42
SNL Midwest Bank Index		100.00		128.00		144.44		139.18		160.87		125.39
NASDAQ Bank		100.00		129.93		144.21		137.97		153.15		119.35

          The Corporation’s Common Stock began trading on the NASDAQ Stock Market under the symbol PNBC on May 8, 1992. On December 31, 2007 and February 29, 2008, the Record Date, the closing bid prices for the Common Stock as quoted on NASDAQ Online were $24.25 and $27.20, respectively.

          (c) The following table provides information about purchases of the Corporation’s common stock by the Corporation during the quarter ended December 31, 2007:

Period	(a) Total number of shares purchased	(b) Average price paid per share			(c) Total number of shares purchased as part of a publicly announced plans or programs (1)	(d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs
10/1/07 – 10/31-07	0		$	0.00	0	50,000
11/1-07 – 11/30-07	10,000		$	25.50	10,000	40,000
12/1-07 – 12/31/07	0		$	0.00	0	40,000
Total	10,000		$	25.50	10,000	40,000

          (1) On April 24, 2007, the Board of Directors approved the repurchase of up to an aggregate of 50,000 shares of our common stock pursuant to a repurchase program announced the same day (“the Program”). The expiration date of this Program is April 24, 2008. Unless terminated earlier by resolution of our Board of Directors, the Program will expire on the earlier of such expiration date or when we have repurchased all shares authorized for repurchase under the Program.

Item 6. Selected Financial Data

          Information regarding the Corporation’s selected financial data is included on page 44 of the Corporation’s Annual Report, which information is incorporated by reference herein.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

          Information regarding the Corporation’s management’s discussion and analysis of financial condition and results of operations is included on pages 33-43 in the Corporation’s Annual Report, which information is incorporated by reference herein.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

          The information required by Item 305 of Regulation S-K is contained in the Corporation’s Annual Report on pages 40-42, under the headings “Asset Liability Management” and “Contractual Obligations, Commercial Commitments and Off-Balance Sheet Arrangements”, which information is incorporated herein by reference.

Item 8. Consolidated Financial Statements and Supplementary Data

          Information regarding the Corporation’s consolidated financial statements and supplementary data is included on pages 9-32 and page 43 in the Corporation’s Annual Report, which information is incorporated by reference herein.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

          None.

Item 9A. Controls and Procedures

(a)	Disclosure controls and procedures. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2007. Our disclosure controls and procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit to the SEC. Tony J. Sorcic, President and Chief Executive Officer, and Todd D. Fanning, Senior Vice President and Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Sorcic and Fanning concluded that, as of the date of their evaluation, our disclosure controls were effective.
(b)	Internal controls. There have not been any significant changes in our internal accounting controls or in other factors during the quarter ended December 31, 2007 that could significantly affect those controls.
	The reports required by Item 308 of Regulation S-K are attached hereto as Exhibits 99.1 and 99.2 respectively, and are incorporated herein by reference.

Item 9B. Other Information

          None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

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

          Information regarding executive officers and directors of the Corporation and the Corporation’s Audit Committee is included in the Corporation’s Definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 29, 2008 (the “Proxy Statement”) under the captions “Proposal 1-Election of Directors” and “Board of Directors’ Meetings and Committees”, which information is incorporated by reference herein.

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

          Information regarding the Corporation’s Code of Ethics is included in the Proxy Statement under the caption “Code of Ethics”, which information is incorporated by reference herein.

          Information regarding an Audit Committee Financial Expert is included in the Proxy Statement under the caption “Audit Committee Financial Expert”, which information is incorporated by reference herein.

Item 11. Executive Compensation

          Information regarding executive compensation is included in the Proxy Statement under the captions “Board of Directors’ Meetings and Committees”, “Compensation of Directors”, “Executive Compensation”, “Compensation Discussion and Analysis”, “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report”, which information is incorporated by reference herein.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters

          Information regarding security ownership is included in the Proxy Statement under the captions “Security Ownership of Directors, Nominees for Director, Most Highly Compensated Executive Officers and All Directors and Executive Officers as a Group” and “Security Ownership of Certain Beneficial Owners,” which information is incorporated by reference herein.

