# UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington D.C. 20549

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FORM 10-Q

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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006

Commission File Number 0-20050

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

|Delaware                                                      | 36-3210283                          
|------------------------------------------------------------- | ------------------------------------
|(State or other jurisdictionof incorporation or organization) | (I.R.S. Employer Identification No.)

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

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

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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 such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.

|Yes | X |  | No | 
|--- | - |  | -- | 

Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

|Large accelerated filer |  |  
|----------------------- |  | -
|Accelerated filer       |  | X
|Non-accelerated filer   |  |  

Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

|Yes |  |  | No | X
|--- |  |  | -- | -

As of October 17, 2006, the registrant had outstanding 3,369,245 shares of its $5 par value common stock.





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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 operation 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 1A.   Risk Factors



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



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



PNBCs agricultural and agricultural real estate loan portfolio total $136.0 million at September 30, 2006, comprising 23.1% of total loans. The primary risks associated with agricultural loans are weather and borrowers management. In the event of catastrophic weather conditions, such as severe drought or flooding, these loans would represent a higher risk due to poor crop sales and reduced cash flow that could impact the borrowers ability to repay the loan on a timely basis.



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



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

2

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



In determining the appropriate
level of allowance for loan losses, management considers, among other things, the overall composition of the loan portfolio, types
of loans, past loss experience, loan delinquencies, potential substandard and doubtful loans, underlying collateral, and other
factors that, in managements best judgment, deserve evaluation. Although management monitors the allowance monthly and
considers it adequate to absorb probable losses at September 30, 2006, if any of the assumptions are incorrect, the allowance may
not be sufficient to cover future loan losses. Future adjustments may be necessary to allow for different economic conditions or
adverse developments in the loan portfolio. Consequently, a problem with one or more loans could require the Corporation to
significantly increase the level of its provision for loan losses resulting in a reduction of earnings.



The Internal Controls of PNBC may not be
effective.



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



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



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



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



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



PNBC operates in a highly regulated
environment.



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

3

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Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds



(c)
        The following table provides information about purchases of the Corporations        common stock by the Corporation during the quarter ended September 30, 2006:




Period
        
        (a) Total number ofshares purchased
        
        (b) Average price paidper share
        
        (c)  Total number
of shares purchasedas part ofpublicly announcedplans or programs
        
        (d) Maximum number
(or approximate dollar
value) of shares that
may yet be purchased
under the plans orprograms7/1/06 -7/31/06
        
        0
        
        $
        0.00
        
        0
        
        75,0008/1/06 -8/31/06
        
        10,000
        
        $
        33.50
        
        10,000
        
        65,0009/1/06  9/30/06
        
        0
        
        $
        0.00
        
        0
        
        65,000Total
        
        10,000
        
        $
        33.50
        
        10,000
        
        65,000




On April 25, 2006, the Board of Directors approved the repurchase of up to an aggregate of 100,000 shares of our common stock pursuant to a repurchase program announced the same day (the Program). The expiration date of this Program is April 25, 2007. Unless terminated earlier by resolution of our Board of Directors, the Program will expire on the earlier of such expiration date or when we have repurchased all shares authorized for repurchase under the Program.



Item 6. 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
        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.






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.





By
        /s/ Tony J. Sorcic
        
        By
        /s/ Todd D. FanningTony J. Sorcic
President & Chief Executive Officer
November 7, 2006
        
        
        Todd D. Fanning
Sr. VP & Chief Financial Officer
November 7, 2006


4

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Schedule 1

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)



September 30,
2006(unaudited)
        
        December 31,2005ASSETSCash and due from banks
        
        $
        16,115
        
        $
        23,635Interest-bearing deposits with financial institutions
        
        
        6,921
        
        
        110Federal funds sold
        
        
        16,260
        
        
        0Total cash and cash equivalents
        
        
        39,296
        
        
        23,745Loans held for sale, at lower of cost or market
        
        
        3,864
        
        
        2,587Investment securities:Available-for-sale, at fair value
        
        
        250,734
        
        
        235,371Held-to-maturity, at amortized cost (fair value of $16,751 and $16,274)
        
        
        16,629
        
        
        16,115Total investment securities
        
        
        267,363
        
        
        251,486Loans:Loans, net of unearned interest
        
        
        589,906
        
        
        581,724Allowance for loan losses
        
        
        (3,164
        )
        
