|FORM 10-Q



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|----------------------------------------------------------------------

| |  | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
| |  | -----------------------------------------------------------------------------------------------------------------------------------------

|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 S. Main Street                      
|Princeton, IL                            | 61356              
|(Address of principal executive offices) | (Zip Code)         

|(815) 875-4444
                               (Registrants telephone number, including area code)


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
üNoo


Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
   Yeso    Noü

As of October 20, 2003, the registrant
had outstanding 3,148,945 shares of its $5 par value common stock.
Page 1 of 22 pages
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| | ---------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------- | --------------------------------------------- | -------------------------------- | ---------------------------------------- |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  | Part I: FINANCIAL INFORMATION                                                     |                                               |                                  |                                          | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| | The unaudited consolidated financial statements of
Princeton National Bancorp, Inc. and Subsidiary and     |                                                                                                            |  |                                                                                  
| | management's discussion and analysis of financial condition and
results of operations are presented in the |                                                                                                            |  |                                                                                  
| | schedules as follows:                                                                                      |                                                                                                            |  |                                                                                  
| |                                                                                                            |                                                                                                            |  | Schedule
1: Consolidated Balance Sheets                                           |                                               |                                  |                                          | 
| |                                                                                                            |                                                                                                            |  | Schedule 2: Consolidated Statements of Income
and Comprehensive Income            |                                              
| |                                                                                                            |                                                                                                            |  | Schedule 3: Consolidated Statements of
Stockholders Equity                       |                                               |                                  |                                         
| |                                                                                                            |                                                                                                            |  | Schedule 4: Consolidated Statements of Cash
Flows                                 |                                               |                                  |                                          | 
| |                                                                                                            |                                                                                                            |  | Schedule 5: Notes to Consolidated Financial
Statements                            |                                               |                                  |                                         
| |                                                                                                            |                                                                                                            |  | Schedule 6: Management's Discussion and
Analysis of                               |                                               |                                  |                                         
| |                                                                                                            |                                                                                                            |  |                                                                                   | Financial Condition and Results of Operations |                                  |                                          | 
| |                                                                                                            |                                                                                                            |  | Schedule 7: Controls and Procedures                                               |                                               |                                  |                                          |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  | Part II: OTHER INFORMATION                                                        |                                               |                                  |                                          |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| | Item 6. Exhibits and Reports on Form 8-K                                                                   |                                                                                                            |  |                                                                                   |                                               |                                  |                                          | 
| | (a)    Exhibits :                                                                                          |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            | 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                                                                                                       |  | Certificaton 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                                                                                                       |  | Certificaton 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.                               |                                               |                                  |                                         
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| | (b)                                                                                                        | The Corporation filed an
8-K on July 30, 2003 related to the announcement of third quarter 2003
earnings.  | 
| |                                                                                                            | The Corporation filed an 8-K on August 1, 2003 related to the
announcement of a shareholders rights plan.
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   | SIGNATURES                                    |                                  |                                          |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| | Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this   |                                                                                                            |  |                                                                                  
| | report to be signed on its behalf by the undersigned thereunto
duly authorized.                            |                                                                                                            |  |                                                                                  
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               | PRINCETON NATIONAL BANCORP, INC. |                                          | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| | Date:  November 7, 2003                                                                                    |                                                                                                            |  | By                                                                                | /s/ Tony J. SorcicTony J. Sorcic              |                                  |                                          |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  | President & Chief Executive Officer      |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| | Date:  November 7, 2003                                                                                    |                                                                                                            |  | By                                                                                | /s/ Todd D. FanningTodd D. Fanning            |                                  |                                          |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  | Vice-President & Chief Financial Officer |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 
| |                                                                                                            |                                                                                                            |  |                                                                                   |                                               |                                  |                                          |  |  |  |  | 

---

Schedule 1

PRINCETON NATIONAL
BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS(Unaudited)
(dollars in thousands, except share data)