Equity Compensation Plan Information

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities in column (a))
	(a)		(b)			(c)
Equity compensation plans approved by security holders		404,186		$	28.59		314,123
Equity compensation plans not approved by security holders		N/A			N/A		9,652	(1)
Total		404,186		$	28.59		28,712

(1) Represents shares issuable under the Company’s Amended and Restated Employee Stock Purchase Plan (the “ESPP”). The ESPP is a broad-based plan which was originally adopted by the Company in October, 1994 and has been amended and restated to increase the number of shares issuable under the ESPP to the current maximum of 80,000 shares. Under the ESPP, eligible employees and directors may purchase PNBC common stock without incurring any brokerage commissions or service charges using lump sum contributions and/or payroll deductions, in the case of employees.

Item 13. Certain Relationships and Related Transactions, and Director Independence

          Information regarding relationships and transactions is included in the Proxy Statement under the captions “Certain Transactions” and “Board of Directors’ Meetings and Committees,” which information is incorporated by reference herein.

Item 14. Principal Accountant Fees and Services

          Information regarding principal accountant fees and services is included in the Proxy Statement under the caption “Audit Committee Report”, which information is incorporated by reference herein.

Item 15. Exhibits and Financial Statement Schedules

(a)(1)	The following is a list of the Financial Statements included in Part II, Item 8 of this report:
		Report of Independent Registered Public Accounting Firm
		Consolidated Balance Sheets as of December 31, 2007 and 2006.
		Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005.
		Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2007, 2006, and 2005.
		Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, and 2005.
		Notes to Consolidated Financial Statements.
(a)(2)	Financial Statement Schedules
		No consolidated financial statement schedules are required to be included in this Report on Form 10-K.
(a)(3)	Exhibits
	The exhibits filed herewith are listed on the Exhibit Index filed as part of this report on Form 10-K. Each management contract or compensatory plan or arrangement of the Corporation listed on the Exhibit Index is separately identified by an asterisk.

SIGNATURES

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

PRINCETON NATIONAL BANCORP, INC.
By:	/s/ Tony J. Sorcic
	Tony J. Sorcic, President and Chief Executive Officer
Date:   March 17, 2008

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

Signature	Title	Date
/s/ Tony J. Sorcic	President and Chief Executive Officer and Director
	(Principal Executive Officer)
Tony J. Sorcic
/s/ Todd D. Fanning	Senior Vice-President & Chief Financial Officer
	(Principal Accounting and Financial Officer)
Todd D. Fanning
/s/ Craig O. Wesner	Chairman of the Board
Craig O. Wesner
/s/ Daryl Becker	Director
Daryl Becker
/s/ Gary C. Bruce	Director
Gary C. Bruce
/s/	Director
Sharon L. Covert
/s/	Director
John R. Ernat
/s/ Donald E. Grubb	Director
Donald E. Grubb
/s/	Director
Mark Janko
/s/	Director
Willard Lee
/s/ Thomas M. Longman	Director
Thomas M. Longman
/s/	Director
Ervin I. Pietsch
/s/ Stephen W. Samet	Director
Stephen W. Samet

INDEX TO EXHIBITS

Exhibit
Number			Exhibit
	3.1	Amended and Restated Certificate of Incorporation of Princeton National Bancorp, Inc. (“PNBC”) (incorporated by reference to Exhibit 3.1 to the PNBC Registration Statement on Form S-1 (Registration No. 33-46362) (the “S-1 Registration Statement”)).
	3.2	By-Laws of PNBC (as amended October 22, 2007) (filed herewith).
	4.1	Certificate of Designation of Series A Junior Participating Preferred Stock (incorporated by reference from Registration Statement on Form 8-A filed by PNBC on August 1, 2003 (File No. 000-20050)) incorporated by reference to Exhibit 4.1 of the 2004 PNBC Annual Report on Form 10-K).
	4.2	Trust Preferred Securities Indenture (incorporated by reference to Exhibit 4.1 to PNBC Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
	10.1*	Employment Agreement, dated as of January 8, 2003 between PNBC and James B. Miller. (incorporated by reference to Exhibit 10.2 of the 2002 PNBC Annual Report on Form 10-K).
	10.2*	Employment Agreement, dated as of October 23, 2000, between PNBC and Tony J. Sorcic (incorporated by reference to Exhibit 10.2 of the 2000 PNBC Annual Report on Form 10-K).
	10.3*	Citizens First National Bank Profit Sharing Plan, as amended and restated January 1, 1989 (incorporated by reference to Exhibit 10.4 to the S-1 Registration Statement).
	10.4*	Citizens First National Bank Defined Contribution Plan and Trust, as amended and restated January 1, 1989 (incorporated by reference to Exhibit 10.5 to the S-1 Registration Statement).
	10.5*	Princeton National Bancorp, Inc. Stock Option Plan (incorporated by reference from Schedule 14A filed by PNBC on March 6, 1998).
	10.6*	Princeton National Bancorp, Inc. Deferred Compensation Plan (incorporated by reference to Exhibit 10.6 of the 2001 PNBC Annual Report on Form 10-K).
	10.7*	Princeton National Bancorp, Inc. Management Incentive Compensation Plan (incorporated by reference to Exhibit 10.7 of the 2001 PNBC Annual Report on Form 10-K).
	10.8*	Princeton National Bancorp, Inc. 2003 Stock Option Plan (incorporated by reference from Schedule 14A filed by PNBC on March 19, 2003).
	10.9*	Form of Stock Option Agreement (incorporated by reference to Exhibit 10.9 of the 2004 PNBC Annual Report on Form 10-K).
	10.10*	Amendment to Stock Option Agreement (incorporated by reference to Exhibit 10.10 of the 2005 PNBC Annual Report on Form 10-K).