        (3,109
        )Net loans
        
        
        586,742
        
        
        578,615Premises and equipment, net of accumulated depreciation
        
        
        28,121
        
        
        26,412Bank-owned life insurance
        
        
        21,490
        
        
        20,434Accrued interest receivable
        
        
        10,314
        
        
        8,714Goodwill
        
        
        22,678
        
        
        22,665Intangible assets, net of accumulated amortization
        
        
        6,152
        
        
        6,843Other real estate owned
        
        
        440
        
        
        468Other assets
        
        
        3,904
        
        
        3,294TOTAL ASSETS
        
        $
        990,364
        
        $
        945,263LIABILITIESDeposits:Demand
        
        $
        89,606
        
        $
        103,622Interest-bearing demand
        
        
        228,717
        
        
        222,675Savings
        
        
        114,791
        
        
        109,491Time
        
        
        405,372
        
        
        362,770Total deposits
        
        
        838,486
        
        
        798,558Borrowings:Customer repurchase agreements
        
        
        34,931
        
        
        29,375Advances from the Federal Home Loan Bank
        
        
        7,364
        
        
        8,346Interest-bearing demand notes issued to the U.S. Treasury
        
        
        2,486
        
        
        2,154Federal funds purchased
        
        
        0
        
        
        1,000Trust Preferred securities
        
        
        25,000
        
        
        25,000Note payable
        
        
        6,550
        
        
        6,700Total borrowings
        
        
        76,331
        
        
        72,575Other liabilities
        
        
        9,337
        
        
        10,986TOTAL LIABILITIES
        
        
        924,154
        
        
        882,119STOCKHOLDERS EQUITYCommon stock:  $5 par value, 7,000,000 shares authorized;  4,478,295 issued atSeptember 30, 2006 and 4,478,296 at December 31, 2005
        
        
        22,392
        
        
        22,392Surplus
        
        
        18,025
        
        
        16,968Retained earnings
        
        
        47,562
        
        
        45,786Accumulated other comprehensive loss, net of tax
        
        
        (129
        )
        
        (482
        )Less:  Cost of 1,109,050 and 1,131,853 treasury shares atSeptember 30, 2006 and December 31, 2005, respectively
        
        
        (21,640
        )
        
        (21,520
        )TOTAL STOCKHOLDERS EQUITY
        
        
        66,210
        
        
        63,144TOTAL LIABILITIES ANDSTOCKHOLDERS EQUITY
        
        $
        990,364
        
        $
        945,263




See accompanying notes to unaudited consolidated financial statements

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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 MonthsEnded September 30
        