|                                                          | September 30,
2003 | December 31,
2002
|--------------------------------------------------------- | ------------------ | -----------------
|                                                          |                    |                  
|ASSETS                                                    |                    |                  
|Cash and due from banks                                   |                    |                  
|Interest-bearing deposits with financial institutions     |                    |                  
|Federal funds sold                                        |                    |                  
|                                                          |                    |                  
|Total cash and cash equivalents                           |                    |                  
|Loans held for sale, at lower of cost or market           |                    |                  
|Investment securities:                                    |                    |                  
|Available-for-sale, at fair value                         |                    |                  
|Held-to-maturity, at amortized cost                       |                    |                  
|                                                          |                    |                  
|Total investment securities                               |                    |                  
|                                                          |                    |                  
|Loans:                                                    |                    |                  
|Loans, net of unearned interest                           |                    |                  
|Allowance for loan losses                                 |                    |                  
|                                                          |                    |                  
|Net loans                                                 |                    |                  
|                                                          |                    |                  
|Premises and equipment, net of accumulated depreciation   |                    |                  
|Bank-owned life insurance                                 |                    |                  
|Interest receivable                                       |                    |                  
|Goodwill, net of accumulated amortization                 |                    |                  
|Intangible assets, net of accumulated amortization        |                    |                  
|Other real estate owned                                   |                    |                  
|Other assets                                              |                    |                  
|                                                          |                    |                  
|                                                          |                    |                  
|TOTAL ASSETS                                              |                    |                  
|                                                          |                    |                  
|LIABILITIES                                               |                    |                  
|Deposits:                                                 |                    |                  
|Demand                                                    |                    |                  
|Interest-bearing demand                                   |                    |                  
|Savings                                                   |                    |                  
|Time                                                      |                    |                  
|                                                          |                    |                  
|Total deposits                                            |                    |                  
|                                                          |                    |                  
|Borrowings:                                               |                    |                  
|Customer repurchase agreements                            |                    |                  
|Advances from the Federal Home Loan Bank                  |                    |                  
|Interest-bearing demand notes issued to the U.S. Treasury |                    |                  
|Note payable                                              |                    |                  
|                                                          |                    |                  
|Total borrowings                                          |                    |                  
|Other liabilities                                         |                    |                  
|                                                          |                    |                  
|TOTAL LIABILITIES                                         |                    |                  
|                                                          |                    |                  
|                                                          |                    |                  
|STOCKHOLDERS EQUITY                                      |                    |                  
|Common stock:  $5 par value, 7,000,000 shares             |                    |                  
|authorized; 4,139,841 issued                              |                    |                  
|Surplus                                                   |                    |                  
|Retained earnings                                         |                    |                  
|Accumulated other comprehensive income, net of tax        |                    |                  
|Less:  Cost of 990,896 and 906,155 treasury shares at     |                    |                  
|September 30, 2003 and December 31, 2002, respectively    |                    |                  
|                                                          |                    |                  
|TOTAL STOCKHOLDERS EQUITY                                |                    |                  
|                                                          |                    |                  
|                                                          |                    |                  
|TOTAL LIABILITIES AND                                     |                    |                  
|STOCKHOLDERS EQUITY                                      |                    |                  
|                                                          |                    |                  
|                                                          |                    |                  

See accompanying notes to
consolidated financial statements

3

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Schedule 2

PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME(Unaudited)
(dollars in thousands, except share data)

|                                                          | For the Three Months
Ended September 30 | For the Nine Months
Ended September 30
|--------------------------------------------------------- | --------------------------------------- | --------------------------------------
|
|                                                          |                                         |                                       
|Interest income:                                          |                                         |                                       
|Interest and fees on loans                                |                                         |                                       
|Interest and dividends on investment securities           |                                         |                                       
|Interest on federal funds sold                            |                                         |                                       
|Interest on interest-bearing time deposits in other banks |                                         |                                       
|                                                          |                                         |                                       
|                                                          |                                         |                                       
|Total interest income                                     |                                         |                                       
|                                                          |                                         |                                       
|Interest expense:                                         |                                         |                                       
|Interest on deposits                                      |                                         |                                       
|Interest on borrowings                                    |                                         |                                       
|                                                          |                                         |                                       
|                                                          |                                         |                                       
|Total interest expense                                    |                                         |                                       
|                                                          |                                         |                                       
|                                                          |                                         |                                       
|Net interest income                                       |                                         |                                       
|Provision for loan losses                                 |                                         |                                       
|                                                          |                                         |                                       
|                                                          |                                         |                                       
|Net interest income after provision                       |                                         |                                       
|for loan losses                                           |                                         |                                       
|                                                          |                                         |                                       
|Non-interest income:                                      |                                         |                                       
|Trust & farm management fees                              |                                         |                                       
|Service charges on deposit accounts                       |                                         |                                       
|Other service charges                                     |                                         |                                       
|Gain on sales of securities available-for-sale            |                                         |                                       
|Brokerage fee income                                      |                                         |                                       
|Mortgage banking income, net                              |                                         |                                       
|Bank-owned life insurance income                          |                                         |                                       
|Other operating income                                    |                                         |                                       
|                                                          |                                         |                                       
|                                                          |                                         |                                       
|Total non-interest income                                 |                                         |                                       
|                                                          |                                         |                                       
|Non-interest expense:                                     |                                         |                                       
|Salaries and employee benefits                            |                                         |                                       
|Occupancy                                                 |                                         |                                       
|Equipment expense                                         |                                         |                                       
|Federal insurance assessments                             |                                         |                                       
|Intangible assets amortization                            |                                         |                                       
|Data processing                                           |                                         |                                       
|Advertising                                               |                                         |                                       
|Other operating expense                                   |                                         |                                       
|                                                          |                                         |                                       
|                                                          |                                         |                                       
|Total non-interest expense                                |                                         |                                       
|                                                          |                                         |                                       
|                                                          |                                         |                                       
|Income before income taxes                                |                                         |                                       
|Income tax expense                                        |                                         |                                       
|                                                          |                                         |                                       
|                                                          |                                         |                                       
|Net income                                                |                                         |                                       
|                                                          |                                         |                                       
|                                                          |                                         |                                       
|                                                          |                                         |                                       
|Net income per share:                                     |                                         |                                       
|Basic                                                     |                                         |                                       
|Diluted                                                   |                                         |                                       
|                                                          |                                         |                                       
|Basic weighted average shares outstanding                 |                                         |                                       
|Diluted weighted average shares outstanding               |                                         |                                       