10.11	Trust Preferred Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to PNBC Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
10.12	Trust Preferred Securities Declaration of Trust (incorporated by reference to Exhibit 10.2 to PNBC Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
10.13	Trust Preferred Securities Guarantee Agreement (incorporated by reference to Exhibit 10.3 to PNBC Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
10.14*	2007 Stock Compensation Plan (incorporated by reference from Schedule 14A filed by PNBC on March 14, 2007).
13	Portions of 2007 Annual Report to Shareholders.
14	Code of Ethics (incorporated by reference to Exhibit 14 of the 2003 PNBC Annual Report on Form 10-K).
21	Subsidiaries of PNBC.
23.1	Consent of BKD, LLP.
23.2	Consent of KPMG LLP.
31.1	Certification of Tony J. Sorcic required by Rule 13a-14(a).
31.2	Certification of Todd D. Fanning required by Rule 13a-14(a).
32.1	Certification of Tony J. Sorcic required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
32.2	Certification of Todd D. Fanning required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
99.1	Report of Management on Internal Control Over Financial Reporting
99.2	Report of Independent Registered Public Accounting Firm

*     Management contract or compensatory plan.

EX-3.2

Exhibit 3.2 By-Laws of PNBC

BYLAWS OF

PRINCETON NATIONAL BANCORP, INC.

Amended & Restated October 22, 2007

ARTICLE I: Meetings of Stockholders

Section 1: The annual meeting of the stockholders of the Corporation shall be held in Princeton, Illinois at a time and place to be determined by the Board of Directors for the election of Directors and such other business as may properly come before the meeting.

Section 2: Except as otherwise specifically provided by statute, special meetings of the stockholders may be called for any purpose at any time by the Board of Directors only. Every such special meeting, unless otherwise provided by law, shall be called by mailing, postage prepaid, not less than ten days prior to the date fixed for such meeting, to each stockholder at his address appearing on the books of the Corporation a notice stating the place, date, hour and purpose of the meeting.

Section 3: It shall be the duty of the President to give proper notice of the place, day and hour of and other matters with respect to each meeting as may be called pursuant to these Bylaws in the form and manner required or permitted by the laws relating to the business for which such meeting is called.

Section 4: The Board of Directors may designate any place as the place of meeting for any annual meeting. In the case of a special meeting, the meeting shall be held at such place within Princeton, Illinois as may be designated in the call.

Section 5: In lieu of closing the stock transfer books for the purpose of determining stockholder entitled to notice of or to vote at any meeting of stockholders, or stockholders entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the Board of Directors may fix in advance a date as the record date for any such determination. In the absence of specific action by the Board closing the stock transfer books or fixing a different record date, at each annual meeting of the stockholders, and at each special meeting, each stockholder of record at the close of business on the fifteenth (15th) day preceding the day of such meeting shall be entitled to vote, in person or by proxy, the number of shares of stock registered in his name on the stock books as of said record date. Notwithstanding the foregoing, the record date with respect to a meeting of stockholders to consider a merger or consolidation shall not be less than twenty (20) days prior to such meeting.

Section 6: The Secretary shall make a record of the stockholders represented in person or by proxy, giving the names of the stockholders present and the number of shares of stock held by each; the names of stockholders represented by proxy; the number of shares held by each and the names of the proxies. The record shall show the number of shares voted, in person or by proxy, for each resolution and for each candidate for Director and shall be filed with the minutes of the Corporation.