        For the Nine MonthsEnded September 302006
        
        2005
        
        2006
        
        2005Interest income:Interest and fees on loans
        
        $
        10,714
        
        $
        8,547
        
        $
        30,559
        
        $
        21,609Interest and dividends on investment securities
        
        
        2,767
        
        
        2,419
        
        
        7,905
        
        
        5,838Interest on federal funds sold
        
        
        206
        
        
        65
        
        
        357
        
        
        75Interest on interest-bearing time deposits in other banks
        
        
        59
        
        
        34
        
        
        77
        
        
        43Total interest income
        
        
        13,746
        
        
        11,065
        
        
        38,898
        
        
        27,565Interest expense:Interest on deposits
        
        
        6,397
        
        
        3,866
        
        
        16,736
        
        
        9,098Interest on borrowings
        
        
        961
        
        
        673
        
        
        2,791
        
        
        1,072Total interest expense
        
        
        7,358
        
        
        4,539
        
        
        19,527
        
        
        10,170Net interest income
        
        
        6,388
        
        
        6,526
        
        
        19,371
        
        
        17,395Provision for loan losses
        
        
        80
        
        
        0
        
        
        175
        
        
        0Net interest income after provisionfor loan losses
        
        
        6,308
        
        
        6,526
        
        
        19,196
        
        
        17,395Non-interest income:Trust & farm management fees
        
        
        300
        
        
        364
        
        
        1,158
        
        
        1,192Service charges on deposit accounts
        
        
        1,065
        
        
        936
        
        
        3,166
        
        
        2,416Other service charges
        
        
        501
        
        
        357
        
        
        1,336
        
        
        953Gain on sales of securities available-for-sale
        
        
        98
        
        
        21
        
        
        158
        
        
        50Gain on sale of loans
        
        
        0
        
        
        0
        
        
        90
        
        
        0Brokerage fee income
        
        
        201
        
        
        212
        
        
        563
        
        
        504Mortgage banking income
        
        
        149
        
        
        198
        
        
        536
        
        
        527Bank-owned life insurance income
        
        
        205
        
        
        169
        
        
        581
        
        
        444Other operating income
        
        
        45
        
        
        38
        
        
        125
        
        
        120Total non-interest income
        
        
        2,564
        
        
        2,295
        
        
        7,713
        
        
        6,206Non-interest expense:Salaries and employee benefits
        
        
        3,936
        
        
        3,621
        
        
        11,944
        
        
        9,608Occupancy
        
        
        523
        
        
        428
        
        
        1,458
        
        
        1,105Equipment expense
        
        
        717
        
        
        494
        
        
        2,138
        
        
        1,418Federal insurance assessments
        
        
        78
        
        
        63
        
        
        236
        
        
        179Intangible assets amortization
        
        
        163
        
        
        81
        
        
        488
        
        
        185Data processing
        
        
        194
        
        
        202
        
        
        781
        
        
        605Advertising
        
        
        220
        
        
        218
        
        
        634
        
        
        536Other operating expense
        
        
        1,135
        
        
        1,095
        
        
        3,525
        
        
        2,861Total non-interest expense
        
        
        6,966
        
        
        6,202
        
        
        21,204
        
        
        16,497Income before income taxes
        
        
        1,906
        
        
        2,619
        
        
        5,705
        
        
        7,104Income tax expense
        
        
        299
        
        
        580
        
        
        867
        
        
        1,665Net income
        
        $
        1,607
        
        $
        2,039
        
        $
        4,838
        
        $
        5,439Earnings per share:Basic
        
        
        0.48
        
        
        0.63
        
        
        1.43
        
        
        1.75Diluted
        
        
        0.47
        
        
        0.62
        
        
        1.43
        
        
        1.73Basic weighted average shares outstanding
        
        
        3,372,188
        
        
        3,252,157
        
        
        3,372,780
        
        
        3,114,303Diluted weighted average shares outstanding
        
        
        3,393,341
        
        
        3,283,682
        
        
        3,394,517
        
        
        3,139,371




See accompanying notes to unaudited consolidated financial statements

6

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Schedule 2

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(dollars in thousands)





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



See accompanying notes to unaudited consolidated financial statements

7

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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)

|CommonStock                   |  | Surplus |   | RetainedEarnings |  | AccumulatedOtherComprehensiveIncome (loss)net of tax effect |        | TreasuryStock |   | Total 
|----------------------------- |  | ------- | - | ---------------- |  | ----------------------------------------------------------- | ------ | ------------- | - | ------
|                             
|Balance, January 1, 2006      |  |         | $ | 22,392           |  | $                                                           | 16,968 |               | $ | 45,786
|                             
|Net income                    |  |         |   |                  |  |                                                             |        |               |   | 4,838 
|Sale of 937 shares           
|of treasury stock             |  |         |   |                  |  |                                                             | 15     |               |   |       
|Purchase of 35,000 shares     |  |        
|of treasury stock             |  |         |   |                  |  |                                                             |        |               |   |       
|Exercise of stock options and
|re-issuance of treasury      
|stock (56,865 shares)         |  |         |   |                  |  |                                                             | 1,042  |               |   | (565  
|Cash dividends                |  |        
|($.74 per share)              |  |         |   |                  |  |                                                             |        |               |   | (2,497
|Other comprehensive income,  
|net of $223 tax effect        |  |         |   |                  |  |                                                             |        |               |   |       
|                              |  |         |   |                  |  |                                                             |        |               |   |       
|                             
|Balance, September 30, 2006   |  |         | $ | 22,392           |  | $                                                           | 18,025 |               | $ | 47,562
|                              |  |         |   |                  |  |                                                             |        |               |   |       
|                             
|For the Nine Months Ended     |  |        
|September 30, 2005            |  |        
|                             
|Balance, January 1, 2005      |  |         | $ | 20,699           |  | $                                                           | 7,810  |               | $ | 42,156
|                             
|Net income                    |  |         |   |                  |  |                                                             |        |               |   | 5,439 
|Sale of 4,290 shares         
|of treasury stock             |  |         |   |                  |  |                                                             | 50     |               |   |       
|Purchase of 84,600 shares     |  |        
|of treasury stock             |  |         |   |                  |  |                                                             |        |               |   |       
|Exercise of stock options and
|re-issuance of treasury      
|stock (43,891 shares)         |  |         |   |                  |  |                                                             | 777    |               |   | (610  
|Cash dividends                |  |        
|($.65 per share)              |  |         |   |                  |  |                                                             |        |               |   | (2,059
|Issuance of 338,600 shares   
|of common stock               |  |         |   | 1,693            |  |                                                             | 8,307  |               |   |       
|Other comprehensive loss,     |  |        
|net of $626 tax effect        |  |         |   |                  |  |                                                             |        |               |   |       
|                              |  |         |   |                  |  |                                                             |        |               |   |       
|                             
|Balance, September 30, 2005   |  |         | $ | 22,392           |  | $                                                           | 16,944 |               | $ | 44,926
|                              |  |         |   |                  |  |                                                             |        |               |   |       