See accompanying notes to
consolidated financial statements

4

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Schedule 2

PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME(Unaudited)
(dollars in thousands, except share data)

|                                                            | For the Three Months
Ended September 30 | For the Nine Months
Ended September 30
|----------------------------------------------------------- | --------------------------------------- | --------------------------------------
|
|                                                            |                                         |                                       
|Net income                                                  |                                         |                                       
|Other comprehensive income (loss), net of tax               |                                         |                                       
|Unrealized holding gains (losses) arising during the period |                                         |                                       
|Less:  Reclassification adjustment for realized gains       |                                         |                                       
|included in net income                                      |                                         |                                       
|                                                            |                                         |                                       
|                                                            |                                         |                                       
|Other comprehensive income (loss)                           |                                         |                                       
|                                                            |                                         |                                       
|                                                            |                                         |                                       
|Comprehensive income                                        |                                         |                                       
|                                                            |                                         |                                       

See accompanying notes to
consolidated financial statements

5

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Schedule 3



PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY(Unaudited)
(dollars in thousands, except per
share data)

|                                                                                | For the Nine Months
Ended September 30
|------------------------------------------------------------------------------- | --------------------------------------
|
|                                                                                |                                       
|Balance, January 1                                                              |                                       
|Net income                                                                      |                                       
|Cash dividends ($0.47 per share in 2003, and $.40 per share in 2002)            |                                       
|Other comprehensive income (loss), net of tax                                   |                                       
|Purchases of treasury stock (111,000 shares in 2003, and 57,300 shares in 2002) |                                       
|Exercise of stock options and re-issuance of treasury stock                     |                                       
|(22,936 shares in 2003 and 6,689 shares in 2002)                                |                                       
|Sales of treasury stock  (3,323 shares in 2003, and 3,549 shares in 2002)       |                                       
|                                                                                |                                       
|Balance, September 30                                                           |                                       
|                                                                                |                                       

See accompanying notes to
consolidated financial statements

6

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Schedule 4

PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
(dollars in thousands)