Section 7: A majority of the outstanding shares of the capital stock of the Corporation, represented either by the holders thereof or by duly authenticated proxies, shall constitute a quorum for the transaction of business at any meeting of the stockholders, but in the absence of a quorum a meeting may be adjourned from time to time without notice to the stockholders.

Page 1

Section 8: (a) Business to be considered by the stockholders shall be brought before an annual meeting (i) pursuant to the Corporation’s notice of meeting, (ii) by or at the direction of the Board or (iii) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this Section, who is entitled to vote with respect thereto and who complies with the notice procedures set forth in this Section. For business to be properly brought before an annual meeting by a stockholder the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such proposed business must otherwise be a proper matter for stockholder action. To be timely, a stockholder’s notice must be delivered to or mailed to and received by the Secretary at the principal executive offices of the Corporation not later than the close of business on the 120^th day nor earlier than the close of business on the 150^th day prior to the anniversary of the mailing date of the proxy statement for the preceding year’s annual meeting. In no event shall the public or other announcement of an adjournment of an annual meeting or the adjournment thereof commence a new time period for the giving of a stockholder’s notice as described above. Such stockholder’s notice to the Secretary of the Corporation shall set forth (i) as to any business the stockholder proposed to bring before the annual meeting, (A) a brief description of the business desired to be brought before the annual meeting, (B) the reasons for conducting such business at the annual meeting, (C) any material interest in such business of such stockholder and (D) the beneficial owner, if any, on whose behalf the proposal is made, and (ii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the proposed business is to be brought, (A) the name and address of such stockholder as they appear on the Corporation’s books, and the name and address of such beneficial owner and (B) the class and number of shares of the Corporation’s capital stock that are owned beneficially and of record by such stockholder and such beneficial owner.

                 (b) At any special meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting.

                 (c) Notwithstanding anything in these Bylaws of the Corporation to the contrary, only such business shall be brought before or conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section. The officer of the Corporation or other person presiding over the meeting shall, if the facts so warrant, determine and declare to the meeting that business was not brought before the meeting in accordance with the provisions of this Section and, if such person should so determine, such person shall so declare to the meeting and any such business so determined not to be properly before the meeting shall be disregarded.

Section 9: (a) Nominations of candidates for election as directors at any meeting of stockholders may be made: (i) by, or at the direction of, a majority of the Board, or (ii) by any stockholder of record entitled to vote at such meeting; provided that only persons nominated in accordance with procedures set forth in this Section shall be eligible for election as directors.

Page 2

                  (b) Nominations, other than those made by, or at the direction of, the Board, may only be made pursuant to timely notice in writing to the Secretary of the Corporation as set forth in this Section. To be timely, a stockholder’s notice shall be delivered to, or mailed and received by the Secretary of the Corporation, for an annual meeting, not later than the close of business on the 120^th day nor earlier than the close of business on the 150^th day prior to the anniversary of the mailing date of the proxy statement for the previous year’s annual meeting. Such stockholder notice shall set forth: (i) as to each person whom the stockholder proposes to nominate for election as a director: (A) the name, age, business address and residential address of such person; (B) the principal occupation or employment of such person; (C) the class and number of shares of the Corporation’s stock which are beneficially owned by such person on the date of such stockholder notice; and (D) any other information relating to such person that would be required to be disclosed on Schedule 13D pursuant to Regulation 13D-G under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in connection with the solicitation of proxies with respect to nominees for election as directors, regardless of whether such person is subject to the provisions of such regulations, including, but not limited to, information required to be disclosed by Items 4(b) and 6 of Schedule 14A of Regulation 14A with the Securities and Exchange Commission; and (ii) as to the stockholder giving the notice: (A) the name and address, as they appear on the Corporation’s books, of such stockholder and the name and principal business or residential address of any other beneficial stockholders known by such stockholder to support such nominees; and (B) the class and number of shares of the Corporation’s stock which are beneficially owned by such stockholder on the date of such stockholder notice and the number of shares owned beneficially by any other record or beneficial stockholders known by such stockholder to be supporting such nominees on the date of such stockholder notice. At the request of the Board, any person nominated by, or at the request of, the Board for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder’s notice of nomination which pertains to the nominee.