See accompanying notes to unaudited consolidated financial statements

8

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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 EndedSeptember 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 and purchase accounting adjustments       |                                       | 
|Amortization of premiums on investment securities, net of accretion               |                                       | 
|Gain on sales of securities, net                                                  |                                       | 
|Gain on sale of loans                                                             |                                       | 
|FHLB stock dividends                                                              |                                       | 
|Loans originated for sale                                                         |                                       | 
|Proceeds from sales of loans originated for sale                                  |                                       | 
|Increase in accrued interest payable                                              |                                       | 
|Increase in accrued interest receivable                                           |                                       | 
|Increase in other assets                                                          |                                       | 
|(Decrease) increase 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 sale of loans                                                       |                                       | 
|Net increase in loans                                                             |                                       | 
|Purchases of premises and equipment                                               |                                       | 
|Payment related to acquisition, net of cash and cash equivalents                  |                                       | 
|                                                                                  |                                       | 
|                                                                                 
|Net cash provided used in investing activities                                    |                                       | 
|                                                                                  |                                       | 
|                                                                                 
|Financing activities:                                                            
|Net increase in deposits                                                          |                                       | 
|Issuance of trust preferred securities                                            |                                       | 
|Net increase in borrowings                                                        |                                       | 
|Issuance of common stock                                                          |                                       | 
|Dividends paid                                                                    |                                       | 
|Purchases of treasury stock                                                       |                                       | 
|Exercise of stock options and issuance of treasury stock                          |                                       | 
|Sales of treasury stock                                                           |                                       | 
|                                                                                  |                                       | 
|                                                                                 
|Net cash provided by financing activities                                         |                                       | 
|                                                                                  |                                       | 
|                                                                                 
|Increase 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 unaudited consolidated financial statements

9

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Schedule 5

PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)



The accompanying unaudited
condensed consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods ended September 30, 2006 and 2005, and all such adjustments are of a normal
recurring nature. The 2005 year-end consolidated balance sheet data was derived from audited financial statements, but do not
include all disclosures required by generally accepted accounting principles.



The 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 2005 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 2005
consolidated financial statements have been reclassified to conform to the 2006 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 EndedSeptember 30, |  | Nine Months EndedSeptember 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                                                     |                                 |  | $                             

10

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(2)   GOODWILL AND INTANGIBLE ASSETS



The balance of goodwill, net of
accumulated amortization, totaled $22,678,000 at September 30, 2006 and $22,665,000 at December 31, 2005. The balance of
intangible assets, net of accumulated amortization, totaled $6,152,000 and $6,843,000 at September 30, 2006 and December 31, 2005,
respectively.



The following table summarizes the
Corporations intangible assets, which are subject to amortization, as of September 30, 2006 and December 31,
2005.



|(in thousands)          | 2006 |  | 2005
|----------------------- | ---- |  | ----
|
|Core deposit intangible |      |  | $   
|Other intangible assets |      |  |     
|                        |      |  |     
|Total                   |      |  | $   
|                        |      |  |     

Amortization expense of the
intangible assets in the table above totaled $691,000 for the nine months ended September 30, 2006 and $185,000 for the nine
months ended September 30, 2005, respectively, with the increase related to a full years amortization of the core deposit
intangible resulting from the acquisition of Somonauk FSB Bancorp, Inc. in August, 2005. The amortization expense of these
intangible assets will be approximately $230,000 for the remainder of 2006.



The Corporation has 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 on a basis similar to the interest method using
an accelerated amortization method and are subject to periodic impairment testing. As of September 30, 2006, no impairment had
been recorded during the year. Changes in the carrying value of capitalized mortgage servicing rights are summarized as
follows:



|(in thousands)                  
|--------------------------------
|                                
|Balance, January 1, 2006        
|Servicing rights capitalized    
|Amortization of servicing rights
|Impairment of servicing rights  
|                                
|Balance, September 30, 2006     
|                                

The Corporation services loans for
others with unpaid principal balances at September 30, 2006 and December 31, 2005 of approximately $233,566,000, and $202,042,000,
respectively.

11

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The following table shows the
future estimated amortization expense for mortgage servicing rights based on existing balances as of September 30, 2006. 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, actual prepayment speeds,
and market conditions.



|Estimated Amortization Expense:              | Amount (in thousands)
|-------------------------------------------- | ---------------------
|For the three months ended December 31, 2006 |                      
|For the year ended December 31, 2007         |                      
|For the year ended December 31, 2008         |                      
|For the year ended December 31, 2009         |                      
|For the year ended December 31, 2010         |                      
|For the year ended December 31, 2011         |                      
|Thereafter                                   |                      