|                                                                     | For the Nine Months Ended
Ended September 30
|-------------------------------------------------------------------- | --------------------------------------------
|
|                                                                     |                                             
|Operating activities:                                                |                                             
|Net income                                                           |                                             
|Adjustments to reconcile net income to net                           |                                             
|cash provided by operating activities:                               |                                             
|Depreciation                                                         |                                             
|Provision for loan losses                                            |                                             
|Amortization of other intangible assets                              |                                             
|Amortization of premiums on investment                               |                                             
|securities, net of accretion                                         |                                             
|Gain on securities transactions, net                                 |                                             
|Gain on sale of premises and equipment                               |                                             
|FHLB stock dividends                                                 |                                             
|Loans originated for sale                                            |                                             
|Proceeds from sales of loans originated for sale                     |                                             
|Decrease in interest payable                                         |                                             
|Decrease in interest receivable                                      |                                             
|Increase in other assets                                             |                                             
|Decrease in other liabilities                                        |                                             
|                                                                     |                                             
|                                                                     |                                             
|Net cash provided by operating activities                            |                                             
|                                                                     |                                             
|                                                                     |                                             
|Investing activities:                                                |                                             
|Proceeds from sales of investment securities available-for-sale      |                                             
|Proceeds from maturities of investment securities available-for-sale |                                             
|Purchase of investment securities available-for-sale                 |                                             
|Proceeds from maturities of investment securities held-to-maturity   |                                             
|Purchase of investment securities held-to-maturity                   |                                             
|Proceeds from sales of premises and equipment                        |                                             
|Net increase in loans                                                |                                             
|Purchases of premises and equipment                                  |                                             
|                                                                     |                                             
|Net cash used in investing activities                                |                                             
|                                                                     |                                             
|                                                                     |                                             
|Financing activities:                                                |                                             
|Net increase in deposits                                             |                                             
|Net decrease in borrowings                                           |                                             
|Dividends paid                                                       |                                             
|Purchases of treasury stock                                          |                                             
|Exercise of stock options                                            |                                             
|Sales of treasury stock                                              |                                             
|                                                                     |                                             
|                                                                     |                                             
|Net cash provided by financing activities                            |                                             
|                                                                     |                                             
|                                                                     |                                             
|Increase (decrease) in cash and cash equivalents                     |                                             
|Cash and cash equivalents at beginning of period                     |                                             
|                                                                     |                                             
|                                                                     |                                             
|Cash and cash equivalents at September 30                            |                                             
|                                                                     |                                             
|                                                                     |                                             
|                                                                     |                                             
|Supplemental disclosures of cash flow information:                   |                                             
|Cash paid during the period for:                                     |                                             
|Interest                                                             |                                             
|Income taxes                                                         |                                             
|Supplemental disclosures of non-cash flow activities:                |                                             
|Loans transferred to other real estate owned                         |                                             

See accompanying notes to
consolidated financial statements

7

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Schedule 5

PRINCETON NATIONAL
BANCORP, INC. AND SUBSIDIARYNotes to Consolidated
Financial Statements(Unaudited)

The accompanying unaudited
consolidated financial statements have been prepared in accordance with the instructions
to Form 10-Q and do not include all of the information required by accounting principles
generally accepted in the United States of America for complete financial statements and
related footnote disclosures. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered for a fair presentation of the results for
the interim period have been included. For further information, refer to the consolidated
financial statements and notes included in the Registrants 2002 Annual Report on
Form 10-K. Results of operations for interim periods are not necessarily indicative of the
results that may be expected for the year. Certain amounts in the 2002 consolidated
financial statements have been reclassified to conform to the 2003 presentation.

# (1) EARNINGS PER SHARE
CALCULATION

The
following table sets forth the computation of basic and diluted earnings per share for the
periods indicated (in thousands, except share data):

|                                 | Three Months Ended
September 30, |  | Nine Months Ended
September 30,
|-------------------------------- | -------------------------------- |  | -------------------------------
|
|                                 |                                  |  |                                
|Numerator:                       |                                  |  |                                
|Net income                       |                                  |  | $                              
|Denominator:                     |                                  | 
|Basic earnings per share-        |                                  | 
|weighted average shares          |                                  |  |                                
|Effect of dilutive securities-   |                                  | 
|stock options                    |                                  |  |                                
|                                 |                                  |  |                                
|Diluted earnings per share-      |                                  | 
|adjusted weighted average shares |                                  |  |                                
|Net income per share:            |                                  | 
|Basic                            |                                  |  | $                              
|Diluted                          |                                  |  | $                              

8

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# (2) GOODWILL AND
INTANGIBLE ASSETS

The
balance of goodwill, net of accumulated amortization, totaled $1,355,000 at September 30,
2003 and December 31, 2002. The balance of intangible assets, net of accumulated
amortization, totaled $1,576,000 and $1,732,000 at September 30, 2003 and December 31,
2002, respectively.

The
following table summarizes the Corporations intangible assets, which are subject to
amortization, as of September 30, 2003 and December 31, 2002.

|                        | 2003 |  | 2002
|----------------------- | ---- |  | ----
|
|                        |      |  |     
|Core deposit intangible |      |  | $   
|Other intangible assets |      |  |     
|                        |      |  |     
|Total                   |      |  | $   
|                        |      |  |     

Amortization
expense totaled $52,000 and $156,000 both for the three and nine months ended September
30, 2003 and September 30, 2002, respectively. The amortization expense will be
approximately $52,000 for the remainder of 2003 and will be approximately $205,000 for
each of the next five years.