                  (c) The Board may reject any nomination by a stockholder not timely made in accordance with the requirements of this Section. If the Board, or a committee designated by the Board, determines that the information provided in a stockholder’s notice does not satisfy the informational requirements of this Section in any material respect, the Secretary of the Corporation shall promptly notify such stockholder of the deficiency in the notice. The stockholder may cure the deficiency by providing additional information to the Secretary within such period of time, not less than five days from the date such deficiency notice is given to the stockholder, as the Board or such committee shall determine. If the deficiency is not cured within such period, or if the Board or such committee determines that the additional information provided by the stockholder, together with information previously provided, does not satisfy the requirements of this Section in any material respect, then the Board may reject such stockholder’s notice and the proposed nominations shall not be accepted if presented at the stockholder meeting to which the notice relates. The Secretary of the Corporation shall notify a stockholder in writing whether his or her nomination has been made in accordance with the time and informational requirements of this Section. Notwithstanding the procedure set forth in this Section, if neither the Board nor such committee makes a determination as to the validity of any nominations by a stockholder, the presiding officer of the stockholder’s meeting shall determine and declare at the meeting whether a nomination was not made in accordance with the terms of this Section. If the presiding officer determines that a nomination was not made in accordance with the terms of this Section, he or she shall so declare at the meeting and the defective nomination shall not be accepted.

ARTICLE II: Directors

Section 1: The business and affairs of the Corporation shall be managed by the Board of Directors. Except as expressly limited by law, all corporate powers of the Corporation shall be vested in and may be exercised by said Board.

Section 2: The number of directors of the Corporation and the term of office of each director shall be as set forth in the Amended and Restated Certificate of Incorporation. Any director may resign at any time upon written notice to the Corporation.

Page 3

Section 3: (a) The Board of Directors may adopt such rules and regulations for the conduct of its meeting and the management of the affairs of the Corporation as it may deem proper, not inconsistent with the law of the United States, of the state of Delaware, or these Bylaws; and all officers and employees shall strictly adhere to and be bound by such rules and regulations.

                 (b) The Board of Directors shall have power to appoint such committees, as it may deem necessary, and from time to time, suspend or continue the powers and duties of any committee.

Section 4: A meeting for the organization of the Board of Directors shall be held immediately after adjournment of the annual stockholder meeting for the election of Directors at such hour and at such place as shall be announced by the President at such annual meeting as soon as the result of the election is known. Regular meetings of the Board of Directors shall be held without other notice than this Bylaw on the fourth Monday of January, April, July and October at 8:15 a.m. at the main office of Citizens First National Bank, Princeton, Illinois, unless such day be a legal holiday, in which case, the regular meeting shall be held at the same time on the next business day, or at such other time as the Board of Directors may determine. Special meetings may be called by the President or by or at the written request of any three or more Directors. Except to the extent the time or method of giving notice is regulated by statute, twenty-four hours’ notice of any special meeting, or such shorter period as the person or persons calling such meeting deem appropriate in the circumstance, shall be given by telegram, letter, telephone, facsimile or in person to each Director, stating the time and place of each special meeting. Any Director may waive notice of any meeting, by waiver signed either before or after such meeting. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting with the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at nor the purpose of any meeting need be specified in the notice or waiver. (Amended January 20, 2003).

Section 5: (a) A majority of the members of the Board of Directors shall constitute a quorum for the transaction of business. If, at any time fixed for the meeting, a quorum is not present, the directors in attendance may adjourn the meeting from time to time until a quorum is obtained.

                  (b) Except as otherwise provided herein, the majority of those Directors present and voting at any meeting of the Board of Directors shall decide each matter considered. A Director cannot vote by proxy, or otherwise act by proxy, at a meeting of the Board of Directors.

Section 6: The Board of Directors may appoint a Secretary of the Board of Directors who may or may not be a member of the Board and who shall keep the minutes of the meeting of the Board of Directors and perform such other duties as the Board of Directors shall from time to time prescribe.

Section 7: Unless otherwise restricted by the Certificate of Incorporation or Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or any committee thereof, may be taken without a meeting if all members of the Board or Committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or Committee.

Section 8: Unless specifically prohibited by the Certificate of Incorporation, members of the Board of Directors, or of any committee of the Board of Directors, may participate in and act at any meeting of such Board or committee through the use of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other. Participation in such a meeting shall constitute attendance and presence in person at the meeting of the person or persons so participating. (Amended January 20, 2003.)

Page 4

ARTICLE III: Officers and Managers

Section 1: The officers of the Corporation shall be a Chairman of the Board of Directors, a President, one or more vice Presidents, a Secretary, a Treasurer and any other officers designated by the Board. Said officers shall be elected by the Board of Directors and shall hold their respective offices until the next organizational meeting of the board of Directors, or until their successors are elected and qualified. The President and Chairman of the Board of Directors shall be persons who are duly elected members of the Board of Directors. Election or appointment of an officer or agent shall not of itself create contract rights. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any two or more offices may be held by the same person. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the Board of Directors for the unexpired portion of the term.