(3)   STOCK BASED COMPENSATION



Effective January 1,
2006, the Company adopted Financial Accounting Standards Board Statement No. 123R (FASB 123R)
requiring the recording of future compensation expense based on grant date fair value with regard to stock options as opposed to
recording compensation expense equal to the intrinsic value of stock options on grant date which generally resulted in no
compensation expense being recorded. On December 20, 2005, the Company announced that the Personnel Policy and Salary Committee of
the Board of Directors approved the accelerated vesting of all outstanding unvested stock options to purchase shares of common
stock of PNBC granted through the Companys non-qualified stock option plan. The unvested options related to awards granted
in 2003 and 2004 to directors and officers of the Company. All of the unvested options were in the money, in a range from $4.42 to
$22.06 per share, at the date vesting was accelerated. There was no compensation cost recognized in the financial statements from
the vesting decision. By accelerating the vesting of these options, the Company estimates approximately $925,000 of future
compensation expense will be eliminated, which the Company believes is in the best interests of the shareholders. Options to
purchase 142,133 shares of PNBC common stock, which otherwise would have vested from time to time over the next two years, became
immediately exercisable as a result of this decision. The remaining terms for each of the options granted remain the same. This
acceleration became effective as of December 31, 2005. Additionally, the Company announced the stock option award for 2005 of
80,700 shares was granted with full vesting. This decision was made to eliminate additional future compensation expense of
approximately $163,000 for each of the next three years, beginning in 2006.



12

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The number of shares of common
stock authorized under the stock option plans is 502,500. The option exercise price must be at least 100% of the fair market value
of the common stock on the date of grant, and the option term cannot exceed ten years. A summary of the stock option activity and
related information follows:

|                                              | Nine Months EndedSeptember 30, 2006 |  | Twelve Months EndedDecember 31, 2005
|--------------------------------------------- | ----------------------------------- |  | ------------------------------------
|
|Beginning of period balance                   |                                     |  |                                     
|Granted                                       |                                     |  |                                     
|Exercised                                     |                                     |  |                                     
|Forfeited                                     |                                     |  |                                     
|                                              |                                     |  |                                     
|                                             
|End of period balance                         |                                     |  |                                     
|                                             
|Options exercisable                           |                                     |  |                                     
|Fair value of options granted during the year |                                     |  | $                                   
|Average exercise price                        |                                     |  | $                                   

The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS 123 on
stock-based compensation for the three and six-month periods ended September 30, 2005.



|                                                                                                        | Three Months EndedSeptember 30, 2005 |  | Nine Months EndedSeptember 30, 2005
|------------------------------------------------------------------------------------------------------- | ------------------------------------ |  | -----------------------------------
|                                                                                                       
|Net income as reported                                                                                  |                                      |  | $                                  
|Stock based compensation expense determined under    fair value based method, net of related tax effect |                                      |  |                                    
|                                                                                                        |                                      |  |                                    
|Pro forma net income                                                                                    |                                      |  | $                                  
|                                                                                                       
|Basic Earnings Per Share:                                                                               |                                      | 
|As reported                                                                                             |                                      |  | $                                  
|Pro forma                                                                                               |                                      |  |                                    
|                                                                                                       
|Diluted Earnings Per Share:                                                                            
|As reported                                                                                             |                                      |  | $                                  
|Pro forma                                                                                               |                                      |  |                                    

(4)   IMPACT OF NEW ACCOUNTING STANDARDS



In February 2006, the FASB issued
SFAS No. 155 (FAS 155), Accounting for Certain Hybrid Financial Instruments: an amendment of FASB Statements
No. 133 and 140. FAS 155 permits fair value re-measurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are
not subject to the requirements of Statement 133, establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends Statement 140 to eliminate the prohibition on

13

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a qualifying special purpose entity from holding a
derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. FAS 155
is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that
begins after September 15, 2006. The Corporation does not expect the adoption of FAS 155 will have a material impact on its
results of operations, financial position, or liquidity.



In March 2006, the FASB issued SFAS
No. 156 (FAS 156), Accounting for Servicing of Financial Assets  an amendment of FAS 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, with respect to the accounting for separately
recognized servicing assets and liabilities. FAS 156 requires an entity to recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following
situations: a transfer of the servicers financial assets that meets the requirements for sale accounting, a transfer of the
servicers financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the
transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading
securities in accordance with FAS 115, Accounting for Certain Investments in Debt and Equity Securities, or an
acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer
or its consolidated affiliates. FAS 156 maintains the requirement set forth under FAS 140 that all separately recognized servicing
assets and servicing liabilities are to be initially measured at fair value, if practicable. In regard to subsequent measurement
methods for each class of separately recognized servicing assets and servicing liabilities, FAS 156 amends FAS 140 to allow for
either an amortization method or a fair value measurement method. FAS 156 is effective as of the beginning of the fiscal year that
begins after September 15, 2006. The Corporation does not expect the adoption of FAS 156 will have a material impact on its
results of operations, financial position, or liquidity.