The
Corporations other intangible assets consist of originated mortgage servicing rights
which are included in other assets on the consolidated balance sheets. Mortgage servicing
rights are amortized in proportion to, and over the period of, estimated net servicing
income similar to the interest method using an accelerated amortization method and are
subject to periodic impairment testing. As of September 30, 2003 no impairment had been
recorded. Changes in the carrying value of capitalized mortgage servicing rights are
summarized as follows:

|(in thousands)                   |  |  |   |       |  
|-------------------------------- |  |  | - | ----- | -
|Balance, January 1               |  |  | $ | 970   |  
|Servicing rights capitalized     |  |  |   | 80    |  
|Amortization of servicing rights |  |  |   | (488  | )
|Impairment of servicing rights   |  |  |   | 0     |  
|                                 |  | 
|Balance, September 30            |  |  | $ | 1,288 |  
|                                 |  | 

Amortization
expense for the mortgage servicing rights asset are based on assumptions made during each
reporting period. Such assumptions include, but are not limited to, the current level of
interest rates and the forecasted prepayment speeds. Actual amortization expense is also
affected by the amount of loans sold with servicing retained.

9

---

The
Corporation services loans for others with unpaid principal balances at September 30, 2003
and December 31, 2002 of approximately $133,444,000, and $94,678,000, respectively.

The
following table shows the future estimated amortization expense for mortgage servicing
rights based on existing balances as of September 30, 2003. 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 servicing rights, changes in
mortgage interest rates, estimated prepayment speeds, and market conditions.

Estimated Amortization Expense:

|                                             | Amount (in thousands)
|-------------------------------------------- | ---------------------
|For the three months ended December 31, 2003 |                      
|For the year ended December 31, 2004         |                      
|For the year ended December 31, 2005         |                      
|For the year ended December 31, 2006         |                      
|For the year ended December 31, 2007         |                      
|For the year ended December 31, 2008         |                      
|Thereafter                                   |                      

# (3) STOCK OPTION PLAN

The
Corporation accounts for the stock-based compensation plan under APB Opinion No. 25. For
the stock option program, no compensation cost is recognized in connection with the
granting of stock options with an exercise price equal to the fair market value of the
stock on the date of the grant. In accordance with the disclosure requirements of FAS 123,
as amended by FAS 148, the following table provides the pro forma effect on net income and
earnings per share if the fair value method of accounting for stock-based compensation had
been used for all awards:

|                                         | For the Three Months Ended Sept. 30 | For the Nine Months Ended Sept. 30,
|---------------------------------------- | ----------------------------------- | -----------------------------------
|
|Net Income as reported                   |                                     |                                    
|Deduct: Stock-based compensation, net of |                                     |                                    
|tax, that would have been reported       |                                     |                                    
|if the fair value based method had       |                                     |                                    
|been applied to all awards               |                                     |                                    
|                                         |                                     |                                    
|Pro forma net income                     |                                     |                                    
|                                         |                                     |                                    
|Basic Earnings Per Share                 |                                     |                                    
|As Reported                              |                                     |                                    
|Pro Forma                                |                                     |                                    
|Diluted Earnings Per Share               |                                     |                                    
|As Reported                              |                                     |                                    
|Pro Forma                                |                                     |                                    

10

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Schedule 6

PRINCETON
NATIONAL BANCORP, INC. AND SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the quarter and nine months ended September 30, 2003 and 2002

The
following discussion provides information about Princeton National Bancorp, Inc.s
(PNBC or the Corporation) financial condition and results of
operations for the quarter and nine months ended September 30, 2003 and 2002. This
discussion should be read in conjunction with the attached consolidated financial
statements and notes thereto. Certain statements in this report constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not
limited to those statements that include the words believes,
expects, anticipates, estimates, or similar
expressions. PNBC cautions that such forward-looking statements involve risks and
uncertainties that may cause actual results to differ materially from those expressed or
implied. Such risks and uncertainties include potential change in interest rates,
competitive factors in the financial services industry, general economic conditions, the
effect of new legislation, and other risks detailed in documents filed by the Corporation
with the Securities and Exchange Commission from time to time.