Section 2: All officers shall be subject to the supervision and direction of the Board of Directors.

Section 3: (a) CHAIRMAN OF THE BOARD OF DIRECTORS – The Chairman of the Board of Directors shall participate in the supervision of the policies of the Corporation and shall have such other duties as shall be assigned to him by the Board of Directors. He shall preside at meetings of the stockholders and at meetings of the Board of Directors.

                  (b) PRESIDENT – The President shall be the chief executive officer of the Corporation and as such, shall have, subject to the supervision and direction of the Board of Directors, general supervision of the business, property and affairs of the Corporation and all of the powers vested in him by law or by these Bylaws, or which usually attach or pertain to such office. He shall be an ex officio member of all committees. He shall have power on behalf of the Corporation to execute any and all contracts, and sign certificates, checks, drafts, orders, receipts or other instruments or documents not required by the Bylaws or by any resolution of the Board of Directors or by law to be signed by another officer or officers. He shall have power on behalf of the Corporation to accept any office, duty or position of trust or confidence, which the Corporation may be by law authorized to accept. He shall have power to declare defaults, employ counsel and direct the taking of any legal action in reference to any matter or thing touching the interests of the Corporation. He shall make a report at each regular meeting of the Board of Directors of such matters as the Board of Directors may request or he determines.

                  (c) VICE PRESIDENTS – The Vice President, or each of the Vice Presidents if there is more than one, shall have and perform such duties as the President may delegate, and is authorized, subject to the supervision and direction of the President and within the limits authorized by the Board of Directors, to execute contracts and agreements in relation to loans and other borrowings incurred in the ordinary course of business, sign authentications and certificates in connection with certificates of stock and sign or countersign checks, drafts, and all similar instruments or obligations issued by this Corporation.

                  (d) TREASURER – The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate account of receipts and disbursements in books belonging to the Corporation. The Treasurer shall deposit all monies and other valuables in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors.

The Treasurer shall disburse such funds of the Corporation as may be ordered by the Board of Directors, or the President, taking proper vouchers for such disbursements. The Treasurer shall render to the President and Board of Directors at the regular meetings of the Board of Directors, or whenever they may request it, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond for the faithful discharge of their duties in such amount and with such surety as the Board shall prescribe.

Page 5

                    (e) SECRETARY – The Secretary shall give, or cause to be given, notice of all meetings of stockholders and directors, and all other notice required by law or by these Bylaws, and in case of the Secretary’s absence or refusal or neglect to do so, any such notice may be given by any person thereunto directed by the President, or by the Directors, or stockholders, upon whose requisition the meeting is called as provided in these Bylaws. The Secretary shall record all the proceedings of the meetings of the Corporation and of the Directors in a book to be kept for that purpose, and shall perform such other duties as may be assigned to the Secretary by the Directors or the President. The Secretary shall have the custody of the seal of the Corporation and shall affix the same to all instruments requiring it, when authorized by the Directors or the President and attest the same.

                    (f) OTHER OFFICERS – The Board of Directors may appoint one or more Assistant Treasurers, one or more Assistant Secretaries, and such other officers as from time to time may appear to the Board of Directors to be required or desirable to transact the business of the Corporation. Such officers shall respectively exercise such powers and perform such duties as may be delegated to the several offices, or as may be conferred upon, or assigned to them, by the Board of Directors or by the President.

ARTICLE IV: Committees

                    The Board of Directors may appoint from time to time such committees of Directors for such purpose and with such powers as the Board may determine.

ARTICLE V: Seal

                    The Board of Directors shall provide a seal for the Corporation, which shall be in the charge of the Secretary or any other officer designated by them or by the President, such seal or a facsimile thereof to be affixed to or otherwise reproduced on certificates of stock and any other documents in accordance with the directions of the Board of Directors, the President, any Vice President or the Secretary.

ARTICLE VI: Capital Stock

Section 1: Shares of stock of the Corporation may be certificated or uncertificated, as provided under the General Corporation Law of the State of Delaware. Notwithstanding the foregoing, every holder of stock in the Corporation upon written request to the secretary of the Corporation, shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the Chairman of the Board of Directors or by the President or a Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by them in the Corporation. Where a certificate is countersigned (1) by a transfer agent other than the Corporation or its employee, or (2) by a registrar other than the Corporation or its employee, any other signature on the certificate may be facsimile. In case of any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if they were such officer, transfer agent or registrar at the date of issue.