In July 2006, the FASB issued
FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes  an Interpretation of FASB
Statement 109, which provides guidance on the measurement, recognition, and disclosure of tax positions taken or expected to
be taken in a tax return. The Interpretation also provides guidance on derecognition, classification, interest and penalties, and
disclosure. FIN 48 prescribes that a tax position should only be recognized if it is more-likely-than-not that the position will
be sustained upon examination by the appropriate taxing authority. A tax position that meets this threshold is measured as the
largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The cumulative effect
of applying the provisions of FIN 48 is to be reported as an adjustment to the beginning balance of retained earnings in the
period of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently
assessing the impact, if any, that the adoption of this Interpretation will have on its financial statements.



In September 2006, FASB issued SFAS
No. 157 (FAS 157), Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets
and liabilities. FAS 157 establishes a common definition of fair value, provides a framework for measuring fair value under U.S.
GAAP and expands disclosures requirements about fair value measurements. FAS 157 is effective for financial statements issued in
fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating
the impact, if any, the adoption of FAS 157 will have on its financial reporting and disclosures.

14

---

In September 2006, the FASB issued
SFAS No. 158 (FAS 158), Employers Accounting for Defined Benefit Pension and Other Postretirement Plans  an
amendment of FASB Statements 87, 88, 106, and 132 (R), which requires recognition of a net liability or asset to report the
funded status of defined benefit pension and other postretirement plans on the balance sheet and recognition (as a component of
other comprehensive income) of changes in the funded status in the year in which the changes occur. Additionally, FAS 158 requires
measurement of a plans assets and obligations as of the balance sheet date and additional annual disclosures in the notes to
the financial statements. The recognition and disclosure provisions of FAS 158 are effective for fiscal years ending after
December 15, 2006, while the requirement to measure a plans assets and obligations as of the balance sheet date is effective
for fiscal years ending after December 15, 2008. The Company is currently evaluating the impact the adoption of FAS 158 will have
on its financial reporting and disclosures.

15

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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 three and nine months ended September 30, 2006 and 2005



The following discussion
provides information about Princeton National Bancorp, Inc.s (PNBC or the Corporation) financial
condition and results of operations for the three and nine month periods ended September 30, 2006 and 2005. 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 2006 was $1,607,000, or basic earnings per share of $0.48 (diluted earnings per share of $0.47), as compared to net
income of $2,039,000 in the third quarter of 2005, or basic earnings per share of $0.63 (diluted earnings per share of $0.62).
This represents a decrease of $432,000 (21.2%) or $.15 per basic and diluted share. The lower net income figure is primarily
attributed to a decrease in the net yield on interest-earning assets from 3.65% for the third quarter of 2005 to 3.23% for the
third quarter of 2006. Also contributing to the lower net income were additional expenses incurred with the opening of our newest
office in Aurora, Illinois on May 1, 2006. Net income for the first nine months of 2006 was $4,838,000, or basic earnings per
share of $1.43 (diluted earnings per share also $1.43), compared to net income of $5,439,000, or basic earnings per share of $1.75
(diluted earnings per share of $1.73) for the first nine months of 2005. This represents a decrease of $601,000 (11.1%) or $0.32
per basic share and $0.30 per diluted share. The lower net income figure is again primarily attributed to a decrease in the net
yield on interest-earning assets from 3.80% for the first nine months of 2005 to 3.39% for the first nine months of 2006. The
annualized return on average assets and return on average equity were 0.66% and 9.90%, respectively, for the third quarter of
2006, compared with 0.94% and 13.71% for the third quarter of 2005. For the comparable nine-month periods, the annualized return
on average assets and return on average equity were 0.69% and 10.12%, respectively for 2006, compared with 1.00% and 13.34%,
respectively for 2005.



Net interest income before
provision for loan losses was $6,388,000 for the third quarter of 2006, compared to $6,526,000 for the third quarter of 2005 (a
decrease of $138,000 or 2.1%). This is a result of the previously mentioned decrease in the net interest margin, despite an
increase of $87.7 million in average interest-earning assets over the past twelve months. For the three months ended September 30,
2006, average interest-earning assets were $858.8 million compared to $771.0 million for the three months ended September 30,
2005. Net interest income before any provision for loan losses was $19,371,000 for the first nine months of 2006, compared to
$17,395,000 for the first nine months of 2005 (an increase of $2.0 million or 11.4%). As mentioned above, the resulting net yield
on interest-earning assets (on a fully taxable equivalent basis) decreased to 3.39% in the first three quarters of 2006 from 3.80%
in the first three quarters of 2005. As interest rates have risen quickly over the past year, the yield on interest-earning assets
(increased 65 basis points) has not been able to keep pace with the rising cost of interest-bearing liabilities (increased 107
basis points). A further increase to the cost of interest-bearing liabilities has occurred because average time deposits now
account for 48.6% of average interest-bearing liabilities for the nine months ended September 30, 2006 compared to 46.2% for the
same period in 2005. The average cost of the time deposits portfolio has risen 139 basis points in the past twelve months.