# RESULTS OF OPERATIONS

Net
income for the third quarter of 2003 was $1,709,000, or basic earnings per share of $0.54
(diluted earnings per share of $0.53), as compared to net income of $1,528,000 in the
third quarter of 2002, or basic and diluted earnings per share of $0.46. This represents
an increase of $181,000 (11.9%) or $.08 per basic share and $.07 per diluted share. An
increase in non-interest income along with an improving net interest margin more than
offset increases in non-interest expenses causing the increase in net income. Net income
for the first nine months of 2003 was $4,966,000, or basic earnings per share of $1.55
(diluted earnings per share of $1.54), compared to net income of $4,629,000, or basic
earnings per share of $1.40 (diluted earnings per share of $1.39) for the first nine
months of 2002. This represents an increase of $337,000 (or 7.3%) during the first nine
months of 2003 over the same period in 2002, and an increase of $.15 per basic and diluted
share (or 10.7% and 10.8%, respectively). The increase in net income for the first nine
months of 2003 is a result of a 33.8% increase in non-interest income, partially offset by
a 6.3% increase in non-interest expense and a lower net interest margin. The annualized
return on average assets and return on average equity were 1.13% and 13.50%, respectively,
for the third quarter of 2003, compared with 1.05% and 11.82% for the third quarter of
2002. For the nine-month periods, the annualized return on average assets and average
equity were 1.12% and 13.06%, respectively for 2003, compared to 1.11% and 12.54%,
respectively for 2002.

Net
interest income before provision for loan losses was $4,959,000 for the third quarter of
2003, compared to $4,713,000 for the third quarter of 2002 (an increase of $246,000 or
5.2%). This increase is a result of both an increase in average interest-earning assets
and an improving net interest margin. For the three months ended September 30, 2003,
average interest-earning assets were $547.7 million compared to $522.5 million for the
three months ended September 30, 2002. The resulting net yield on interest-earning assets
(on a fully taxable equivalent basis) increased from 3.83% in the third quarter of 2002 to
3.84% in the third quarter of 2003. For the first nine months of 2003, the net yield on
interest-earning assets (on a fully

11

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taxable equivalent basis) decreased
to 3.62% from 4.02% for the first nine months of 2002 . This decrease resulted from
premium amortization of $1,184,000 recorded in the second quarter of 2003 due to
accelerated prepayments in the collateralized mortgage obligation (CMO)
portfolio causing the yield on taxable investment securities to decrease from 5.07% for
the nine months ended September 30, 2002 to 2.43% for the nine months ended September 30,
2003.

PNBC
recorded a loan loss provision of $100,000 in the third quarter of 2003 compared to
$50,000 in the third quarter of 2002. For the nine-month comparable periods, PNBC recorded
a loan loss provision of $365,000 in 2003 and $425,000 in 2002. The provision expense
recorded each quarter is determined by managements evaluation of the risk
characteristics of the loan portfolio. For the third quarter of 2003, PNBC had net
charge-offs of $152,000, compared to net charge-offs of $28,000 for the third quarter of
2002. For the nine-month comparable periods, PNBC had net charge-offs of $647,000 in 2003
and net recoveries of $22,000 in 2002.

Non-interest
income totaled $2,258,000 for the third quarter of 2003, as compared to $1,927,000 during
the third quarter of 2002, an increase of $331,000 (or 17.2%). This is a result of an
increase in mortgage banking income of $444,000 (or 265.9%) due to fee income generated
from continued origination/refinancing and subsequent sales and servicing of mortgage
loans in the secondary market. Additionally, there was $98,000 in gains on sales of
available-for-sale securities in the third quarter of 2002, but none in the third quarter
of 2003. Year-to-date in 2003, non-interest income totals $7,434,000 compared to
$5,557,000 for the first nine months of 2002 (an increase of $1,877,000 or 33.8%).
Mortgage banking income has increased by $1,023,000 in the comparable periods, while gains
on sales of securities have increased by $797,000 during the first three quarters of 2003.
Other notable increases have been seen in service charges on deposit accounts ($211,000 or
10.4%) and in trust and farm management fees ($60,000 or 6.7%).

Total
non-interest expense for the third quarter of 2003 was $4,728,000, an increase of $110,000
(or 2.4%) from $4,618,000 in the third quarter of 2002. The largest increases was in
salaries/employee benefits, which increased $213,000 (or 8.4%) due to increases in
commissions from mortgage banking operations as well as increased insurance costs.
Collectively, all other categories of non-interest expense decreased $103,000 (or 4.9%).
Year-to-date non-interest expenses for 2003 of $13,928,000 have increased $821,000 (or
6.3%) from the year-to-date totals at September 30, 2002. The most notable increases are
again in salaries/employee benefits ($596,000 or 8.1%), other operating expense ($169,000
or 6.9%), and in equipment expense, which increased $78,000 (7.0%) due to increased
depreciation from the upgrade of bank technology. Additionally impacting other operating
expense was the Corporations decision to outsource the internal audit function.