Page 6

Section 2: If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preference and/or rights shall be as determined by the Board of Directors in accordance with then applicable provisions of the General Corporation Law of the State of Delaware.

Section 3: A new certificate of stock or substitute stock in uncertificated form may be issued in the place of any certificate theretofore issued by the Corporation, alleged to have been lost or destroyed, and the Directors may in their discretion, require the owner of the lost or destroyed certificate, or their legal representative, to give the Corporation a bond, in such sum as they may direct, not exceeding double the value of the stock to indemnify the Corporation against any claim that may be made against it on account of the alleged loss of any such certificate, the issuance of any such new certificate or substitute stock in uncertificated form.

Section 4: Transfers of uncertificated shares of stock shall be made on the books of the Corporation only by the holders thereof in person or by their duly authorized attorneys or legal representatives upon presentment of proper evidence of succession, assignation or authority to transfer in accordance with customary procedures for transferring shares in uncertificated form. The shares of certificated stock of the Corporation shall be transferable only upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered to the Corporation by the delivery thereof to the person in charge of the stock and transfer books and ledgers, or to such other person as the directors may designate, by whom they shall be canceled, and new certificates shall thereupon be issued. A record shall be made of each transfer and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer, if when the certificates are presented for transfer, both the transferor and the transferee request the Corporation to do so.

ARTICLE VII: Prohibited Loans

                   This Corporation shall make no loans in whole or in part upon the stock of this Corporation as collateral.

ARTICLE VIII: Indemnification of Directors or Officers

Section 1: The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was a director, officer, employee or agent of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.

Page 7

Section 2: The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director, officer, employee or agent of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery of the court in which such action or suit was brought shall determine upon application that, despite the adjudication of 1iability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper.

Section 3: Any indemnification under Sections (1) and (2) of this ARTICLE VIII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth in Sections (1) and (2) of this ARTICLE VIII. Such determination shall be made (i) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (ii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (iii) by the stockholders.

Section 4: Expenses (including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this ARTICLE VIII. Such expenses (including attorneys’ fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deem appropriate.

Section 5: The indemnification and advancement of expenses provided by, or granted pursuant to, the other Sections of this ARTICLE VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office.

Section 6: The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the Corporation would have the power to indemnify such person against such liability under this ARTICLE VIII or otherwise.

Section 7: For purposes of this ARTICLE VIII, references to “the Corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent or a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this ARTICLE VIII with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued.

Page 8

Section 8: For purposes of this ARTICLE VIII, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to “serving at the request of the Corporation shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Corporation” as referred to in this ARTICLE VIII.

Section 9: The indemnification and advancement of expenses provided by, or granted pursuant to this ARTICLE VIII shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

Section 10: The Delaware Court of Chancery is vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this ARTICLE VIII. The Delaware Court of Chancery may summarily determine the Corporation’s obligation to advance expenses (including attorneys’ fees).

Section 11: Notwithstanding any other Article of these Bylaws, no amendment, modification, restatement or repeal of the Bylaws shall limit or impair in any manner the rights of any person to indemnification or advancement of expenses under this ARTICLE VIII in respect of any action or failure to act occurring prior to such amendment, modification, restatement or repeal.

Section 12: The provisions of this ARTICLE VIII shall be deemed to be a contract between the Corporation and each person who serves as such officer or director in any such capacity at any time while this ARTICLE III and the relevant provisions of the General Corporation Law of Delaware or other applicable laws, if any, are in effect, and any repeal or modification of any such law or this ARTICLE III shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of fact.

ARTICLE IX Miscellaneous

Section 1: The registered office shall be established and maintained at 606 South Main Street, in the City of Princeton, in Bureau County, in the State of Illinois.

Section 2: The Corporation may have other offices, either within or without the State of Illinois, at such place or places as the Board of Directors may from time to time appoint or the business of the Corporation may require.

Section 3: The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors.

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ARTICLE X Amendment or Repeal

                    These Bylaws may be amended, altered or repealed, at any regular meeting of the Board of Directors by vote of a majority of the total number of Directors.

                    Adopted by unanimous vote of the Board of Directors of Princeton National Bancorp, Inc. this 22^ND day of October, A.D., 2007.

Lou Ann Birkey, Vice President – Investor Relations

& Corporate Secretary

Page 10

EX-13

Exhibit 13

Report of Independent Registered Public Accounting Firm

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.