16

---

The Corporations
provision for loan losses expense recorded each quarter is determined by managements evaluation of the risk characteristics
of the loan portfolio. For the third quarter of 2006, PNBC had net recoveries of $11,000, compared to net charge-offs of $6,000
for the third quarter of 2005. For the nine-month comparable periods, PNBC had net charge-offs of $208,000 in 2006 and net
charge-offs of $28,000 in 2005. PNBC recorded a loan loss provision of $80,000 in the third quarter of 2006 and $175,000 in the
first nine months of 2006 compared to a provision of $0 in the third quarter and first nine months of 2005. The ratio of
non-performing loans to total loans at September 30, 2006 remains very low at 0.70% compared to 0.44% at September 30,
2005.



Non-interest income totaled
$2,564,000 for the third quarter of 2006, compared to $2,295,000 in the third quarter of 2005, an increase of $269,000 (or 11.7%).
Service charges on deposits and other service charges had the largest increases of $129,000 and $144,000, respectively, due to a
larger customer base following the acquisition of Somonauk FSB Bancorp in the third quarter of 2005. Annualized non-interest
income as a percentage of average total assets decreased slightly to 1.05% for the third quarter of 2006 from 1.06% for the same
period in 2005. Year-to-date in 2006, non-interest income totaled $7,713,000 compared to $6,206,000 for the first three quarters
of 2005, an increase of $1,507,000 (or 24.3%). Again, the primary reason for the positive change is the increase in service
charges on deposits and other service charges (increasing $750,000 and $383,000, respectively). The Corporation recorded gains
from the sales of securities available-for-sale of $158,000 in the first nine months of 2006 compared to $50,000 for the first
nine months of 2005. The Corporation also recorded a pre-tax gain of $90,000 in conjunction with the sale of $16,500,000 of first
mortgage loans during the first quarter of 2006. These funds were used to meet the Corporations short-term liquidity needs
and fund future loans at higher interest rates, thus improving the net interest margin. The servicing of these loans was retained
which will help further increase non-interest income. Annualized non-interest income as a percentage of total average assets
decreased from 1.14% for the first nine months of 2005, to 1.09% for the same period in 2006.



Total non-interest expense for
the second quarter of 2006 was $6,966,000, an increase of $764,000 (or 12.3%) from $6,202,000 in the third quarter of 2005. All
categories of non-interest expense, other than data processing, were higher due to the increased number of employees and
facilities resulting from the FSB acquisition in August, 2005 and the opening of new locations in Plano during the 4th
quarter of 2005 and Aurora during the 2nd quarter of 2006. Annualized non-interest expense as a percentage of total
average assets decreased to 2.86% for the third quarter of 2006, compared to 2.87% for the same period in 2005. Year-to-date
non-interest expense for the first nine months of 2006 was $21,204,000, an increase of $4,707,000 (or 28.5%) from the $16,497,000
for the first nine months of 2005 for the same reasons mentioned above in comparing the second quarter activity. Annualized
non-interest expense as a percentage of total average assets also decreased to 3.00% for the first nine months of 2006, compared
to 3.03% for the same period in 2005.

17

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INCOME TAXES



Income tax expense totaled
$299,000 for the third quarter of 2006, as compared to $580,000 for the third quarter of 2005. The effective tax rate was 15.7%
for the three month period ended September 30, 2006 and 22.2% for the three month period ended September 30, 2005. Income tax
expense totaled $867,000 for the first nine months of 2006, as compared to $1,665,000 for the first nine months of 2005. The
effective tax rate was 15.2% for the nine month period ended September 30, 2006 and 23.4% for the nine month period ended
September 30, 2005. The lower effective tax rate in 2006 (both quarter and year-to-date) is due to a significant increase in the
amount of tax-exempt investment securities in the Corporations investment portfolio.