# INCOME TAXES

Income
tax expense totaled $680,000 for the third quarter of 2003, as compared to $444,000 for
the third quarter of 2002. The effective tax rate was 28.5% for the three months ended
September 30, 2003 compared to 22.5% for the three months ended September 30, 2002. Income
tax expense totaled $1,943,000 for the first nine months of 2003, as compared to
$1,647,000 for the same time period of 2002. The effective tax rate was 28.1% for the nine
months ended September 30, 2003 compared to 26.2% for the nine months ended September 30,
2002.

12

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# ANALYSIS OF FINANCIAL
CONDITION

Total
assets at September 30, 2003 increased to $599,164,000 from $587,375,000 at December 31,
2002 (an increase of $11.8 million or 2.0%). Total deposits at September 30, 2003
increased to $524,384,000 from $511,267,000 at December 31, 2002 (an increase of $13.1
million or 2.6%). As interest rates have decreased, there continues to be a shift to
savings and interest-bearing demand deposits (which would include money market and
interest checking accounts) away from time deposits. Comparing categories of deposits at
September 30, 2003 to the December 31, 2002 totals: interest-bearing demand deposits
increased $20.2 million (or 13.0%) and savings deposits increased $4.8 million (or 9.2%).
Conversely, time deposits decreased $8.7 million (or 3.5%); and demand deposits decreased
by $3.2 million (or 5.4%). Borrowings, consisting of customer repurchase agreements, notes
payable, treasury, tax, and loan (TT&L) deposits, federal funds purchased,
and Federal Home Loan Bank advances, decreased from $19,491,000 at December 31, 2002 to
$18,700,000 at September 30, 2003 (a decrease of $791,000 or 4.1%). Investments totaled
$163,004,000 at September 30, 2003, compared to $169,318,000 at December 31, 2002 (a
decrease of $6.3 million or 3.7%).

Loan
balances, net of unearned interest, increased to $379,267,000 at September 30, 2003,
compared to $364,120,000 at December 31, 2002 (an increase of $15.1 million or 4.2%).
Non-performing loans totaled $2,839,000 or 0.75% of net loans at September 30, 2003, as
compared to $3,820,000 or 1.07% of net loans at December 31, 2002.

For
the nine months ended September 30, 2003, the subsidiary bank charged off $792,000 of
loans and had recoveries of $145,000, compared to charge-offs of $391,000 and recoveries
of $413,000 during the nine months ended September 30, 2002. The allowance for loan losses
is based on factors that include the overall composition of the loan portfolio, types of
loans, underlying collateral, past loss experience, loan delinquencies, substandard and
doubtful credits, and such other factors that, in managements reasonable judgment,
warrant consideration. The adequacy of the allowance is monitored monthly. At September
30, 2003, the allowance was $2,378,000 which is 83.8% of non-performing loans and 0.63% of
total loans, compared with $2,660,000 which was 69.6% of non-performing loans and 0.73% of
total loans at December 31, 2002.

At
September 30, 2003, impaired loans totaled $1,755,000 compared to $2,230,000 at December
31, 2002. Loans 90 days or more past due and still accruing interest at September 30, 2003
were $0, compared to $23,000 at December 31, 2002. The balances of non-performing and
impaired loans continue to be below industry averages. There is a specific loan loss
reserve of $462,000 established for impaired loans as of September 30, 2003 compared to a
specific loan loss reserve of $173,000 at December 31, 2002. PNBCs management
analyzes the allowance for loan losses monthly and believes the current level of allowance
is adequate to meet probable losses as of September 30, 2003.

# CAPITAL RESOURCES

Federal
regulations require all financial institutions to evaluate capital adequacy by the
risk-based capital method, which makes capital requirements more sensitive to the
differences in the level of risk assets. At September 30, 2003 total risk-based capital of
PNBC was 11.57%, compared to 11.74% at December 31, 2002. The Tier 1 capital ratio
increased from 7.80% at December 31, 2002, to 7.88% at September 30, 2003. Total
stockholders equity to total assets at September 30, 2003 decreased to 8.60% from
8.70% at December 31, 2002.

13

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# 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 include
cash flow from the repayment of loans and the maturity of investment securities. Major
uses of cash include the origination of loans and purchase of investment securities. Cash
flows provided by operating and financing activities, offset by those used in investing
activities, resulted in a net increase in cash and cash equivalents of $1,686,000 from
December 31, 2002 to September 30, 2003. This increase was primarily due to a net increase
in deposits and a net decrease in investments, offset by a net increase in loans. For more
detailed information, see PNBCs Consolidated Statements of Cash Flows.

# FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK

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

The
subsidiary banks exposure to credit loss in the event of non-performance by the
other party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of those instruments.
The subsidiary bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. At September 30, 2003 commitments
to extend credit and standby letters of credit were approximately $94,952,000 and
$2,781,000, 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 counter party. 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.

# EXPANSION PLANS

The
Corporation has signed a sales contract for the purchase of property in Aurora, Illinois.
The purchase of this property should occur prior to year-end 2003 and construction of the
new bank facility will begin in the spring of 2004. Once this facility is completed, a
facility will be built on the Elburn, Illinois property which was purchased in July of
2003.

14

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# LEGAL PROCEEDINGS

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

# QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There
has been no material change in market risk since December 31, 2002, as reported in
PNBCs 2002 Annual Report on Form 10-K.

# NEW ACCOUNTING
PRONOUNCEMENTS

In
January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities which
provides new accounting guidance on when to consolidate a variable interest entity. A
variable interest entity exists when either the total equity investment at risk is not
sufficient to permit the entity to finance its activities by itself, or the equity
investors lack one of three characteristics associated with owning a controlling financial
interest. Those characteristics include the direct or indirect ability to make decisions
about an entitys activities through voting rights or similar rights, the obligation
to absorb the expected loss of an entity if they occur, and the right to receive the
expected residual return of the entity to occur. The Corporation does not expect the
adoption of the Interpretation will have any impact on the consolidated financial
statements.

In
April 2003, the FASB issued FAS 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. This Statement amends and clarifies accounting
for derivative instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This Statement is effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated after June
30, 2003. Adoption of this Statement did not have a material effect on the
Corporations consolidated financial statements.

In
May 2003, the FASB issued FAS 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This statement would require that
certain financial instruments with characteristics of both liabilities and equity be
classified on the consolidated balance sheet as liabilities. The Statement is effective
for financial instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15, 2003.
Adoption of this Statement did not have a material effect on the Corporations
consolidated financial statements.

# 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.

15

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PRINCETON NATIONAL BANCORP, INC. AND
SUBSIDIARY

The
following table sets forth (in thousands) details of average balances, interest income
and expense, and resulting annualized rates for the Corporation for the periods
indicated, reported on a fully taxable equivalent basis, using a tax rate of 34%.

|                                             | Nine Months Ended, September 30, 2003 | Nine Months Ended, September 30, 2002
|-------------------------------------------- | ------------------------------------- | -------------------------------------
|
|Average Interest-Earning Assets              |                                       |                                      
|                                             |                                       |                                      
|Interest-bearing deposits                    |                                       |                                      
|Taxable investment securities                |                                       |                                      
|Tax-exempt investment securities             |                                       |                                      
|Federal funds sold                           |                                       |                                      
|Net loans                                    |                                       |                                      
|                                             |                                       |                                      
|Total interest-earning assets                |                                       |                                      
|                                             |                                       |                                      
|Average non-interest earning assets          |                                       |                                      
|                                             |                                       |                                      
|                                             |                                       |                                      
|Total average assets                         |                                       |                                      
|                                             |                                       |                                      
|                                             |                                       |                                      
|Average Interest-Bearing Liabilities         |                                       |                                      
|Interest-bearing demand deposits             |                                       |                                      
|Savings deposits                             |                                       |                                      
|Time deposits                                |                                       |                                      
|Interest-bearing demand notes                |                                       |                                      
|issued to the U.S. Treasury                  |                                       |                                      
|Federal funds purchased and                  |                                       |                                      
|securities repurchase agreements             |                                       |                                      
|Advances from Federal Home Loan Bank         |                                       |                                      
|Borrowings                                   |                                       |                                      
|                                             |                                       |                                      
|Total interest-bearing liabilities           |                                       |                                      
|                                             |                                       |                                      
|                                             |                                       |                                      
|Net yield on average interest-earning assets |                                       |                                      
|                                             |                                       |                                      
|                                             |                                       |                                      
|Average non-interest-bearing liabilities     |                                       |                                      
|Average stockholders equity                 |                                       |                                      
|                                             |                                       |                                      
|Total average liabilities and                |                                       |                                      
|stockholders equity                         |                                       |                                      
|                                             |                                       |                                      

16

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# Schedule 7. 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 September 30,           2003.
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, 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 September 30,
          2003 that could significantly affect those controls.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

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INDEX TO EXHIBITS

|ExhibitNumber | Exhibit                                                                                                                               
|------------- | --------------------------------------------------------------------------------------------------------------------------------------
|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.
|              |                                                                                                                                       

18

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