Decatur, Illinois
March 17, 2008

9

Report of Independent Registered Public Accounting Firm

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.

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		Carrying Value		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

EX-21

Exhibit 21. Subsidiary of Princeton National Bancorp, Inc.

Citizens First National Bank	Princeton National Bancorp, Inc.
	owns 100 percent of the shares
	Citizens First National Bank.

EX-23.1

Exhibit 23.1 Consent of BKD, LLP.

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Princeton National Bancorp, Inc.

We consent to the incorporation by reference in the registration statements (Nos. 333-69019, 333-117663, 333-129484 and 333-133448) on Form S-8 of Princeton National Bancorp, Inc. of our reports dated March 17, 2008, with respect to the consolidated balance sheets of Princeton National Bancorp, Inc. and subsidiary as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the two year period ended December 31, 2007, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2007, and the effectiveness of internal control over financial reporting as of December 31, 2007, which reports appear in the December 31, 2007 annual report on Form 10-K of Princeton National Bancorp, Inc.

/sig/ BKD, LLP

Decatur, Illinois
March 17, 2008

EX-23.2

Exhibit 23.2 Consent of KPMG LLP.

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Princeton National Bancorp, Inc.:

We consent to the incorporation by reference in the registration statements (No.’s 333-69019, 333-117663, 333-129484, 333-133448 and 333-146255) on Form S-8 of Princeton National Bancorp, Inc. of our report dated March 13, 2006, with respect to the consolidated statements of income, changes in stockholders’ equity and cash flows for the year ended December 31, 2005, which report appears in the December 31, 2007 annual report on Form 10-K of Princeton National Bancorp, Inc.

/s/ KPMG LLP

Chicago, Illinois
March 17, 2008

EX-31.1

Exhibit 31.1

I, Tony J. Sorcic, certify that:

1.	I have reviewed this annual report on Form 10-K of Princeton National Bancorp, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Tony J. Sorcic

Tony J. Sorcic

President & Chief Executive Officer

March 17, 2008

EX-31.2

Exhibit 31.2

I, Todd D. Fanning, certify that:

1.	I have reviewed this annual report on Form 10-K of Princeton National Bancorp, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Todd D. Fanning

Todd D. Fanning

Senior Vice-President & Chief Financial Officer

March 17, 2008

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Princeton National Bancorp, Inc. (“PNBC”) on Form 10-K for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I Tony J. Sorcic, President & Chief Executive Officer of PNBC, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly represents, in all material respects, the financial condition and result of operations of PNBC.

/s/ Tony J. Sorcic

Tony J. Sorcic
President & Chief Executive Officer

March 17, 2008

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Princeton National Bancorp, Inc. (“PNBC”) on Form 10-K for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I Todd D. Fanning, Vice President & Chief Financial Officer of PNBC, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly represents, in all material respects, the financial condition and result of operations of PNBC.

/s/ Todd D. Fanning

Todd D. Fanning
Senior Vice President & Chief Financial Officer

March 17, 2008

EX-99.1

Exhibit 99.1. Report of Management on Internal Control over Financial Reporting.

          Management of Princeton National Bancorp, Inc. (“PNBC”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. PNBC’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that:

- pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of PNBC;

- provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America;

- provide reasonable assurance that receipts and expenditures of PNBC are being made only in accordance with authorization of management and directors of PNBC; and

- provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.

          Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified.

          Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

          Management assessed the effectiveness of PNBC’s internal control over financial reporting as of December 31, 2007. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of PNBC’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the Board of Directors.

          Based on this assessment, management determined that, as of December 31, 2007, PNBC maintained effective internal control over financial reporting.

          BKD LLP, the independent registered public accounting firm, that audited and reported on the consolidated financial statements of PNBC included in this report, has issued an attestation report on management’s assessment of internal control over financial reporting as of December 31, 2007.

EX-99.2

Exhibit 99.2

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors and Stockholders
Princeton National Bancorp, Inc.
Princeton, Illinois

We have audited 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). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s report. Our responsibility is to express an opinion on the Company’s internal control over financial reporting 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

225 N. Water Street, Suite 400  P. O. Box 1580  Decatur, IL 62525-1580  217.429.2411  Fax 217.429.6109
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In our opinion, Princeton National Bancorp, Inc. maintained, in all material respects, effective 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).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Princeton National Bancorp, Inc. and our report dated March 17, 2008 expressed an unqualified opinion thereon.

Decatur, Illinois
March 17, 2008