ANALYSIS OF FINANCIAL CONDITION



Total assets at September 30,
2006 increased to $990,364,000 from $945,263,000 at December 31, 2005 (an increase of $45.1 million or 4.8%). Investment balances
totaled $267,363,000 at September 30, 2006, compared to $251,486,000 at December 31, 2005 (an increase of $15.9 million or 6.3%).
Total deposits increased to $838,486,000 at September 30, 2006 from $798,558,000 at December 31, 2005 (an increase of $39.9
million or 5.0%). Comparing categories of deposits at September 30, 2006 to December 31, 2005, time deposits increased by $42.6
million (or 11.7%), interest-bearing demand deposits increased by $6.0 million (or 2.7%), and savings deposits increased $5.3
million (or 4.8%). Conversely, demand deposits decreased $14.0 million (or 13.5%). Borrowings, consisting of customer repurchase
agreements, notes payable, treasury, tax, and loan (TT&L) deposits, federal funds purchased, and Federal Home Loan
Bank advances, increased from $72,575,000 at December 31, 2005 to $76,331,000 at September 30, 2006 (an increase of $3.8 million
or 5.2%).



Loan balances, net of unearned
interest, increased to $589,906,000 at September 30, 2006, compared to $581,724,000 at December 31, 2005 (an increase of $8.2
million or 1.4%). This increase is net of the aforementioned loan sale of $16.5 million of residential real estate mortgages
during the first quarter of 2006. Non-performing loans increased slightly to $4,125,000 or 0.70% of net loans at September 30,
2006, as compared to $3,825,000 or 0.66% of net loans at December 31, 2005. Although non-performing loans have increased, all are
individually evaluated and management continues to maintain adequate reserves in the allowance for loan losses.



ASSET QUALITY



For the nine months ended
September 30, 2006, the subsidiary bank charged off $428,000 of loans and had recoveries of $220,000, compared to charge-offs of
$171,000 and recoveries of $143,000 during the nine months ended September 30, 2005. 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, 2006, the allowance was $3,164,000
which is 76.7% of non-performing loans and 0.54% of total loans, compared with $3,109,000 which was 81.3% of non-performing loans
and 0.53% of total loans at December 31, 2005.



At September 30, 2006,
non-accrual loans were $4,125,000 compared to $3,822,000 at December 31, 2005. Impaired loans totaled $2,336,000 at September 30,
2006 compared to $2,204,000 at December 31, 2005. The total amount of loans ninety days or more past due and still accruing
interest at both September 30, 2006 and December 31, 2005 was $0. There was a specific loan loss reserve of $390,000 established
for impaired loans as of September 30, 2006 compared to a specific loan loss reserve of $111,000 at December 31, 2005. PNBCs
management analyzes the allowance for loan losses monthly and, again, believes the current level of allowance is adequate to meet
probable losses as of September 30, 2006.

18

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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, 2006, total risk-based capital of PNBC was 9.75%,
compared to 9.76% at December 31, 2005. The Tier 1 capital ratio decreased from 7.83% at December 31, 2005, to 6.63% at September
30, 2006. Total stockholders equity to total assets at September 30, 2006 increased to 6.69% from 6.68% at December 31,
2005.



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 by investing activities, resulted in a net increase in cash and cash equivalents of $15,551,000 from December
31, 2005 to September 30, 2006. This increase was primarily due to a net increase in deposits, offset by an increase in loans and
investments. 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, 2006, commitments to extend credit and standby letters of credit were approximately $129,042,000 and $9,360,000,
respectively.

19

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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.



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, 2005, as reported in PNBCs 2005 Annual Report on Form 10-K.



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.

20

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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 yields/costs 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, 2006 |  | Nine Months Ended, September 30, 2005
|-------------------------------------------- | ------------------------------------- |  | -------------------------------------
|
|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                      |                                       |  |                                      
|Customer repurchase agreements               |                                       |  |                                      
|Advances from Federal Home Loan Bank         |                                       |  |                                      
|Trust preferred securities                   |                                       |  |                                      
|Note payable                                 |                                       |  |                                      
|                                             |                                       |  |                                      
|                                            
|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                         |                                       |  | $                                    
|                                             |                                       |  |                                      

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

|                                      | For the Nine Months EndedSeptember 30,
|------------------------------------- | --------------------------------------
|
|Net interest income as stated         |                                       
|Tax equivalent adjustment-investments |                                       
|Tax equivalent adjustment-loans       |                                       
|                                      |                                       
|Tax equivalent net interest income    |                                       
|                                      |                                       

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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, 2006. Our disclosure controls and procedures are the controls and other procedures that we designed to ensure
that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or
submit to the SEC. Tony J. Sorcic, President and Chief Executive Officer, and Todd D. Fanning, Senior Vice-President and Chief
Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Sorcic and Fanning
concluded that, as of the date of their evaluation, our disclosure controls were effective.




(b)
        Internal
controls. There have not been any significant changes in our internal accounting controls or in other factors during the quarter
ended September 30, 2006 that could significantly affect those controls.


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INDEX TO EXHIBITS



ExhibitNumber
        Exhibit31.1
        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.


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